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Collective enfranchisement FAQs

22.03.17

We’ve done several blogs on the subjects of extending a lease and buying a Freehold, but we haven’t delved too deeply into the often confusing subject of collective enfranchisement.

When a homeowner buys a Freehold, they own the land the property is built on. This is a relatively simple concept when buying a house, but when you live in an apartment there are usually several other properties occupying the same land. This means you can’t buy the Freehold on your own and don’t have the sole right of first refusal (when the landowner must offer you the land to sell before offering it to anyone else). In order to make the purchase, you need to collaborate with the other homeowners in the building and work together to make the purchase. They may even be able to force the landowner to sell the Freehold. This collaboration is called collective enfranchisement.

With more people involved, the process becomes even more complicated. To help you get your head around it, here are some of the frequently asked questions about collective enfranchisement:

Q1: Does my building qualify for collective enfranchisement?

The eligibility is quite specific. First of all, the building must contain at least two flats (that one’s pretty obvious). Within the building, at least two-thirds of the properties must be owned by qualifying tenants. Qualifying as a tenant isn’t too difficult – they need to be holding a lease that had at least 21 years remaining on the lease when it was first granted (it’s unlikely any properties were sold with such a short lease). So far, so good. However, a tenant will not qualify if they have a business or commercial lease; if the landlord is a charitable house trust and the flat is provided as part of the charity’s functions; or if the tenant owns more than two flats in the building, either as the sole owner or jointly. Participating tenants must own at least half the flats in the building. It’s also worth noting that if a tenant owns three or more properties in the building, those properties cannot be counted towards the aforementioned half of the properties owned by qualifying tenants.

Got a little more tricky at the end there, but hopefully, you’re still with us!

Q2: How is it done?

This is where things get complicated. There are several steps to collective enfranchisement. Here are the essential ones:

Participating Leaseholders must sign an ‘Initial Notice’, which sets out essential information about the building, the people in it and the price the Leaseholders are willing to pay. It’s best to be organised as a group, so you could try setting up a Participation Agreement. Once it’s completed, the notice must be served to the Freeholder.

Next, you need to wait for a response. The Response Date will be included in the Initial Notice and should be a minimum of two months after the service of the notice.

The Freeholder will then serve a Counter-Notice. This states whether or not they accept the tenants’ right to enfranchise, and which terms they do and do not agree to. If the Freeholder fails to respond, the Leaseholders are entitled to acquire the Freehold-based on the terms set out in the Initial Notice.

Through their respective valuers, each party will negotiate an agreement. This period will last at least two months.

If there are any terms that the Leaseholders and Freeholders cannot agree on, the Leaseholders have six months (from the date of the Counter-Notice) to apply for the Leasehold Valuation Tribunal (LVT) to decide those terms. While this is decided, the LVT will instruct on what documentation etc. it wants the parties to negotiate.

Q3: How much will it cost?

The price of a Freehold will depend on many factors, so there’s no definitive answer. For instance, the length left on the leases has a significant impact. The less time left on the lease, the more expensive it is to buy it. The Freehold cost on a lease with 999 years can increase to around 250% when there are fewer than 80 years left on it. The value of the property also has an impact on the Freehold – a valuable home will make the land it lies on more valuable.

Before you issue the Initial Notice, get a professional valuer in to give you an accurate idea of how much you should expect to spend on the lease. Not only will this help with your expectations, but it’s also the law to have a ‘realistic’ number in the Initial Notice.

Q4: Are there any other costs to consider?

It’s important to remember that in addition to the cost of purchasing the Freehold, there are other fees to consider. Having valuations done is an essential step in collective enfranchisement, and can cost between £500 and £600 per apartment. Then add to that the legal fees that, while varying drastically, will be roughly £4000 for five flats. You’ll also need to pay the Freeholder’s legal and valuation fees, so this figure will probably double.

Last of all, there’s the stamp duty to consider. It would usually only come into effect once a threshold of £125,000 per participator had been reached, so if your Freehold costs are particularly high, it’s something to think about.

Q5: Is that it? Am I the Freeholder now?

You sure are! You and all those other tenants who were part of the arrangement. This means no more paying to extend a lease and the value of your property will go up! However, as joint owner of the Freehold, it’s now yours and the other Freeholders’ responsibility to maintain the communal areas. You can find out more information about the responsibilities of being a Freeholder in our blog. But luckily, you have a whole collective to share those responsibilities. You’ll need to make sure your collective is organised and have agreements and liabilities set out from the start. Many collectives choose to set up a business to make things smoother when it comes to – among other things – the transference of shares when a property is sold to a new tenant.

Q6: Should I just extend the lease instead?

Well, it’s funny you should ask. It’s entirely dependent on your circumstances. Luckily for you, we happen to have written a blog about just that subject, and you can read it right here!

 

Sadly, we’ve only scratched the surface of what is actually involved with collective enfranchisement. It’s a complicated process and we would recommend getting professional help. Feel free to contact us with any questions you might have on Leaseholds, Freeholds or collective enfranchisement, or follow us on Twitter and send us an @!