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What is a collective enfranchisement claim?
A collective enfranchisement claim is when a group of flat owners jointly make a claim to acquire the freehold interest in their building from their freeholder. The claim is not fault-based, which means that the claim can be made against a freeholder whether or not they are carrying out their obligations under the leases and consequently there are very limited ways that the freeholder can dispute a collective enfranchisement claim. On completion of a collective enfranchisement claim, each flat owner that participated in the claim will own a share in the freehold interest in the building.
Why should I participate in a collective enfranchisement claim?
Once the freehold interest has been acquired by the participating flat owners, they will collectively have control over the maintenance, repair and management of the building (typically including the buildings insurance, service charges and day to day management of the building). This often results in improved management of the building and lower service charges.
Each participating flat owner can also extend their individual leases to 999 years and reduce the ground rent to nil for no premium. If all flats participate, the new lease can be tailored to suit the circumstances of your particular building and ensure that your individual flats are as marketable as possible which will help you realise the maximum value of your flat. If there are one or more flats that do not participate in the collective enfranchisement claim, then certain improvements can still be made to the participating flat owners individual leases and any defects in the leases can be remedied.
Your share of the costs are also likely to be lower as a flat owner participating in a collective enfranchisement claim, in comparison to making a claim for a statutory lease extension in respect of your individual flat.
How does the building qualify to participate in a collective enfranchisement claim?
To qualify for a collective enfranchisement claim the following conditions must be fulfilled:-
- the claim must be made in respect of a self-contained building or a self-contained part of a building (which can be severed vertically from the rest of the building); and
- at least two thirds of the flats must be let on long leases (leases which were originally granted for a term of at least 21 years); and
- the commercial space must not exceed 25% of the floor space in the building; and
- at least 50% of the flats in the Building must participate in the claim, save that if there are only two flats in the building, they must both participate.
How do I qualify to participate in a collective enfranchisement claim?
In order to participate in a collective enfranchisement claim, the flat owner must be a long leaseholder of a residential unit. This means that your lease must have been granted for an original term of at least 21 years (regardless of how many years are left on the term).
What is the cost of participating in a collective enfranchisement claim?
The total cost of participating in a collective enfranchisement claim will be comprised of the following:-
- Your share of the premium – this is the payment that will be made to the freeholder in consideration for the transfer of the freehold interest. You will need to instruct a specialist enfranchisement valuer at the outset of the matter to advise the flat owners of the estimated cost of acquiring the freehold interest, to advise you of the initial offer premium to put forward to the freeholder and to negotiate the premium on behalf of the participating flat owners to ensure that it is the lowest possible premium payable.
- Your share of the participating flat owners’ costs – this will include the cost of your solicitor and your valuer, plus any applicable disbursements, for example, Land Registry fees, Tribunal fees, bank charges, stamp duty, etc.
- Your share of the freeholder’s reasonable costs – this will include the reasonable recoverable costs of the freeholder’s solicitor and valuer, plus any of the freeholder’s disbursements in connection with the collective enfranchisement procedure. It is important to note that you are not responsible for any of the freeholder’s costs in connection with negotiating the premium or any protracted negotiations in respect of the terms of the Transfer Deed. If the matter ends up being determined by the Tribunal then you will not be responsible for the freeholder’s costs in connection with any preparation or attendance at the Tribunal hearing.
- Lease extension costs – you will not have to pay an additional premium for extending your lease, but you will have to pay your own legal costs for drafting and finalising the lease extension. In addition, if you have a mortgage over your individual flat, then your lender may charge a small fee for providing their consent to the lease extension.
How long will it take to purchase the freehold?
We usually estimate that the procedure will take 6-12 months from the service of the initial notice to completion of the claim.
It is important to note that once the offer notice is served on the freeholder to commence your claim to acquire the freehold the valuation date is ‘crystallised’. This means that the premium payable to the freeholder is calculated based on this fixed date (and the term that is left on each lease on this fixed date). Therefore, it doesn’t matter if the collective enfranchisement claim takes a year to complete, the premium is calculated based on the number of years left on the leases when the notice is served on the freeholder and not when the collective enfranchisement claim completes.
We work with each client and their personal objectives to either speed up or slow down completion of the claim. For example, if the participating flat owners wanted to ensure that their notice was served as soon as possible to crystallise the valuation date but wanted to delay the completion of the claim (and the payment of the agreed premium to the freeholder), we would delay the process for you. Conversely, if you are trying to prevent disproportionately expensive major works from being carried out by the existing freeholder and would like to complete the acquisition as soon as possible then we would work with all the parties to try and accelerate completion of the claim.
Should we hold the freehold in a company name or in our individual names?
If you were to hold the freehold in the name of the company each participating flat would be entitled to membership in the freehold company, and each flat owner would be responsible as the members and directors for the administration of the company, for example, registering new members, submitting annual returns, etc. The freehold company will then be responsible for the freeholder’s obligations under the leases, which typically includes arranging the buildings insurance, maintenance and repair of the building and common parts and dealing with the service charges and the day to day management of the building.
It must also be noted that legal title in England and Wales can only be held by a maximum of four individuals, and therefore if there are more than four individual freeholders then it is highly recommended that a company is set up to hold the freehold interest, otherwise you will have to enter into a Deed of Trust with all the beneficial owners of the freehold if there are more than four to record and protect the unnamed freeholders beneficial ownership.
