What is it?
This gives the right for tenants of flats acting together to purchase the freehold and any headleases of their building. In order for the building to qualify under the Act, it must:
- be an independent building or be a part of a building which is capable of independent development; and
- contain two or more flats held by qualifying tenants; and
- have at least two thirds of the flats held by qualifying tenants.
In order to be a qualifying tenant you must have a long lease which means a lease which, when originally granted, was for a term of more than 21 years. However, you must not own three or more flats in the building. You cannot be a qualifying tenant if you hold a business lease. Notwithstanding the above, the building will not qualify if:
- it comprises four or less units and has a “resident freeholder”;
- more than 25% of the internal floor space (excluding common parts) is used for non-residential purposes;
- the building is part of an operational railway.
How do I prepare for a claim?
Any qualifying tenant can give a notice to his landlord or the managing agent requiring details of the various legal interests in the block. This notice places no commitment on the tenant but the response to the notice should provide the tenant with the information necessary for him to ascertain whether the building contains a sufficient number of qualifying tenants for it to qualify.
Having established that the building qualifies, it is then advisable to ascertain whether you have a sufficient number of tenants who want to participate, both for the purpose of qualifying for enfranchisement and for the purpose of being able to finance the acquisition. In order to qualify for enfranchisement, you need to establish that the number of participating tenants comprises not less than one half of all the flats in the building. However, if there are only two flats in the building then both must participate.
When you have established that the building qualifies and that there is a sufficient number of qualifying tenants who wish to participate, then there are five further practical steps which should be taken before embarking on the enfranchisement procedure. First, you need to establish what it is going to cost by obtaining a valuation. In simple terms, the price to be paid by the participating tenants to purchase the freehold of the building is the aggregate of:
- the building’s investment value to the freeholder – the capitalised value of his ground rents and the value of his reversion (being the present freehold vacant possession value deferred for the unexpired term of the leases);
- one half of the marriage value – the increased value attributable to the freehold by virtue of the participating tenants being able to grant themselves extended leases at nil premium and a peppercorn rent; the marriage value attributable to a lease held by a participating tenant will be deemed to be nil if that lease has an unexpired term of more than 80 years at the date that the initial notice is given;
- compensation for loss in value of other property owned by the freeholder, including development value consequent to the severance of the building from that other property.
The valuation date is the date that the claim notice is given. Value added to the flat of a participating tenant by tenant’s improvements is disregarded in the valuation.
For the purposes of calculating price, the tenants should take the advice of a properly qualified surveyor or valuer with experience in the field of enfranchisement and knowledge of the market.
In addition to the price and the participating tenants’ own legal costs and valuation fees, the claimants will be required to reimburse the freeholder his legal costs and valuation fees.
Secondly, the participators will need to establish how to finance the cost of acquisition. It may, for example, be necessary for a number of participating tenants to seek a further advance from a Building Society or Bank. In particular, the participators will want to decide who is to finance the purchase of the non-participators’ flats and on what basis.
Thirdly, it will be necessary to establish what vehicle the participating tenants should use in order to buy the freehold and how they will establish and regulate the relationship between themselves. In most cases, this is likely to be through a company structure, although in some circumstances a trust might be more appropriate. It should be noted that the participating tenants do not all have to have equal shares, so that the proportion of the shareholdings will be a matter for negotiation between them.
The 2002 Act provides for collective claims to be made through the mechanism of a Right to Enfranchise (RTE) company. However those provisions have never been brought into force and it is unlikely that they will be.
Fourthly, the participating tenants should seek advice to establish whether there are tax implications to the transaction, both in relation to their individual positions and in relation to the vehicle chosen to buy the freehold.
Finally, the collective enfranchisement legislation provides no guidance or controls on the way in which the participating tenants should work together in order to acquire the freehold. Since the purchase may well involve substantial sums of money and is likely to take time to complete and, during this time, the participating tenants will be heavily reliant on each other for the performance of tasks within strict limits, it is strongly advised that, before embarking on a claim, the participating tenants should enter into a formal agreement (called a participation agreement) in order to regulate the relationship between them during the course of the claim.
If any terms of acquisition (including the price) remain in dispute after two months following the date of the counter-notice, then either party can apply to the First-tier Tribunal (FtT) for the matter in dispute to be determined.
This application must be made within six months following the date of the counter-notice or the claim is lost. Most claims are settled by negotiation. If a FtT is required to make a determination, then there is a right to appeal that decision to the Upper Tribunal (Property Chamber) if permission is given to do so.
Once the terms of acquisition have been agreed or determined by the FtT, then the matter reverts to a conveyancing transaction with the parties entering into a sale contract on the terms agreed or determined and thence to completion.
If the matter proceeds to completion, then the participating tenants, through their nominee purchaser, will become the freeholder of the building, subject to the various flat leases. In effect, the participating tenants will replace the existing freeholder. This will put them in a position to grant themselves extended leases.
There may be taxation consequences on granting an extended lease, particularly for second home owners.
There will also be responsibilities. The participating tenants will become responsible for the management of the building and the administration of the service charge account in accordance with the covenants in the original leases.
If the nominee purchaser is a company, all participators will be shareholders and some will be officers of that company.
These are all matters on which clear professional advice will be needed.
It is important to note that an individual tenant has no right to become a participating tenant – even if he is a qualifying tenant. It is a matter for the tenants to resolve between themselves. You can always ask to be allowed to join in, but you will have no remedy if refused. If a group does form without you – and does not need you – you may well find yourself left out.
However, if you are left out, that need not necessarily be the end of the road. This is because of the second major innovation that was introduced by the 1993 Act – the individual right to acquire a new lease.