A step-by-step guide.
This note briefly summarises the steps and timeframe for a group of residential flat tenants with long leases to act together to buy the freehold of their building, under the Leasehold Reform, Housing and Urban Development Act 1993. This process is called collective enfranchisement.
Purchasing the freehold allows tenants to collectively take control of the management of the property, including granting longer leases of each flat for longer terms at a lower rent, often a peppercorn. Landlords are obliged to sell the freehold to tenants who follow the statutory procedure, but the tenants must pay a purchase price (known as a premium), and they must also cover the landlord’s reasonable professional costs.
This note also applies to landlords who receive collective enfranchisement notices from their tenants. The process is the same, except that it begins at step 3 instead.
Step 1: instructing your team
The first step is to instruct a solicitor who will check that you qualify for a collective enfranchisement. Your solicitor will review which of the tenancies in question qualify for enfranchisement, and ascertain which tenants in the building will be joining the collective enfranchisement, as the claim is only valid if at least half the qualifying tenants in the building are participating (or, if there are only two qualifying tenancies in the building, both tenants).
Ordinarily the solicitor will advise that the qualifying tenants enter into a participation agreement together, which formalises the tenants’ relationship with each other and the financial contributions made by each tenant to the enfranchisement process. In most cases, and usually where there are more than 2 tenants, it will be beneficial for the tenants to jointly create a company which will become the new owner of the freehold.
At this point a valuation surveyor will be required to undertake an inspection of the flats to calculate the total purchase price the tenants must pay the landlord to buy the freehold. The surveyor will record this in a formal valuation report.
It is important to start the enfranchisement process before the remaining term of any qualifying leases falls below 80 years, as an increased purchase price will be payable to purchase the freehold where any of the underlying leases has under 80 years left to run.
Step 2: the initial notice
Using the surveyor’s report, your solicitor will draft and serve a statutory notice on the landlord, proposing the terms for the purchase of the freehold. The notice must specify a single person or entity, known as the nominee purchaser, who will become the new freeholder. This is why it is often best for the participating tenants to set up a company to become the nominee purchaser, rather than having to choose one of the participating tenants to shoulder the administrative burden.
There are certain circumstances where flats in the building are subject to a “leaseback” once the freehold is purchased. Your solicitor will advise on this at the outset, because any proposed leasebacks must be included in the initial notice itself.
Your solicitor will also register the notice at the Land Registry to ensure that any potential buyer of the property is aware that you have an ongoing application to buy the freehold. This will also prevent the landlord from creating new leases in the building which could otherwise prevent the enfranchisement from going ahead by reducing the number of participating tenants in the building below the minimum threshold.
Step 3: the landlord’s counter-notice
After receiving your notice, the landlord has two months to instruct their own solicitors and surveyors to review your notice, inspect the premises, prepare their own valuation survey and serve a counter-notice. The counter-notice may either:
- accept the claim and indicate the landlord’s own proposals for the purchase price payable and other terms for the sale of the freehold; or
- dispute the claim, giving reasons for the objection which may include the fact that the landlord intends to redevelop the building.
Your solicitor will review the landlord’s counter-notice to check its validity, and advise on the next steps if required. If the landlord wrongly disputes the claim for collective enfranchisement, it may be necessary to apply to the court for a declaration that the nominee purchaser was in fact entitled to bring the claim.
The nominee purchaser will also be responsible for the landlord’s reasonable legal and surveying costs incurred in granting the collective enfranchisement.
Step 4: negotiations
If the counter-notice is validly served, the parties’ respective surveyors then have six months from the date of the landlord’s counter-notice to agree the terms for the purchase of the freehold, including the purchase price payable.
Step 5: drafting the transfer
Once the terms for the purchase of the freehold are agreed, the parties must follow a strict timetable for the negotiation of the transfer document. The landlord’s solicitor will produce the first draft of the transfer, and the parties’ solicitors will fine-tune it via negotiation over the subsequent weeks.
Once the terms of the transfer are agreed, the parties will usually exchange contracts before completing the transfer. On exchange of contracts, the landlord is entitled to the payment of a deposit by the nominee purchaser, which will be the larger of £500 or 10% of the total purchase price.
Once the transfer is completed, it will be registered at the Land Registry showing the nominee purchaser as the new freeholder.
Step 6: if terms cannot be agreed
On the rare occasions where the parties cannot agree the terms of the transfer within the six-month window mentioned at step 4, or the timetable mentioned at step 5, the matter must be referred to the First-tier Property Tribunal (“FTT”). The FTT will then decide the purchase price that you must pay for the freehold based on evidence provided by both parties.
If the landlord fails to respond to your notice within the two-month period mentioned at step 3, then you can apply to the county court, within six months of the landlord’s deadline to respond, for an order granting the enfranchisement on the terms proposed in the initial notice.
Step 7: if your landlord is unknown or missing
Where your landlord is missing or unknown, the process is slightly different. If you have taken reasonable steps to track down the landlord but they cannot be located, then instead of serving the initial notice, you must instead apply to the county court for a vesting order.
Once you obtain a vesting order, the matter will be referred to the FTT to determine the purchase price, which you will pay into the court instead.
Contact FSP’s property litigation team today
At FSP, we are experienced in handling collective enfranchisements on behalf of both landlords and tenants, and working alongside a number of trusted external surveyors, we strive to ensure that our clients secure the best possible terms as quickly and smoothly as possible.
If you wish to purchase your freehold, or if you are a landlord and you have received a notice from your tenants seeking an enfranchisement, please contact Mark Banham in our property litigation team: [email protected].