Share of the Freehold
When flats are sold as ‘share of the freehold’ it will be because one of two mechanisms have been used:
- The freehold is owned jointly by a number (up to four) of the flat owners in their personal names which will be noted on the title deeds;
- Leaseholders have exercised the right under s1 of the Leasehold Reform, Housing and Urban Development Act 1993 to collectively buy the freehold and become the new freeholders.
Each of the participating leaseholders of the latter will hold a nominal share in that company (along wiith their leases) as company directors, with the Articles of Association needing to be drafted carefully so that when an individual sells their flat they also have to sell their share in the company to the new purchaser. If two people own the property then the share will be owned jointly so as not to give one flat too many voting rights.
None of this will apply if the seller did not take part in the process. Whilst it is sometimes possible to buy into the freehold at a premium later, there is no obligation on the part of the RMC to sell a share.
The main advantages of owning a ‘share of the freehold’ are:
- The leases can be extended at little or no cost to 999 years at a peppercorn rental (i.e. nil);
- As the freehold is collectively owned by the tenants of the block, any changes to the terms of the leases that are causing problems (for example, pets or wooden flooring) can be varied so long as the majority of shareholders in the freehold company agree;
- The tenants have far more control over the day-to-day management of their building;
- The tenants have the ability to govern the level of service charges and insurance premiums levied as they are in control; and
- The saleability of a flat with a share of freehold is generally increased. Often, a property is an individual’s most valuable asset and securing a share of freehold will protect it.
Note: It is generally recommended that in any developments larger than 4 flats that a managing agent be used.
QUALIFYING AND NON QUALIFYING LEASEHOLDERS
Not all the qualifying leaseholders will necessarily wish to take part in the enfranchisement process so some banks will give 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.
There is also no legal mechanism 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 stay in exactly the same situation as they were at the outset. They still have the same lease and pay the same ground rent and 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.
Disputes over enfranchisement can often arise when the mechanism for apportioning service charges in the existing leases differ 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 re-apportion 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.
The next stage of the process is working out how to compensate the freeholder for the loss of ground rent.