Collectively Buying the Freehold: Criteria, Absent Freeholders and Non Participants
The Leasehold Reform, Housing & Urban Development Act 1993 gave leaseholders of flats the right to collectively buy the freehold of their block of flats.
It’s a process of several months (sometimes years) depending on the building and its residential makeup as both have to meet certain criteria. It is also equally important to be aware that a building might be subject to several forms of lease so if possible, the terms of the new lease should be agreed before commencing the claim. Disputes can often arise when the mechanism for apportioning service charges in the existing leases differs on each one (and if it does then the lease is defective) with the participants unable to agree on how the new lease should reapportion those charges.
The building must be self contained with at least two flats, at least 50% of all flats in the building must participate (if there are only two flats in the building then both must participate), a maximum of 25% of internal floor space for non-residential use and it must not be a building within a cathedral precinct, a National Trust or Crown property.
The qualifying criteria for leaseholders is that they:
- Own a lease that when granted had an unexpired term of at least 21 years;
- A lease with an unexpired term of less than 21 years but with a clause providing a right of perpetual renewal or;
- The communication of a long lease under the Local Government Housing Act 1989 following the expiry of the original term or;
- A shared ownership lease where the leaseholders share is 100%;
- The leaseholder owns a maximum of 2 flats in the building (although you can still qualify for a lease renewal).
Even if a leaseholder satisfies one of the above conditions there are certain exceptions where they will still not qualify where they:
- Have a landlord who is a charitable housing trust and the flat is purchased as part of the charity’s functions;
- Own more than 2 flats in the building;
- Own a business or a commercial lease.
VESTING ORDERS IF THE FREEHOLDER IS ABSENT
Qualifying tenants can apply to the county court for what’s called a ‘vesting order’ under s26(1) of the 1993 Act. This removes the need to serve an Initial Notice under s13 on some if not all of the landlords. If there is a head landlord present but the freeholder is missing, the court can order that the head landlord take on the role of Reversioner and deal with the claim in the usual way.
If the vesting order is applied for, s26(5) of the Act allows the court to issue directions to give effect to rights and obligations including directions adapting or discarding any of the requirements of the Act. The court will make an order vesting the interest to be acquired in the body set up by the qualifying tenants to collectively enfranchise (i.e. the nominee purchaser). Furthermore, the terms of acquisition must be agreed by the LVT.
As long as 50% of the leaseholders qualify there is no legal requirement for any non-qualifying leaseholders to be part of the process. This is because on 12th May 2009, the previous Government published its consultation paper ‘The Right to Enfranchise (RTE) Provisions’ setting out its proposal for the non-implementation and repeal of s121, s122, s123 and s124.These sections were going to grant membership of the Right to Enfanchise Company to all qualifying leaseholders who wanted to be part of the collective enfranchisement process, giving them a legal right to join.
However, serious concerns over workability were expressed and although the Government acknowledge that the collective enfranchisement process had worked well in the main for the last 15 years or so, it still meant that eligible tenants could be directly excluded from the process, perhaps because of neighbourhood disputes, or possibly indirectly excluded by being offered unfavourable participation terms.
The issue that was fundamental in resolving this was the need for an effective mechanism for determining, (in default of agreement by participants), how the costs and expenses of collective enfranchisment would be apportioned between them. The conclusion reached was that this could not be achieved without introducing disproportionately more burdens than advantages into the process.
So, excluded leaseholders can’t launch their own claim for the same freehold and they remain in exactly the same situation as they were at the outset in that they still have the same lease and pay the same ground rent. The only difference to them is that they will have a new freeholder in whoever the Nominee Purchaser is, and will pay ground rent to whoever finances the non-participant element of the purchase price.
The next stage of the process is that of how much the process will cost.