Collective Enfranchisement

Flats are generally sold leasehold for a fixed term length. Leaseholders of flats can join together to purchase the freehold of the property from the freeholder in certain circumstances. This is known as collective enfranchisement.

What are the requirements for collective enfranchisement?

In order to qualify, the various components of the situation need to meet certain requirements.

Building and tenant requirements

There are various criteria that the building and tenants need to meet:

• The building must contain at least two flats. It does not matter if the leaseholders live in the flat and whether they are a company or an individual.
• At least two-thirds of the flats must be owned by qualifying tenants, which means they are leaseholders with a lease of at least 21 years when first granted. There are other situations that also qualify, such as a shorter lease with a right of perpetual renewal, a shared ownership lease where the tenant has a 100% share or a lease granted under the “right to buy”
• The building has to be at least 75% for residential use
• Certain categories of properties are excluded, such as National Trust properties, buildings within a cathedral precinct and freeholds that in anyway involve an operational railway

If any of the following apply, then the tenant will be exempt:

• A tenant that owns three or more flats in the building (either jointly or in their sole name) will be discounted
• The tenant has a business lease

Landlord requirements

There are certain situations that will exempt a landlord from

• The landlord is a charitable housing trust and the flat is given as part of the charitable function of the organisation
• The building is not purpose built block of flats but a conversion into four or fewer flats and the same person owned the freehold before the conversion and has lived there for the last 12 months

What is the process for collective enfranchisement?

If the tenants meet the relevant criteria then it is advisable to enter into a participation agreement that will set out the expectations and actions of the various leaseholders, including:

• The financial contributions of each leaseholder
• What will happen after the freehold is purchased (for example, the new freeholder will grant leases to the tenants that are part of the agreement)
• How expenses for the process will be shared between the tenants
• Voting rights
• The arrangements if one tenant pulls out

The nominated purchaser

The start of the process requires the tenants to nominate the purchaser that will be named in the initial notice. The nominated purchaser will eventually acquire the freehold and become the new landlord, who is responsible for managing the building. This can be either a person, a trust or a company that is legally formed by the tenants just for this reason.

Determining the purchase price

The property should be valued by a qualified valuer or surveyor so that the tenants have an idea of what the purchase price will be. Under the Leasehold Reform Housing and Urban Development Act 1993 (as amended) there is a formula that will be used to estimate what the leaseholders will need to pay to obtain the freehold.

The initial notice and counter-notice

Once the initial notice is served, this triggers the relevant procedure for collective enfranchisement and the nominated purchaser then is liable for the reasonable costs of the freeholder from that date.

The nominated purchaser should register the initial notice with the Land Registry to ensure they are provided with the available protection against the landlord selling the freehold to someone else. The valuation date is also fixed as the date of service of the initial notice.

The notice should include the following:

• Details of the property including a plan
• Statement of grounds that the premises qualifies under the right of collective enfranchisement
• Details of any leasehold interests to be acquired
• Details of all qualifying tenants
• Details of the nominated purchaser
• Date that the freeholder should provide the counter notice (at least two months)

The landlord’s counter notice has to state either:

• Acceptance of the right to the freehold and on what terms
• Non-acceptance of the right with reasons (this will need to be determined by the courts)
• Stating an application will be made to the courts that the enfranchisement cannot proceed because the leaseholder intends to redevelop all or a substantial part of the premises
• Confirmation of any leasehold proposals

If the freeholder does not respond, then the leaseholder is give the right to buy the freehold on the terms stated in the notice.

What happens if the landlord cannot be located?

In some situations, the leaseholders will not be able to find the landlord in order to purchase the freehold. This is not fatal to a collective enfranchisement. Where the freeholder is a company that is no longer trading then enquiries can be made through the Treasury Solicitor in case the property has passed to the Crown. If the freeholder is in receivership, then the person dealing with this will be acting landlord and should be approached. Where the freeholder cannot be found then the leaseholders can apply for a Vesting Order if they have made all reasonable efforts to find the freeholder (for example an advert in relevant newspapers). The court would then sell the freehold to the tenants at a price determined by the First-Tier Tribunal (Property Chamber), which is paid to the court.