What is collective enfranchisement and why it matters
Collective enfranchisement provides a legal pathway for leaseholders of flats in a building to band together and acquire the freehold of their property.
This is made possible by the Leasehold Reform Housing and Urban Development Act 1993 ('LRHUD'), a landmark piece of legislation that sought to redress the balance of power between freeholders and leaseholders.
Owning the freehold to your property enables you to have a more substantial say in the management of your property.
As a freeholder, you can rid yourself of ground rent, service charges, and more easily lengthen the term of your leases.
This reduces the financial uncertainty that often comes with being a long leaseholder, thereby enhancing the attractiveness and potential resale value of your flat.
What are the qualifying criteria for collective enfranchisement?
Only qualifying tenants have the right to join in a collective enfranchisement claim.
A qualifying tenant is a leaseholder with a qualifying lease. Those are:
- a long lease - one granted for an original term of at least 21 years;
- a short lease (one with a term under 21 years) that contains a clause providing a right of perpetual renewal;
- a lease that is terminable on the death or marriage of the tenant or at another unknown date (including the so-called ‘Prince of Wales’ clauses);
- the continuation of a long lease under the Local Government Housing Act 1989 following the expiry of the original term;
- a shared ownership lease where the tenant’s share is 100%; and
- a lease granted under the ‘right to buy’ or ‘right to acquire on rent to mortgage terms’.
Most leaseholders of flats qualify by having long leases, which are often 99 years or 125 years when first granted.
But, even if the tenant has one of the above leases, they will not be a qualifying tenant if any of the following cases apply:
- their landlord is a charitable housing trust and the lease was granted as part of the charity’s functions; or
- the lease is a business or commercial lease, and not a residential one.
In addition, a leaseholder can only count as a qualifying tenant once. If they own more than two flats in the building, whether jointly or solely in their name, they are treated as if all of the flats were one. For example, a building with 10 flats where 2 were owned by the same person would be deemed to have 9 flats.
Technically, it is the building that must qualify for collective enfranchisement, not the tenants.
Collective enfranchisement typically is exercised for a self contained building (one that is structurally detached from any other), but it could be that the 'building' is a fully separated part of a larger building with its own utilities (deemed 'relevant services' in the LRHUD) or could be separated without interrupting the relevant services of non-participants. You can think of this like a semi-detached house - two distinct properties are contained within one building.
It must contain at least two flats, and at least two thirds of the flats must be owned by qualifying tenants.
In addition, it must pass what is known as the 25% non-residential rule.
This rule is that no more than 25% of the internal floor area of the building, excluding any common parts, can be used or should be intended to be used for non-residential purposes.
For example, non residential use would include shops or offices in the building.
Parking spaces and garages that are used by residential tenants are classed as residential space.
Sufficient qualifying tenants
A successful action requires that there are a sufficient number of qualifying leaseholders in the property.
The minimum must equal half the total number of flats in the building. If there are only two flats in the building, the leaseholders of both flats must participate.
Resident landlord exemption
There is a resident landlord exemption, that aims to make sure that a majority owner who converted and remains living in the property isn't forced to sell the freehold.
Leaseholders have no right of collective enfranchisement when:
- the building is not a purpose-built block but rather a conversion into four or fewer flats; and
- the same person has owned the freehold since before the conversion of the building into flats; and they or an adult member of their family has lived there for the past 12 months.
And then some properties are completely excluded from collective enfranchisement. These are:
- buildings within a cathedral precinct;
- National Trust property;
- a property where the freehold includes any track of an operational railway, including a bridge or tunnel or retaining wall to a railway track; and
- Crown properties.
While properties owned by the Crown are not subject to the legislation, the Crown has signalled that it may allow its tenants to buy the freehold of their property under the same principles as under the LRHUD.
Starting the collective enfranchisement process
The process can feel daunting, but taking it step by step can help make it manageable.
Getting leaseholders onboard
First, you should confirm that the collective enfranchisement qualifying criteria are met.
This will require talking to other people living in your building, and understanding whether they are leasehold owners or themselves tenants of a leaseholder.
You'll need to rally support from over two thirds of them.
Regular communication, clear explanations of the benefits, and a demonstration of reasonable efforts to involve everyone can help you gather the necessary consensus.
Preparing a participation agreement
A participation agreement is a document that outlines the rights and responsibilities of the participating leaseholders.
A formal participation agreement is not compulsory by law, but it is generally recommended by specialist solicitors to avoid any future disagreements among the participants.
The biggest area for disagreement is likely to be costs - who pays what proportion of property valuation expenses, professional fees, and the eventual price. Agreeing this in principle at an early stage serves as a strong foundation for later.
Choosing a nominee purchaser: selecting the right candidate
The nominee purchaser is the person that will be the new landlord once the collective enfranchisement claim is successful. They must be identified in the initial notice.
They could be an individual, a trust, or a company owned by the participating tenants.
The nominee purchaser plays such an important role in the enfranchisement process that the decision should be made with care. The choice isn't about favouritism but about trust, responsibility, and long-term vision.
Financing the process
Collective enfranchisement is a significant financial undertaking for the leaseholders that requires careful planning and resources to succeed.
Establishing the finance and a cost fund
Participating leaseholders will nee to collectively finance the purchase of the freehold.
