Collective Enfranchisement (LRHUDA 1993): Client Guide

About This Guide

If you own your flat jointly with any others, such as a partner or family members, you must act together in this matter. References to "you" and "your" in this guide mean all co-owners of your flat. This guide is intended only as a general introduction. It is not a substitute for detailed legal advice. Please speak to us if you have further questions or you are interested in proceeding with a collective enfranchisement claim.

What Does Collective Enfranchisement Mean?

There are two main forms of property ownership in England and Wales: freehold and leasehold. Every piece of land has someone that owns the freehold. They are called the freeholder and they own the land and any buildings on it. In this guide, the freeholder is referred to as the landlord. Most flats are owned on a leasehold basis. Owning a lease of a flat means having the right to possess and occupy that flat for a fixed period of time, known as the term of the lease. The person or company who owns a lease of a flat is known as the tenant of that flat.

Collective enfranchisement is the right for a group of tenants of flats (participants) to act together to buy the freehold of their block of flats (building). It is a statutory right, governed by the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993). To exercise this right, both the building and the tenants must satisfy certain criteria. It is a collective right: it can only be exercised by a group of qualifying tenants acting together, not by one tenant alone.

In some circumstances, additional property may be included in the purchase (such as parking spaces or gardens) and the landlord may take a lease back of certain flats or units in the building. We can help you identify exactly what land and buildings will be in your claim.

What Is The Benefit Of Buying The Freehold?

The main benefit of buying the freehold, is the opportunity for the participants to run and manage their own building. They can control what works are done when, and at what cost.

However, managing a building can involve a considerable amount of work. There are a lot of legal obligations, particularly in relation to service charges, that the participants will need to comply with. Repair and maintenance obligations must be taken seriously, because of the health and safety risks that can arise if the building is in disrepair. Decisions will need to be made over matters such as when to paint exterior woodwork or repair roof tiles. Disputes may arise as each decision will affect everyone personally and different people will have different priorities.

The participants will also be able to grant themselves new, longer leases. This should increase the value of their flats, especially if their existing leases have a remaining term of 80 years or less. Although certain criteria must be satisfied for a valid collective enfranchisement claim, it is not necessary for all the tenants of flats in a building to participate in the purchase. Where one group of tenants makes a claim and acquires the freehold, it is sometimes possible for a different group to make another collective enfranchisement claim later and buy the building back. This can lead to bad feeling and potential mismanagement, as concentration becomes focused on transferring ownership and control.

Can Any Block Of Flats Be Collectively Enfranchised?

To qualify for collective enfranchisement, a building must satisfy certain conditions. These include:

• It must be self-contained. Broadly, this means that the building must not overlap with another building, rely on another building for support or share any services (such as a heating or water) with another building (unless those services can be separated fairly easily).
• Any commercial parts, such as shops or offices, must not exceed 25% of the internal floor area of the building. Common parts, such as shared stairwells, are excluded from this calculation.
• There must be a minimum of two flats in the building that are held by qualifying tenants and at least two-thirds of the total number of flats in the building must be held by qualifying tenants. Therefore, in a ten-flat building, at least seven flats must be held by qualifying tenants.

The legislation also requires a minimum proportion of qualifying tenants to participate in a collective enfranchisement claim.

There are various exclusions from the right to collective enfranchisement. For example, some buildings that were converted into flats will not qualify if the original landlord (or a member of their family) has resided in the building throughout the previous 12 months. You may also not be able to enfranchise if your building is owned by the Crown or the National Trust, for example. We can advise you whether your building will qualify for collective enfranchisement.

Who Is A Qualifying Tenant?

A qualifying tenant is a tenant of a flat under a long lease. Generally, a lease is a long lease if it was originally granted for a term of more than 21 years. Most flat leases qualify, assuming the flat is used for residential purposes. There are some exceptions, for example, if the same person, company or group of companies is a tenant of three or more flats in the building, they are not a qualifying tenant of any of those flats.

If a flat is jointly owned, for example by spouses or family members, then all owners count as one qualifying tenant together. This is important to remember when counting how many qualifying tenants you have to make the claim.

