Collective Enfranchisement
Flat owners (lessees) have the right to buy the freehold of the building on a collective basis (Collective Enfranchisement). Below is a brief explanation:
Collective Enfranchisement
The Leasehold Reform Housing and Urban Development Act 1993 (as amended by the Commonhold and Leasehold Reform Act 2002) gives tenants the right to buy the freehold of the building or part of the building and this right is known as Collective Enfranchisement.
REQUIREMENTS
In order to qualify for collective enfranchisement, there are several requirements which must be met:
- the building must be self-contained or be part of a building which is capable of being self-contained;
- there must be at least 2 flats in the building;
- At least two thirds of the flats must be owned by qualifying tenants. If there are only 2 flats, both must qualify;
- No more than 25% of the building can be used for non-residential (commercial) purposes;
To be a qualifying tenant you must have a long lease which was for a term of more than 21 years when granted.
EXCEPTIONS
However, it is important to be aware of certain exceptions;
- You cannot qualify if you hold a business lease or;
- if you own 3 or more flats in the building and;
- the building will not qualify if it comprises four or less units and has a resident freeholder.
PRELIMINARY WORK
Once these criteria have been established, usually in consultation with your solicitor, preliminary work may include:
- identifying the freeholder,
- establishing that the minimum number of qualifying tenants wish to participate,
- drawing up a participation agreement and possibly setting up a Right To Enfranchise (RTE) Company.
VALUATION
Of course, one of the most important steps is instructing a surveyor to advise on the level of price payable. The basis of the valuation is set out in the Act and is complex, which is why this work is best left to a specialist valuer. Not only will the valuer need to understand the provisions of the Act in relation to the valuation, but they will also need a good knowledge of the local market.
The basis of valuation is set out in Schedule 6 of the Act and the price payable is the aggregate of three elements:-
- The building’s investment value to the freeholder:This is made up of the capitalised value of the annual rental income to the landlord from the ground rents, for the remainder of the original term, plus the loss of the reversion, which is the current value of the flats deferred for the remaining term of the leases.
- Half of the marriage value:‘marriage value’ is the potential increase in value of the flat over and above the combined value of the landlord and tenants current interests arising from the ability of the participating tenants to grant themselves new leases at nil premium and no ground rent. This amount is shared equally between the parties but only applies when the unexpired term of the subject lease is less than 80 years.
- Compensation for any loss to the freeholder arising from loss of the building: This is to provide a remedy to the landlord for any diminution in the value of his interest in other property, including development value.
THINGS TO THINK ABOUT
The process of collective enfranchisement is complex with the need to serve formal notices and counter notices within strict time limits. Participating tenants will need to establish how the purchase will be financed, bearing in mind that they will be responsible for the freeholder’s valuation fee and legal costs. They also need to consider any tax implications and how the purchase of non-participators flats is dealt with.
If the terms cannot be agreed by negotiation, then an application to the Leasehold Valuation Tribunal (LVT) must be made and again, there are strict time limits for this. Appeals can be made against decisions of the LVT to the Lands Tribunal under certain circumstances.
IMPORTANT
From what has been written above, it will be appreciated that specialist legal and valuation advice is imperative. This brief summary is not definitive but intended to give an overview of a complex and ever changing process and professional advice should always be sought if contemplating making a claim.
Contact our Specialists (click on the links below)
For further information, please contact one of our specialist valuers:
Richard Bull - 01273 876207 or 01903 229204 covering our Brighton and Worthing offices,
Mark McFadden - 01323 437903 based in our Eastbourne office
Peter Turner – 01293 441310 based in our Crawley / Gatwick office.