Collective Enfranchisement (share of the freehold)
When flats are sold as ‘share of the freehold’ it will usually be because 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 will hold a share in that company as company directors.
Note: The other way a flat can be share of the freehold is where 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.
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.
Leaseholders and the building are required to meet certain criteria in order to exercise the right which are that:
- The building must be self contained with at least two flats;
- A maximum of 25% of internal floor space for non-residential use is required;
- It must not be a building within a cathedral precinct, a National Trust or Crown property.
The 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).
- At least 50% of the leaseholders must take part, or 100% if the building consists of 2 flats only.
- At lease 2/3rds of all the flats in the building must be ‘qualifying tenancies’ (whether or not participating).
There are however certain exceptions where they will 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.
Leaseholders will then need to form a resident management company and agree a Nominee Purchaser before serving the Initial Notice on the freeholder. Whether leaseholders choose another leaseholder. a corporate individual, a Resident Management Company or a trust, the Nominee Purchaser 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.
All leaeholders who take part in the process will own a share of nominal value in the company along with their leases. Subsequently those flats are marketed ‘share of the freehold’. The Articles of Association need 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, there is no obligation on the part of the RMC to sell a share.
Not all the qualifying leaseholders will necessarily wish to take part in the enfranchisement process and whilst 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.
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.
NON QUALIFYING LEASEHOLDERS
There is 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.
WHEN THE FREEHOLDER IS ABSENT
When the freeholder is deemed absent, (whch means that all efforts to trace them have failed) it is not possibe to serve the notice as there is no one to serve it on. Legislation has however made provisions by allowing leaseholders to make a formal application on a CPR Part 8 application form to the Court for a Vesting Order under s26(1). This will allow for the transfer of the freehold title when the freehold value has been determined by the First Tier Tribunal and the payment received by the Court. The Court will then designate someone to sign a transfer of the title in place of the missing freeholder. The land registry will then register the transfer of the freehold title to enable leaseholders to start managing the building.
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.
It is important to note that before a Vesting Order is granted the Court will need to be satisfied that the proper attempts have been made to trace the freeholder which are as follows:
- A notice of claim being served on the freeholder’s last known address or the same notice served in the London Gazette or a local paper;
- A request sent to the court to dispense with the serving of a notice;
- The Land Registry searched to make sure that the freeholder no longer owns his last known address, has moved to an unknown address or the services of an Enquiry Agent has been engaged;
- Witness statements provided confirming that a visit to the Freeholder’s last known address yielded no forwarding address, or;
- An absent freeholder title indemnity policy that a recent purchaser of a flat may have taken as a condition of securing the mortgage.
- Witness statements confirming that a visit to the freeholder’s last known address did not provided a forwarding address.
If the Court is satisfied with the application and the steps taken to find the freeholder, a Vesting Order can be granted without the need for a formal hearing.
Whilst the transfer cannot be reversed if the original freeholder suddenly re-appears, the freeholder can apply to the court for the premium to be paid to them.
The next stage of the process is that stage is of working out how to compensate the freeholder for the loss of ground rent.