We can advise you whether you are a qualifying tenant.

Do All The Tenants In The Building Need To Take Part?

Not usually, but a minimum number of qualifying tenants must participate. The participants must, collectively, hold at least half of the total number of flats in the building. Therefore, in a building that contains 10 flats, where each flat is held by a different person or company:

• At least seven flats must be held by qualifying tenants.
• At least five of those qualifying tenants must participate in the claim for the freehold.

The only exception is where the building only contains two flats: in that case, both flats must be held by qualifying tenants and both qualifying tenants must participate.

It is possible for additional qualifying tenants to become participants after the claim has started but only if all the other participants agree. You cannot enfranchise alone: you must work together with your neighbours to form the required number of participants. If you do not proceed with the claim, your neighbours may still be able to proceed without you if they are qualifying tenants and make up the required number of participants.

How Do The Participants Make A Claim?

The participants start the claim by serving a formal notice on the landlord (participants' notice). The participants' notice is prepared by us and approved by the participants. It must contain certain compulsory information, otherwise it will not be valid. This includes:

• Key information to prove the participants are entitled to collectively enfranchise.
• Details of the building being enfranchised, plus any additional property and any rights they are claiming (all shown on a plan) and any flats or units that must be leased back to the landlord.
• The proposed purchase price.
• A deadline for the landlord to serve a counter-notice, which must be at least two months after the date the participants' notice is served.
• The name and address of the person or company nominated by the participants to buy the building on their behalf (nominee purchaser).

The landlord has various rights following receipt of the participants' notice, including the right to:

• Request proof that the participants each had a long lease of their flat on the date the claim was made. The landlord must make this request within 21 days of service of the participants' notice and we must respond on the participants' behalf within a further 21 days.

Inspect the building and any additional property included in the claim, on at least ten days' notice to the relevant occupier(s). This will include a right to inspect the flats in the building.

Who Should Be Nominated As The Purchaser?

The participants can nominate whoever they wish as the nominee purchaser. Often, they choose to set up a company which they can all take shares in. This can be beneficial for reason such as:

• A maximum of four people can hold the legal title to property but there is no limit on the number of possible shareholders in a company.
• If a participant later sells their flat, they can transfer the share in the company to the buyer, rather than having to transfer the freehold. This is a simpler process with less paperwork.

If a company is formed, the participants will need to appoint directors and a company secretary and allocate responsibility for Companies House filings (such as company accounts). Internal policies will also need to be agreed, such as how decisions about the building will be made going forward.

How Much Does A Claim Cost?

There is a complicated formula for determining the price payable for the freehold. The formula includes various factors, such as the value of the flats at the date the participants' notice was served, the amount of time left on the leases and the ground rent payable under each lease. Different valuation assumptions apply to participants' and non-participants' flats. As some of the figures used in the formula can be subjective, the formula can produce a range of prices.

The participants should obtain a valuation by a specialist surveyor before starting the process, so that there is a proposed price to put into the participants' notice. The surveyor should also be able to advise on the likely maximum cost, if the landlord chooses to negotiate. The surveyor may request various details about the flats and carry out an inspection.

The landlord may not agree with the proposed price and may respond with a higher amount. Negotiations will then follow to try to settle the price and the other terms of the purchase. We, and the surveyor, can help with these negotiations.

As well as the price for the freehold, there will be other costs for the participants to pay, such as:

• Our costs and the costs of the surveyor, including any expenses (such as a fee for registering the enfranchisement at the Land Registry).
• The reasonable costs of the landlord's lawyer and surveyor in investigating the claim for the freehold, preparing a valuation and transferring the freehold. It is difficult to estimate these costs as the amount depends on the lawyers the landlord uses and how long the process takes.
• Any stamp duty land tax (in England) or land transaction tax (in Wales) that might be payable on the price. We can advise on the amount due once the purchase price is agreed.

The participants should enter into a participation agreement to document how the price and other costs will be split between the participants. We will draft this document.

How Long Does A Claim Take?

An enfranchisement claim is not a quick process. It can take a year or more from the date of the participants' notice to complete, depending on how long it takes to agree the terms with the landlord.

