Buying the Freehold Through Collective Enfranchisement
Since 1993, groups of leaseholders living in blocks of flats have had the right to buy the freehold of their property. This process is called collective enfranchisement. Purchasing the freehold can come with many benefits, such as providing leaseholders with further control of the management of the building and allowing them to extend their own leases.
If a leasehold property is sold with a share of the freehold, it means it is bought through combined leaseholder participation in a collective enfranchisement. The legal owner of a leasehold property is the person or company who owns the freehold - the freehold being the land and any buildings that reside on it.
Compare My Move work with a number of professional property and finance experts to create insightful guides that will aid our users through the entire buying and selling process. In this article, we will explain the meaning of the term ‘collective enfranchisement’, who would be eligible and what the process entails.
What is Collective Enfranchisement?
Collective enfranchisement is the legal process where the leaseholders of a building collectively buy the freehold. This process has been possible in the UK since the Leasehold Reform Housing & Urban Development Act 1993. If a group of leaseholders follow the qualifying criteria and there is an accurate legal claim process, then they will have the right to jointly acquire the freehold from their current landlord.
‘Collective’ is the key word in this legal term as the group of leaseholders will have to work together to gain the freehold of their building. Whilst it can result in many advantages for the leaseholders, the process is often complex and at least two-thirds of the tenants in the building must participate should they qualify. Before choosing to start the process of collective enfranchisement, it’s recommended that the leaseholders contact professional surveyors and solicitors who have experience in this particular field.
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Who Qualifies to Claim Collective Enfranchisement?
Two-thirds of the flats must be owned by qualifying tenants for the process to be completed. To claim collective enfranchisement, the leaseholders must follow the criteria listed below:
- The tenants must have been granted leases of 21-years or more.
- The building in question must not be used for more than 25% non-residential purposes.
- The block of flats must be self-contained.
- At least 50% of the flats within the building should have agreed to collective enfranchisement. If the block has only 2 flats, both must agree to proceed.
- Each individual tenant involved should not own 3 or more flats within the block.
How Does it Work?
As a brief summary, the collective enfranchisement process includes:
- Ensuring leaseholders qualify to purchase the freehold
- Organising a ‘company’ of qualifying tenants
- Choosing a Nominee Purchaser
- Appointing a solicitor and surveyor
- Arranging an expert valuation to determine the purchase price of the freehold
- Serving the Initial Notice
- Receiving a Counter-Notice from the current freeholder
The Initial Notice will also include a responsive date, outlining the date the freeholder must respond by - this should be at least 2 months after receipt. Once the information has been gathered, the document can be sent to the freeholder.
Before the deadline, the freeholder must complete a Counter-Notice which will act as their reply. They should clearly state whether they accept the request and what terms they would agree to. If the freeholder replies too late or doesn’t reply at all, then the leaseholders should be given the legal right to purchase the freehold on specific terms outlined in the notice.
However, if the freeholder does respond but does not agree to the terms, all parties involved must renegotiate or, failing this, the leaseholders can apply to the Leasehold Valuation Tribunal (LVT).
What is an Absent Landlord?
If the landlord is absent or missing, then a separate procedure must be followed, one that involves the Courts and the LVT. Circumstances where this may arise include:
- Companies that became freeholders and have since ceased trading. As a result, the property may have passed to the Crown through the Treasury Solicitor.
- A freeholder who is a company in receivership.
- An individual who is now bankrupt.
If the freeholder can not be located, the Initial Notice cannot be served and the tenants should complete an application to the county court for a Vesting Order.
Before doing this, the tenants must research the property and make as much effort as possible to find the freeholder. If the court is satisfied with their efforts, then the tenants will have a higher chance of being sold the freehold in the landlord’s absence. However, this is not a definite conclusion.
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What is a Collective Enfranchisement Valuation?
A freehold or collective enfranchisement valuation is a report of a freehold that contains at least 2 leasehold flats. A valuation is required to ensure the premium to be paid is realistic and has been agreed upon by all parties involved.
It’s vital you arrange a professional and expert freehold valuation as your freeholder is required by law to negotiate with you and the valuation will ensure their perspective is considered. Without a collective enfranchisement valuation, the process could become incredibly long and expensive for everyone involved.
By law, there are a number of complex factors that must be considered during the valuation. These include:
- The income received from ground rents.
- The marriage value.
- The reversionary value of the freehold on expiry of the leases.
- The value of other interests such as commercial properties or garages.
- Compensation for other losses
How Much Will a Freehold Valuation Cost?
The overall cost will largely depend on the size of the freehold. For example, if there are only 2 flats in the block in question, it could cost £600-£900. However, if there are more, the cost could significantly increase. The valuation cost for a building with 14 flats could be as high as £11,000.
How Much Will it Cost to Buy the Freehold?
There are a number of differences between the costs of buying the freehold of a property and the costs of buying a house. Factors that can affect the cost of buying the freehold include:
- The market value of each flat.
- Whatever else is included as part of the building.
- How long is left on each lease - if the leases included have less than 80-years left, the price of the freehold will increase.
- The price determined by the valuation.
Included in the Leasehold Reform Housing & Urban Development Act 1993 is a formula used by specialist surveyors to calculate an estimate of the premium the qualifying leaseholders must pay. They will then have to decide how they will acquire the freehold - this is often done through one individual acting on behalf of the group or even a small committee.
Once you instruct a solicitor, you will begin to see the costs accrue. The leaseholders must ensure they have thoroughly discussed the potential costs and upcoming process with each other before this stage, as someone may decide to pull out of the transaction, ensuring everyone else has to make up for their shortfall. The qualifying tenants will be liable for the freeholder and professional fees as soon as they serve the Initial Notice.
In addition to the cost of the freehold, there will also be fees that must be reimbursed to the freeholder. An example of these added costs would include the valuation fees and conveyancing costs.
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What Are the Benefits of Buying the Freehold?
The will be a number of benefits to collective enfranchisement, including:
- Leaseholders will collectively and legally own the ground and building.
- Leaseholders having the ability to grant themselves longer leases.
- More flexibility with the maintenance and running of the building.
- Leaseholders can choose their own contractors and property management company.
- Potentially lower repair and maintenance costs for each individual.
- Purchasing the freehold of a property can often make it easier to sell in the future.
Next Steps of Buying a House
This article has been a part of our buying a home guide. The next step in the buying process will be to look at schemes you are eligible for. To find out more read, what is the right to buy scheme.