A cost fund allows all qualifying tenants to contribute a share towards the total costs involved.
This fund will typically cover expenses like professional fees for a specialist solicitor, and the valuation costs for determining the purchase price.
Setting up such a fund early on is a good idea so that no single person becomes the funder who is never repaid.
The extent of each leaseholder's financial contribution may vary. Often, it's determined by the relative values of their flats or their share in the internal floor area of the building.
The price is determined by several factors, including the value of the flats in the building, the ground rent the landlord receives, and the length of the remaining lease term of each leaseholder.
Whilst you might feel confident in your ability to estimate the purchase price, employing a professional, qualified valuer experienced in leasehold reform will all potential participants a more accurate estimation of the final purchase figure before they start the action.
The price that the freeholder will accept is a negotiated figure - valuation does not provide an exact eventual settlement figure.
Instead, you should ask a valuer to provide a range of prices, ‘best and worst’ figures, valuing from both leaseholders' and the freeholder`s perspective and, from local experience, anticipating areas of claim and counter-claim.
In addition to the property's price, leaseholders need to factor in their liability for the freeholder`s costs. These include the freeholder`s reasonable legal and valuation costs, which are in addition to their own costs payable.
It is possible to ask a court to resolve any stalemate over the property's price. The First-tier Tribunal (Property Chamber) (FTT), which was known as the Leasehold Valuation Tribunal until 2013, specialises in resolving disputes related to leasehold property, including matters of collective enfranchisement. Keep in mind that application and hearing fees may apply.
The legal process that needs to be followed is set out in the Leasehold Reform Housing and Urban Development Act.
Serving the initial notice
The first step in formally starting a collective enfranchisement claim is to serve an initial notice to the landlord.
The notice must include certain information, such as the full names and addresses of all participating tenants and the proposed purchase price.
This notice also sets the valuation date, a key factor in calculating the purchase price.
You should use reasonable efforts to identify all freeholders and include them in the notice.
Be careful to complete the form correctly when you serve initial notice. Any errors in the notice or missing information can invalidate it, leading to a delay or even deemed withdrawal of the claim.
Consider seeking advice from a specialist solicitor to ensure you've completed it correctly.
Responding to the landlord's counter notice
After you've served the initial notice, the freeholder has the right to issue a counter-notice.
This must be done within two months from the date of receiving the initial notice.
The counter-notice will typically either admit or deny your right to collective enfranchisement and can propose a counter-offer for the purchase price.
Taking action if the freeholder fails to respond
If the freeholder does not respond with a counter-notice within the specified time, you can apply to the county court for a vesting order.
The court can then decide to let the collective enfranchisement process proceed at the price proposed in your initial notice.
Special situations in collective enfranchisement
Dealing with absent landlords
When the landlord is not readily contactable, a collective enfranchisement claim becomes more challenging.
The the Leasehold Reform Housing and Urban Development Act provides a legal pathway in these situations, enabling the qualifying tenants to pursue collective enfranchisement despite the absence of the landlord.
In such cases, the initial notice is served on the missing landlord's last known address or, if that is unknown, the notice can be affixed to a conspicuous part of the property.
Subsequently, an application may be made to the county court for a vesting order. This effectively substitutes for the landlord's engagement in the process.
An intermediate landlord is a leaseholder who owns a leasehold interest superior to the qualifying tenants but inferior to the freeholder.
The role and rights of intermediate landlords can be complex.
Essentially, if the flat owners are buying the freehold of their block of flats, any intermediate landlord's interest will be extinguished. In compensation, the intermediate landlord is entitled to a share of the purchase price.
It may be necessary for the determined by the FTT.
Public sector freeholders right to leaseback
Public sector bodies, such as local authorities and housing associations, may have the right to lease back properties that are part of a collective enfranchisement claim.
Under the Leasehold Reform Housing and Urban Development Act 1993, if a public sector freeholder loses the freehold to a block of flats where some are still let on secure tenancies, the freeholder has the right to a 999-year leaseback on those flats.
If your landlord is a local authority freeholder, you should ask them if any flats are let on secured tenancies.
What next after successful collective enfranchisement
Managing your property as the new freeholder
Transitioning from leaseholder to freeholder carries new responsibilities and considerations.
As the new landlord, the participating leaseholders will hold direct control over the management and maintenance of their building.
This involves decision making about service contracts, major works, insurance, and more.
While these tasks can be undertaken by the owners, many new freeholders choose to hire a managing agent - most likely a specialist property management company.
Service charges and ground rent
Once you're the new freeholder, service charges and ground rent become part of your remit.
Service charges cover the costs of maintaining, insuring, and providing services for the building, which are now the responsibility of the collective enfranchisement.
Ground rent, on the other hand, can cease to be relevant if you decide to renew your leases.
Lease extensions and new leases
On successful collective enfranchisement, you may encounter situations where lease extensions or even entirely new leases become necessary.
In the case of extensions, you have the authority to agree to extend the leases of the flats at nil ground rent and for no premium.
New leases may be required when a property changes hands.
It's essential to note, that some terms of these leases are regulated. Professional advice should be sought when a property is sold to ensure that the leases are properly drafted and the process is conducted smoothly.