Collective Enfranchisement: An Overview
The Leasehold Reform, Housing & Urban Development Act 1993 gave leaseholders of flats the right to collectively buy the freehold and become the new freeholders themselves. The process can however take several months, or several years, depending on the building and its residential makeup.
A Nominee Purchaser is required to be decide upon at an early stage of the process because leaseholders choose a single person, one of the leaseholders, a corporate individual, a Resident Management Company established by the leaseholders, or a trust,they will be a) responsible for conducting the later stages of the process and b) on completion will be the new landlord responsible for the management of the building.
Note: the RMC must be established before the Initial Notice is served.
Not all of the qualifying leaseholders will necessarily wish to take part in the process and whilst some banks will provide finance for just this purpose, there are also companies offering ‘white knight’ funding in exchange for shares in the company. If either option is to be considered they must be thoroughly investigated before commencing the claim and no written contracts for third-party funding (except by way of a loan) should be entered into before an exchange of contracts.
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) resulting in the participants being unable to agree on how the new lease should reapportion those charges.
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. This is one of the areas where the services of a solicitor should be engaged. Other areas include:
- Preparing information for the action;
- Setting up the RMC;
- Service of the Initial Notice;
- Conveyance of the title;
- Responding to the freeholders request for the claim to be substantiated;
- Amending the lease terms after enfranchisement.
There is no legal requirement for any non-qualifying leaseholders to be part of the process. This is because on 12th May 2009, the Government (at the time) 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 enfranchisement 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.
Both the building and the leaseholders must meet certain criteria before embarking on the process, which can be read here.