The benefit of holding the freehold interest in the name of the company is that if any of the flat owners sell their flat you and your co-freeholders would not be required to sign a Transfer Deed as the company would still hold the freehold interest, but you would just need to transfer your membership in the freehold company to your buyer. By comparison, if you hold the freehold interest in your individual names, all the individuals on the freehold title will have to sign a Transfer Deed to transfer the share of freehold to the buyer and be identified for Land Registry purposes. If there is a Deed of Trust in place, then a new Deed of Trust will have to be signed every time the freehold is transferred. This could result in delay to your sale if, for example, the co-freeholders were not resident in the building, abroad, unwell or simply being uncooperative.
In addition, holding the freehold interest under the name of a company would protect each flat owner as an individual against personal liability from any claims against the freehold company, for example, for breach of covenant.
The drawback of setting up a company, is the cost and time of carrying out the administration for the company, for example, filing annual returns, etc. However, with Companies House web-filing, filing requirements are simplified making it easier for you to do yourself or if you do appoint a managing agent, they will deal with this for you and recoup the cost through the service charge.
If you would like to instruct a managing agent to deal with the management of the building on behalf of the freeholder then you can instruct a managing agent either in the name of the company or in your individual names.
What is the procedure for a collective enfranchisement claim?
As part of the preliminary legal work, we will prepare a participation agreement between all the participating flat owners to confirm their contractual obligations to each other. This agreement will include clauses to reflect the agreed individual shares of the premium and costs of each flat owner and each participating flat owners commitment to proceed to completion of the claim.
The collective enfranchisement procedure is commenced when the participating flat owners collectively serve a formal notice on the freeholder, the Section 13 Initial Notice, offering the premium which they are willing to pay for the freehold. The premium offered will be advised by the participating flat owners’ specialist enfranchisement valuer and must be a realistic offer. The formal offer notice must provide a deadline (which is at least two months from the date of the receipt of the formal offer notice) by which the freeholder must respond with their formal counter-notice.
The freeholder may then respond formally in the following three ways:-
- Admit that the participating flat owners have the right to acquire the freehold interest in the building but dispute the premium offered. The freeholder must then provide a counter-offer of the premium that they will accept for the freehold.
- Admit that the participating flat owners have the right to acquire the freehold interest and accept all the terms in the formal offer notice including the premium offered. In this case the collective enfranchisement claim would proceed to completion.
- Dispute that the participating flat owners have the right to acquire the freehold (there are very limited ways that the freeholder can dispute a collective enfranchisement claim). The participating flat owners can then apply to the court for a declaration that they are entitled to acquire the freehold.
The freeholder may not respond at all in which case the participating flat owners are entitled to acquire the freehold for the terms set out in their formal offer notice, including the premium offered.
In the vast majority of collective enfranchisement cases the freeholder will proceed via option 1. Following option 1, after the freeholder serves their counter-notice, there is an initial period of six months from the date of the counter-notice in which the parties’ valuers will enter negotiations with a view to agreeing the premium and the parties’ solicitors will enter negotiations with a view to agreeing the terms of the Transfer Deed (the legal document that will transfer the freehold interest to the participating flat owners).
If the premium and/or terms of the Transfer Deed cannot be agreed within this six month time period then an application will be made to the Tribunal so that the Tribunal can determine the premium payable and/or the terms of the Transfer Deed. A Tribunal date will be set approximately 4-6 months after the application is made. The parties can continue to negotiate the premium during this time period and if all the terms of the acquisition (including the premium and terms of the Transfer Deed) are agreed before the Tribunal date then the Tribunal proceedings can be vacated.
Once the terms of the Transfer Deed are agreed between the parties or determined by the Tribunal, the parties have a maximum of four months to complete the transaction, which is when the premium and associated costs are paid to the freeholder’s solicitors. If the claim is unable to complete within this four month period there is the option to make an application to Court for a further extension of time, however it is then at the Court’s sole discretion to decide whether an extension should be granted or whether the claim should be deemed withdrawn.
Following completion of the transaction, we will deal with all the post-completion formalities on behalf of the participating flat owners, including paying stamp duty (if any) and registering the Transfer Deed at HM Land Registry.
After the collective enfranchisement claim is completed, we will then deal with your individual 999 year lease extensions.
How can LEASE Law help me with my collective enfranchisement claim?
LEASE Law are specialist solicitors who can act on your behalf in respect of the legal requirements for making a collective enfranchisement claim. In the vast majority of cases, we are able to offer a fixed fee for acting for the participating flat owners.
The work that we will carry out for the participating flat owners includes preparing the participation agreement, preparing and serving the initial notice on the freeholder, receiving the counter-notice from the freeholder, negotiating the terms of the Transfer Deed, completing the transaction and registering the transfer at HM Land Registry. We will also liaise with your specialist valuer in respect of the premium as and when necessary.
We can also recommend specialist enfranchisement valuers who have extensive experience and expertise in this area to ensure that the premium that you pay for the freehold interest is as low as possible. Your valuer will provide you with an initial report which will advise you on the premium that you can expect to pay following negotiations and will also recommend the offer premium to put into your initial offer notice. Your valuer will also negotiate the premium with the freeholder’s valuer on your behalf following the service of the initial notice.
Please contact Jade Thomas (jade@leaselaw.co.uk or 0204 511 9100) or Joanna Botley (joanna@leaselaw.co.uk or 0204 511 9101) for a no obligation discussion about your potential collective enfranchisement claim.
