An Introduction to Collective Enfranchisement

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For many of us, living in close proximity to our neighbours is, at best, pleasant. At worst? Horribly anxiety-inducing.

Entering into a mutually beneficial participation agreement, purchasing a freehold, and potentially starting a company with our neighbours, is a whole different ball game.

In the case of collective enfranchisement, this may not, in fact, be the worst idea ever.

Hear us out: removing ground rent charges, extending the leases on each property and potentially increasing the value of your own and your neighbours’ properties can bring incredible freedom for leaseholders.

So, is it worth the potential headache? For any leaseholders who are considering exercising their right to purchase their freehold, here’s our introduction to collective enfranchisement:

What is collective enfranchisement?

Collective enfranchisement is where leaseholders can jointly purchase the freehold of their residential property.

If all criteria for enfranchisement are met, and the correct legal claim process is followed, the landlord cannot refuse the sale of the freehold.

Eligibility for collective enfranchisement

In order for tenants to purchase the freehold through collective enfranchisement, the following conditions must be met:

  • Two-thirds of the flats must be owned by leaseholders whose leases have more than 21 years remaining on them.
  • The building must contain two or more flats. If there are only two flats in the building, both tenants must participate
  • The freeholder themselves, or a close relative of the freeholder, must not live in the property
  • The building must not comprise 25% or more commercial/non-residential floorspace (including offices or shops)

Process for collective enfranchisement

Whilst the legal process can at first seem rather intimidating and complex, the basic process to serve the claim to the freehold can be summarised as follows:

  1. Checking eligibility (see above) and obtaining legal advice specific to the enfranchisement at hand
  2. Organising for enfranchisement, which may involve canvassing neighbours to participate
  3. Creating/signing a participation agreement for all participating tenants
  4. Choosing the nominee purchaser
  5. Selecting and instructing any other professional advisers (such as surveyors)
  6. Assessing the purchase price
  7. Serving the Initial Notice to the current freeholder
  8. Preparing for any subsequent procedures, such as going to tribunal in the event of a refusal from the current freeholder, such as a dispute in regards to the purchase price

Advantages of collective enfranchisement

  • Leases of up to 999 years can be granted, making the properties much easier to sell at a higher price
  • Management of the building can be controlled by the tenants themselves (this is often done by setting up a company, of which the participating tenants are shareholders)
  • Ground rent charges can be minimised, or removed through varying a tenant’s lease
  • Any defects in the leases and the property itself can be put right
  • Mortgage companies will often approve loan extensions to cover the cost of freehold purchase, as it essentially makes the asset more secure
  • Inheritance is preserved
  • Deterioration in value is much less likely, with the property likely to instead rise with market values
  • If all runs smoothly, collective enfranchisements can be carried out within 12 months

Disadvantages of collective enfranchisement

Whilst there can be disadvantages to participating in collective enfranchisement, having an excellent legal team will help to mitigate any issues before they arise. They should prepare leaseholders every step of the way so there are no unexpected costs, and the process runs smoothly.

That being said, those thinking of enfranchising their lease should be aware of the following:

  • Collective enfranchisement can be a lengthy process, particularly if the current freeholder disagrees with the offered price
  • The current freeholder can take the leaseholder’s advice, or they can get separate advice, and their own survey. This additional legal advice and further survey will be charged to the participating tenants
  • Participating tenants are responsible for all legal (and surveyor) costs, up to the point of if (or when) the case goes to tribunal, so it has the potential to be an expensive process
  • In addition to their own share of the freehold, participating tenants need to pay for a proportion of the cost for tenants who are not participating. This is because the entire freehold must change hands at the same time

New legislation to benefit collective enfranchisement

With the Law Commission’s report on leasehold enfranchisement, published in July 2020, some changes to current legislation could see a streamlined enfranchisement process, or even skipping the need for it entirely.

Key proposed changes include:

  • The percentage limit of permitted non-residential use could be raised from 25% to 50%. The number of buildings that are eligible for enfranchisement could therefore increase considerably
  • Reinvigorating commonhold – which allows people to own a flat forever, with a freehold title and no landlord – as an option to replace leasehold for newly-built flats.
  • Creating a new right to a longer lease extension (of up to 990 years) for houses and flats, to replace short extensions of 90 or 50 years under the current law
  • Any lease extensions granted under the above proposed law would be exempt from ground rent charges
  • Removing certain procedural traps and shortcomings aimed to ensure participating tenants cannot be forced to accept new obligations, such as to not develop or extend the building

For more information and commentary on the key recommendations in the Law Commission's report, click here.

If you are thinking of purchasing the freehold of your property, or need legal advice on any aspect of the collective enfranchisement process, get in touch with Carlsons Solicitors.

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