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jpc_logoThis article follows a talk given by Graham Jaffe, Senior Partner of Jaffe Porter Crossick LLP at the Flat-Living Leaseholders Roadshow on November 1st 2010. Co-authored by former Partner Katie Cohen, it provides a useful insight into why leaseholders should consider buying their freehold.

Acquiring the freehold of your building gives lessees the ability to take full control, remove incompetent managing agents and appoint your own.  It enables you to get rid of oppressive/unreasonable freeholders and at the same time the possibility of reducing excessive service charges and insurance premiums.

It is definitely a way to ensure value for money and avoid waste as well as protecting your investment. Buying the freehold enables lessees to acquire a 999 year lease at a peppercorn ground rent and a share of freehold

Does Your Building Qualify?

Lessees should ask themselves how many flats there are in the property and of these flats how many are qualifying tenants for the purposes of the Leasehold Reform, Housing and Urban Development Act 1993 (“The Act”). A qualifying tenant broadly speaking is one that has been granted a long lease in excess of 21 years. Lessees owning more than 2 flats are not a qualifying tenant of any of their flats. Lessees need to ascertain whether half of the total number of flats in the building are held on long leases because if not, the building cannot be enfranchised. 

Do We Have Enough Lessees Willing To Participate?

The lessees need 50% of qualifying tenants to participate. If there are two flats in the building, both lessees will need to participate. Note that it is possible for ‘Dummy Participants’ to sign the notice in order to comply with the requirements of the Act even if they do not want to participate in the freehold purchase. They will have no liability for costs but are merely signing the Section 13 Notice to facilitate the purchase of the freehold. 

The provisions of Section 18 of the Act preclude lessees from excluding participating lessees with short leases from participating in an attempt to defraud freeholders from obtaining marriage value that is payable when a lessee holds a flat with a lease of less than 80 years remaining.

Is Buying The Freehold A Better Option Than RTM (Right to Manage) Or Lease Extensions?

This is a common question asked and it all depends on a number of factors such as the length of leases and the interest amongst the lessees to acquire the freehold of the building. Another determining factor is the ability of at least 50% of the lessees to fund the purchase of the freehold and the size of the block. 

Note:
The 25% non-residential rule also applies to RTM. 

It is important to bear in mind that RTM does not improve the quality of title/length of lease.  We often advise clients of a two stage option. In other words, a group lease extension or obtaining RTM that serves as a precursor to acquiring the freehold.

What Will It Cost?

Transparency is essential from the outset to avoid any surprises. A solicitor engaged on the lessees’ behalf should provide a full fee proposal to the lessees. We often fix costs for stage 1 of the process which involves:

  • Investigation of the title by obtaining all leases and titles to the property;
  • Instructing a valuer to carry out the report;
  • Drafting a Participation Agreement which we always recommend in order to regularise the arrangement;
  • Reporting to the lessees.

A full Valuation is essential at an early stage to ascertain the likely cost of the freehold. We advise our clients to obtain an insurance valuation at the same time as once the freehold is acquired, the new freehold company of which the lessees are to be shareholders, will be responsible for the insurance of the building. Accordingly, it is vital that the lessees know the full reinstatement cost
Note: All costs need to be ascertained as accurately as possible including the likely fees and disbursements and valuer’s fees. 

There is a Stamp Duty Land Tax (SDLT) exemption for collective enfranchisements. The SDLT is not calculated with reference to the premium ultimately paid for the freehold but is calculated by dividing the premium by the number of participating flats. If this figure exceeds the current threshold of £125,000.00 SDLT will be payable at 1% and at 3% if the purchase price exceeds £250,000.

Is The Enfranchisement Of Our Block Affordable?

As lessees, you need the best possible information on the actual cost of freehold and all associated costs. The valuer appointed should apportion the price of the freehold between the flats.  You need to decide how other costs such as legal and valuer costs are to be apportioned, either being shared equally between the lessees or in the same proportions as set out in the valuation report.

With regards to long leaseholders who may not be interested in participating in the acquisition of the freehold but are essential in order to have the requisite majority of lessees to participate, consider a fixed (small) costs contribution by long leaseholders to secure participation.

There are options for funding the share of freehold of non-participating flats. There may be participating lessees within the building that have the funds to cover this or alternatively ‘White Knights’ who are outside investors.

Engaging The Right Professionals

This is key to buying your freehold. It is essential that the solicitor and valuer engaged have proven expertise in leasehold enfranchisement. All of the professionals below will need to work as part of a team to achieve the common goal of acquiring the freehold for the lessees on the best possible terms.  The list below is non-exhaustive but those engaged will include:

  • Solicitors
  • Valuers
  • Counsel in complex/large cases
  • Surveyor
  • Company formation
  • Accountant

How To Manage The Enfranchisement Process To Ensure Success

  • Appoint a single co-ordinator
  • Form a committee
  • Sign a participation agreement
  • Keep costs down by minimising lessee contact with solicitor
  • Keep participants regularly updated throughout the process
  • Manage expectations
  • Provide a time line
  • Try to negotiate an agreement at an early date
  • Adopt a pragmatic approach
  • Ensure deadlines are met to avoid deemed withdrawal

The solicitor engaged must remember the following key deadlines:

  1. Apply to the Leasehold Valuation Tribunal (LVT) within 6 months of the service of the counternotice if all terms not agreed
  2. Exchange contracts, complete or apply to County Court within 4 months of date all terms of the acquisition agreed

Timing

The best time to start is NOW as delay benefits only the freeholder. The full and prompt co-operation from participating lessees is essential. Remember that voluntary deals outside the Act are always quicker but be aware of the terms being offered.

As a useful summary, below is a realistic time line for a medium size block comprising of 6-10 flats:

  • Instructions and valuation – up to 2 months
  • Commitment  Participation Agreement and serving s.13 notice – up to 3-4 months
  • Agreement with no LVT – up to 4 months
  • Completion – up to  2 months
  • If an LVT hearing is required then up to a further 4/6 months can be added.

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www.jpclaw.co.uk
Enfranchisement Department

Graham Jaffe
Partner

Jaffe Porter Crossick LLP
[email protected]
020 7644 7260
  Katie Cohen
Solicitor

Jaffe Porter Crossick LLP
[email protected]
020 7644 7261

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