Collective Enfranchisement (the purchase of your freehold)

24/09/2019
Purchase of freehold collective enfranchisement, in simple terms, describes how leaseholders purchase the freehold from their landlord/freeholder. If you currently own a leasehold flat and want to buy it outright, this article is for you as we look at how the collective enfranchisement process works and how long it takes - which can range from a few months to several years (depending on the number of leaseholders involved). If you own a leasehold house then read this article - Buying the Freehold of a Leasehold House

Although the process of purchasing your freehold may seem complicated, we have summarised it into 5 easy steps:


Cost of buying freehold from your landlord

The costs of purchasing the freehold can be considerable and as you are sharing these with other leaseholders you should look to budget for the premium, solicitor and surveyor costs, plus the reasonable costs of the freeholder. We go into more detail about the costs of buying a freehold in this article - Costs of buying a freehold

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    1
    Check your eligibility and get ready

Eligible

Not Eligible

You have the legal right to purchase the freehold when:

  • The freehold has at least two flats with two-thirds having qualifying tenants (read definition below; if there are only 2 flats then both must contain qualifying tenants)
  • There are a minimum of half the leaseholders buying the freehold (if there are only 2 eligible leaseholders then both must participate)
You do not have the legal right to purchase the freehold when:

  • the building is a conversion into four or fewer flats
  • the building is not a purpose-built block
  • the same person has owned the freehold since before the conversion of the building into flats AND they or an adult member of his family have lived there for the past 12 months
  • the building is within a cathedral precinct
  • the building is a National Trust property
  • the building is a Crown property

What is a Qualifying Tenant?

A qualifying tenant must have a lease which was originally granted for more than 21 years - i.e. a long lease -  or if the original lease was for less than this, then it must include a clause giving the right of perpetual renewal.

Even if you satisfy the above criteria, you won’t count as a qualifying tenant if:

  • Your landlord is a charitable housing trust and your flat counts as part of the charity’s functions.
  • You or any tenant own more than 2 flats in the building, either jointly with others or solely in your name. If this is the case, these flats won’t count towards the ‘two-thirds’ mentioned above.
  • You or any tenant have a business or commercial lease.
  • More than 25% of the internal floor area of the building, excluding any common parts, is neither used nor intended to be used for residential purposes. This is known as the ‘ 25% non-residential rule’ and includes shops and offices etc. However, garages and parking spaces allocated to flats in the building ARE classed as residential.
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Organising for Enfranchisement

Once you have established that you collectively meet the qualification criteria and you can muster at least the minimum number of qualifying tenants to take part in the action, you should get all participating clients to enter into a participation agreement.

This agreement should address how you conduct your joint action regarding matters including voting, negotiation, agreement of terms and how much each tenant has to contribute. Having an agreement is particularly important with large groups of participating tenants because coordinating them to complete required actions within set deadlines can otherwise prove a huge challenge and might put the action in jeopardy.

The agreement should also address what will happen at the point when the freehold is acquired. It may be decided, for example, that the new freeholder then grants new leases to all participating tenants – this a common practice and often seen as the main point of taking the lease enfranchisement action.

Tip: If there’s only a small group or financial amounts involved are comparatively small, it may be less complicated not to have a formal agreement because the group might be able easily to agree on the finance and how to conduct the action.

Choosing the Nominee Purchaser

The Nominee Purchaser, named in the Initial Notice, acquires the freehold and becomes the new landlord if the process completes. You should decide who this is at an early stage because they will become the manager of the building. If you choose to set up a company then this needs to be set up and incorporated before serving your section 13 notice.

Along with other participating tenants, you are free to decide who the Nominee Purchaser is. They can be, for example:

  • a person;
  • one of the tenants;
  • a corporate person;
  • a trust; or
  • a company you form with the tenants for the purpose. This is the most common option as it allows for a number of leaseholders to manage the company and share the responsibility of maintaining the freehold and adhering to the freeholder's obligations.

Most commonly, if there's more than two leaseholders, you would opt to create a company wholly owned by the participating tenants but if you take this option, you must establish the company BEFORE you put forward your Initial Notice .

