A group of Tenants in a building can join together to purchase the freehold of the building under what is known as “Collective Enfranchisement”. It stems from a provision in the Leasehold Reform and Housing Urban Development Act 1993. Here is a Guide that sets out how a Tenant qualifies and the procedure that they must follow to purchase the freehold of the building.
Leasehold and Freehold – The Difference
When you have a building that is comprised of multiple people who occupy different parts of the building i.e. a block of flats, then the legal status of the building itself is known as the freehold and each of those flats will be occupied by tenants under a separated agreement known as a lease.
A Lease usually grants the tenant certain rights such as a right of support from the flat above, a right to access the common areas etc. and in return they pay a rent and sometimes a service charge to the Landlord and the Landlord is often then responsible for maintaining the building and for insuring the building.
The freehold is what the Landlord owns (the building itself) and then the separate parts of the building that are owned by each of the Tenants are known as the leasehold. Lease terms can vary from anything from relatively short periods i.e. a few years, to 999 years.
In order to purchase the freehold of the building you would need at least 50% of the flat owners who want to purchase the freehold. There is then a set procedure that those flat owners must follow in order to purchase the freehold. Before they start, both the Tenants and the building has to qualify for collective enfranchisement.
- The Tenants’ Lease has to have a minimum of 21 years remaining of the Lease term.
- The same person cannot own more than two of the flats in the building.
- If there is a non-residential part of the building then if that non-residential part comprises more than 25% of the total amount of the building then they will not qualify.
- If the Landlord has owned the freehold of the property since before the building was converted into flats then again the Tenants would not qualify to purchase the freehold.
There are qualifications for the actual building itself and these are: –
- The building has to be self-contained in whole or part.
- At least two thirds of the flats in the building have to be owned by qualifying Tenants (see above).
- At least half of the Tenants in the building have to participate and want to purchase the freehold.
In addition, if either the Landlord or a member of their family has lived in the building for the past 12 months then that makes the building exempt from being subject to the Tenants being able to purchase the freehold under this procedure.
- The Tenants who want to purchase the freehold have to send out an ‘Initial Notice’ to the Landlord which contains their names and addresses (or if they want to purchase in the name of a Limited Company the details of that Company) together with the price that they wish to pay for the freehold. It is advisable for Tenants to have a Participation Agreement which is a collective Agreement between themselves setting out the terms on which they all want to purchase the property. That ensures that each of the Tenants knows exactly where they stand before proceeding. The Tenants should also have a professional valuation of the freehold undertaken so that they know accurately what the freehold is worth before making an offer to purchase.
- They then service the Notice on the Landlord/freehold owner which has a response date.
- The Landlord/freehold owner then has to respond by that date which is normally two months after receipt of the Notice from the Tenants.
- The Landlord/freehold owner can then serve a Counter Notice which states whether they want to accept the Tenants’ right to purchase the freehold or reject it.
- If the Landlord does not respond within the time period set out in the Tenants’ Notice then the Tenants can acquire the freehold on the terms included in their Notice. There is also a separate procedure for actually enforcing this.
- If the Landlord accepts that the Tenants have a right to purchase but disputes the terms – which is usually the price that they have offered – then the parties have a further two months to negotiate the terms. If they cannot reach an agreement then either party can apply to the First Tier Property Tribunal who will then have a hearing to make a decision on the terms. The Tribunal will then make a ruling after considering evidence from both parties at a hearing. What that ruling has been made both sides are required then to enter into a Contract that will contain time limits for dealing with the transfer of the freehold.
- It is important to remember that the Tenants have to pay the Landlord’s reasonable legal and Surveyor’s costs as well as their own costs in the event that the matter is accepted by the Landlord but if it is rejected by the Landlord and it goes to Tribunal then each party is responsible for paying their own costs for that Tribunal hearing but the Tribunal can order one party to pay the other’s costs if they deem it appropriate.
The important thing with purchasing the freehold is to have an Agreement between the Tenants so that all of the Tenants are clear on exactly what their roles and responsibilities are and the procedure that they will need to follow.
It is also vitally important to make sure that the Tenants are aware of the costs involved because going to the First Tier Property Tribunal is likely to be expensive as are the Landlord’s legal fees.
Before starting the procedure it is advisable for the Tenants to meet to discuss these matters, obtain details of the costs and then seek legal advice before serving a Notice on the Landlord.
If you would like more information either from a Tenant’s or a Landlord’s perspective about this procedure and collective enfranchisement please do not hesitate to contact us at email@example.com or 01654 711499.