25 April 2024
Under the Leasehold Reform Housing and Urban Development Act 1993, leaseholders have a statutory right to buy their freehold subject to some conditions. This is a procedure known as collective enfranchisement.
How many leaseholders must take part?
At least two thirds of the flats must also be owned by “a qualifying person” or otherwise the building will not be eligible for collective enfranchisement. If any flat owner owns more than two flats in the building, they will not be a qualifying person, and any flats owned by the freeholder are also deducted from the count.
Under the collective enfranchisement procedure, the participants must own at least half of the flats in the building. If there are nine flats and different people own all the flats, this would mean five of the nine would need to take part to exercise the right.
Are there any other conditions?
The building must not have more than 25% of the internal floor space used for non-residential purposes (for example shops or offices). Communal hallways and staircases are disregarded from the calculation.
If there are only two flats in the building, both flat owners must participate. A single leaseholder cannot proceed on their own.
There are also limited exceptions to the right of collective enfranchisement. For example, freeholds owned by the National Trust are not eligible. Also, if your building is a conversion which is not a purpose-built block, and contains four or fewer flats, then the building will not qualify if the freeholder or their family lives in one of the flats and has owned the freehold since before the building was converted into flats.
What if you don’t have enough qualifying people?
It may be possible to privately agree a sale of the freehold with your freeholder even if you are unable to gather together enough participating flat owners. However, whilst under the collective enfranchisement procedure, the freeholder must sell to the participating flat owners assuming none of the exemptions apply, the freeholder is not obliged to accept an offer outside of the 1993 Act.
If the freeholder were to accept a private offer, they would be bound by the requirement to serve notices under the Landlord and Tenant Act 1987 offering a Right of First Refusal to the flat owners before they can complete the sale. The Right of First Refusal is a "take it or leave it" offer to the flat owners. A majority of the flat owners must take part to accept the offer.
How much will it cost to purchase the freehold?
Only a specialist surveyor can advise on the potential purchase price of the freehold. The calculation is complex and based on a formula set out in the 1993 Act.
What are the legal costs?
A specialist leasehold property adviser will quote a fixed-fee plus VAT. This is divided between the participating flat owners. There would also be Land Registry disbursements to obtain title documents, the total cost of which would depend on the number of flats in the building. A fee will also be payable to the Land Registry to register the purchase, which will be between £20.00 and £500.00 depending on the purchase price.
You would also be liable for the freeholder’s reasonable legal and valuation costs.
How can we ensure that no-one withdraws part way through the purchase?
If you have many participants, it can be difficult to get everyone organised, particularly when it comes to collecting the money to complete the purchase.
It can also be a major problem if participants withdraw mid-purchase meaning you fall below the minimum requirements. If you have to withdraw from the purchase in these circumstances, you would still be liable for legal and valuation costs incurred up until that point as well as the freeholder’s reasonable legal and valuation costs.
It can be useful for all participants to enter into a Participation Agreement. This is a legally binding agreement made between the participants setting out their responsibilities. Within the agreement, you can ensure if someone withdraws, they still must pay their share of costs, or if they pull out causing the transaction to fall apart, they become responsible for all the costs incurred. A leasehold property advisor can prepare a participation agreement for a fixed fee plus VAT.
Do we need to set up a company?
The Land Registry will only allow up to four names on a title. It will therefore likely be necessary to establish a company to purchase the freehold on the participants’ behalf. Each participant would then be a shareholder of this company, which would represent their share of the freehold.
Even where there are fewer than four participants, it can be beneficial for a company to hold the freehold. Otherwise, when a flat owner comes to sell their property, it can be challenging to arrange for all of the freeholders to sign the transfer deed to transfer the flat’s share of the freehold to the prospective buyer.
It currently costs £12.00 to set up a company online with Companies House. There are administrative duties each year such as filing an annual return and accounts. Directors must be appointed who are responsible for the day to day running of the company.
For more information about collective enfranchisement, please contact Lee Hooper, a specialist leasehold property lawyer based at the firm’s Winton office.