If, however, there are only two leaseholders, you would simply act as guarantors for each other and would most likely not set up a company, due to the complexities associated with running one. Setting up a limited company means you have to file annual accounts, give annual tax returns etc. which all involves work and expense.

You should instruct a solicitor, managing agent or accountant to advise you on how to establish a company and create the appropriate Articles of Association to reflect the company’s purpose as well as setting down how voting rights work and how shares are to be controlled.

Tip: more than 2 of you - form a limited company; just 2 of you - become co-guarantors.

Establishing the finance and a cost fund

You may find it worthwhile to set up a cost fund with enough money to cover the initial steps of the action (valuation, gathering information, deciding on the Nominee Purchaser and setting up a company) before serving the Initial Notice.

Just before actually serving the notice, you should also have established how future funding of the items needed to complete the action will work, including mortgages and loans.

Tip: it's critical to have your funding in place for the process ahead - no money means no progress.


    2
    Get a RICS Freehold Valuation

You need to instruct a valuer to value the freehold. The valuer’s purpose is to:
  • provide a valuation report that allows the leaseholders to put forward an offer in their section 13 notice;
  • ensure the leaseholders are aware of the cost of the premium prior to serving the notice; and
  • reduce the time and cost of putting forward an inaccurate premium (see Negotiations)

Freehold valuations are a specialist area and are provided by RICS surveyors. We have experienced RICS valuers and provide competitive quotes so please contact us on 0333 344 3234 for a quote. You can read more on how the freehold is valued here - or surveyor to provide a Freehold Valuation for Collective Enfranchisement.

Get ready before you serve your notice!

Before you serve your Initial Notice, you need to ensure that you have gathered all the required information both to ensure that the notice you serve is correct and valid but also to respond to challenges from the landlord resulting from serving the notice. The landlord, must be made aware of the interests of all the participating tenants and any other related interests.
collective enfranchisement solicitors

In sum, you need to know:

  • the identity of the freeholder(s): an actual person or company name and address;
  • full names and addresses of all the building's tenants and details of their leases;
  • (only if applicable) details of any other lessees connected with the building (names and addresses) along with details of their leases (known as intervening or headleases); and
  • details of any flats in the building that the landlord controls and lets on periodic tenancies.

For a small fee, you can inspect the Land Registry's register of ownership to get information about who owns the freehold of a building and who are the connected lessees - click on the following link to find out more: property ownership information

The right to participate

There is no legal obligation for participating tenants to invite all possibly eligible tenants to take part in a freehold purchase but it generally pays to make people aware what's going on.

    3
    Serving the Section 13 Initial Notice
The Section 13 Initial Notice triggers off the statutory process and from the date the landlord receives it, all participating tenants are jointly and severally liable for the landlord's reasonable costs. Therefore the notice must be complete and without inaccuracies because even though you can apply to the county court to correct them, it will add a further cost to the process. An incomplete notice can be thrown out as invalid. Your solicitor registers the notice with the Land Registry to ensure that even if the freeholder sells the building to another freeholder, the new freeholder still has to respond in the prescribed way to the notice.

The valuation date for the cost of the premium you pay, corresponds to the date the notice is served. This date is when many of the variables affecting the price of the freehold are set, such as present values of flats, years left on leases etc.

What is in the Initial Notice (Section 13 notice)

The Initial Notice must include the following otherwise it can be ruled invalid:

  • Property details including a plan.
  • Details of the grounds for the claim for collective enfranchisement on the date of the Initial Notice.
  • Details of leasehold interests to be acquired.
  • The price proposed.
  • Full names and addresses of all qualifying tenants and details of their leases to prove that these leases qualify.
  • Nominee Purchaser's name and address.
  • The date the freeholder has to serve the Counter-Notice by.
  • Signatures of all participating tenants or a signature on behalf of these.

Dealing with cases of absent landlords

Even when a landlord cannot be found, it may not adversely affect the leasehold enfranchisement process. In some situations, you may not even need to serve an Initial Notice and in others you may need to apply for a vesting order.