After the participants' notice has been served, the landlord must serve a formal counter-notice on us by the deadline set out in the participants' notice. Assuming the landlord accepts the claim, it must then state whether it agrees or disagrees with every proposal (including the proposed price) and provide alternative proposals for any it does not accept.

We can advise in more detail at the time if the landlord does not accept the claim or does not serve their counter-notice by the deadline.

After the counter-notice has been served, negotiations usually happen between the parties' surveyors and lawyers to finalise any points, including the price. If agreement cannot be reached, we will need to apply to the tribunal and ask them to settle the dispute. This application must be made by the date six months after the landlord's counter-notice. If not, the claim fails and no new claim may be made for 12 months.

Once the price and the other terms of the purchase have been agreed (or the tribunal has determined them), the participants have four months to enter into a contract with the landlord (exchange). A deposit is likely to be payable at this stage. The contract will specify the agreed date for finalising the enfranchisement and paying the price and all other relevant costs (completion).

If it looks like exchange will not occur within the four months, we will need to make a court application to protect the claim. If not, and exchange does not take place by the end of the four-month period, the claim fails and no new claim may be made for 12 months.

The parties might skip exchange and go straight to completion. If so, we will still apply to court to protect the claim if it looks like completion will not occur within the four-month deadline.

What Happens If The Participants Change Their Minds?

It is possible to withdraw a collective enfranchisement claim at any point before contracts are exchanged. To do so, the participants must together serve a notice of withdrawal on the landlord. If the participants do decide to withdraw, they must still pay their own legal and valuation costs and some of the landlord's costs, up to the date of the withdrawal. No further collective enfranchisement claim may be made for 12 months following the withdrawal. After expiry of that 12-month period, the cost of enfranchising may have increased.

If a participant sells their flat while the enfranchisement is progressing, then the buyer can choose whether they want to participate in the enfranchisement. If they choose not to participate, the remaining participants should still be able to proceed with the claim but will need to assess whether they can still afford it.

Are There Any Other Ways To Take Over Management Of Our Building?

Tenants of flats with long leases do have other statutory rights that will allow them to change the management of their building. These include:

• Making a right to manage (RTM) claim. The qualifying criteria for an RTM claim are similar to those for collective enfranchisement and the participants do not need to prove any fault in the existing management. Exercising the RTM is usually a quicker process than collective enfranchisement, as there is no need to transfer any interest in the property. However, difficulties can arise in developments that contain commercial units, or flats that have not been let on long leases, as the management of those units will not transfer.
• Applying to the tribunal to appoint a manager. This route is only available where the party with responsibility for managing the building is in default, and it is subject to certain criteria (including the discretion of the tribunal). However, in certain circumstances, an application may be made by one qualifying tenant alone.

Please ask us if you would like further information about alternative ways to manage the building.

Is The Law Relating To Collective Enfranchisement Changing?

The government has outlined proposals to make it easier and cheaper for tenants of flats to collectively enfranchise. However, there is a lot of detail still to work out and no timescale for the changes. It could be years before they come into effect.

Whether now is the right time to collectively enfranchise or not depends on various factors. Please let us know if you would like further advice on this.

What Are The Next Steps?

Before making a collective enfranchisement claim, it is necessary to do the following:

• Verify that your building satisfies the requirements for collective enfranchisement. This may involve carrying out a physical inspection of the building and any common areas and working out how many qualifying tenants there are.
• Establish whether there are sufficient willing participants. This involves working out how many qualifying tenants there are in your building and contacting them, to find out who will participate.
• Obtain a valuation of the likely cost of acquiring the freehold, from a specialist surveyor.
• Agree how the purchase price and other costs will be divided between the participants.
• Instruct us (or another law firm) to act for all the participants. It is important to choose a lawyer with experience in collective enfranchisement. We will go through various formalities before we start work, including collecting evidence of each participant's identity. We will also ask the participants to appoint a single person as our main point of contact.
• Decide who will be the nominee purchaser.

These steps may be taken in a different order, depending on the circumstances.