This topic is examined in more detail here: What to do when you have an Absentee Freeholder

Preparing for subsequent procedures

After the landlord has received the Initial Notice, they have 21 days to request evidence of the participating tenants' title to their flats. If requested, the participating tenants then have 21 days to return this information. You should therefore ensure that your solicitor has all the relevant information and documents to meet the time limit otherwise the Initial Notice will be deemed withdrawn. You will not only have to pay costs to the landlord but you won't be able to serve a new notice for 12 months!

The landlord has the right to inspect the property, including participating tenants' flats, subject to giving 10 days' notice to the occupiers.

Landlord's Section 21 Counter-Notice

The landlord has to serve a Section 21 Counter-Notice by the date specified in the Initial Notice. Their notice must either:

  • Agree to selling the freehold and accept your terms or propose alternative terms; or
  • Not agree to the sale, giving reasons for the court to determine; or
  • Neither agree nor disagree to the sale, stating that an application for the landlord to redevelop all or part of the building is to be made to the court.

In most real-world situations, assuming you have taken proper legal advice and assembled the correct evidence, the freeholder will agree to sell (although they may vary the terms). It is highly unlikely that a freeholder will be prepared to take the matter to the First-tier Tribunal (Property Chamber) (see below) because if it goes this far, they will have to pay all their own costs.

    4
    Negotiation
Negotiations start when you receive the landlord's Counter-Notice as they will either agree to your terms or they will propose a counter offer. In most cases the issue revolves around the premium which is why it is so important your original offer was based on a RICS valuation and not a figure you came up with.

The landlord can avoid selling the freehold if they can prove that they intend to demolish all or part of the building and redevelop it. They can only do this if at least two-thirds of all the building's leases are set to end within 5 years of the serving of the Initial Notice.

Procedures and Statutory Time Limits

  • The freeholder must serve their Section 21 Counter Notice on or before the date stated in the Section 13 Notice.
  • If the counter-notice rejects any of the terms of the initial notice, the leaseholders and freeholder have 2 months after the date stated in the Counter-Notice to negotiate the terms and premium.
  • After the first 2 months, the leaseholder has 4 months to make an application to the Tribunal to determine the terms/premium of the purchase of freehold.
  • The leaseholder and freeholder have 4 months after the date they both agreed to the terms to complete the purchase of freehold. If there is a delay, neither party can make an application to court for the first 2 months after terms are agreed ('Appropriate Period'), however should make an application for a court order in the 3rd month. You cannot make an application after 4 months.


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    5
    Handle the Legal Transfer

The final stage in the process is to handle the transfer of the freehold title from the freeholder to the leaseholders. You will need specialist collective enfranchisement solicitors to handle this for you (which you should have in place at the point of serving the notice).

The end result will be that on the day of completion, your solicitor transfers the premium to acquire the freehold to the freeholder's solicitors and they confirm completion. Post completion your solicitor handles registering the freehold in the name of the new freeholders; either as stated names, or as in the name of the company (with shares distributed according to number of leaseholders - so 50% if there are 2 leaseholders).

How much Stamp Duty/Land Transaction Tax are you likely to have to pay if you collectively enfranchise?

Stamp Duty Land Tax only starts after a threshold of £125,000 per participator paying for the freehold is exceeded, which is rare.

Any questions? Call 0333 344 3234

What are the Pros and Cons of buying a freehold?

Pros

Cons

  • By collectively enfranchising, you change from being a leaseholder to a share of freeholder. You no longer have to pay third parties to manage service charges, look after communal areas etc.
  • You choose when to do major works to keep the freehold in good order
  • You can grant yourself a 999 year lease for FREE
  • You no longer have to pay any ground rent
  • There is considerable expense in completing the process. See our article on collective enfranchisement costs for more on this.
  • You and other share of freeholders now have to manage the property yourself
    Effectively you set yourself up in business with others. Like any business it requires attention to work well and you and the others need to continue to maintain it.
  • Even after buying the freehold your property is still a leasehold and have an ever lowering number of years left on the lease. After buying the freehold most leaseholder's first job as a Freeholder is to grant new leases for 999 years (this is the longest you can have) with no ground rent to pay.

Related News Articles

 
Cost of Buying Freehold
19/09/2018
Freehold Valuation for Collective Enfranchisement
20/05/2019
What to do when you have an Absentee Freeholder
03/09/2018
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