Under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) qualifying tenants of flats have a right to purchase their freehold on payment of a premium to the landlord. That right is known as “collective enfranchisement”.
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Why buy your freehold?
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Freehold purchase gives leaseholders more control over managing and maintaining their building.
Once the right to collective enfranchisement has been exercised, the leaseholders will have the ability to grant themselves very long leases, usually for 999 years, at a “peppercorn rent” (i.e. of no monetary value).
When the unexpired portion of the leases has less than 80 years to run, the cost of purchasing the freehold becomes considerably more expensive. This is because the landlord is entitled to a 50 per cent share of the “marriage value”. In broad terms this means the difference in the value of the property before and after collective enfranchisement. Marriage value is not payable where the leases have more than 80 years to run.
Who is a qualifying tenant?
A person is a qualifying tenant if he or she is a tenant of a flat under a “long lease”, i.e. one that is granted for more than 21 years.
If a person owns three or more flats in the building, he or she will not be a qualifying tenant in respect of any of those flats.
How is the right claimed?
The right to buy the freehold is claimed by the service of an “Initial Notice” on the landlord which gives information prescribed by the 1993 Act. If the required information is not given, the Initial Notice will be invalid.
The notice is served by the “Nominee Purchaser” (normally a company incorporated specifically for the purpose of buying the freehold) which conducts the proceedings on behalf of the qualifying tenants.
Qualifying tenants representing at least 50 per cent of the flats in the building must become members of the Nominee Purchaser company before it can serve the Initial Notice. If there are only two qualifying tenants, both must become members of the Nominee Purchaser company.
What happens if the Initial Notice is invalid or withdrawn?
The 1993 Act imposes strict procedural steps which must be taken within strict time limits. If the Initial Notice is invalidated for any reason or if it is withdrawn, another claim cannot be made for a further 12 months and the landlord will be entitled to his costs of the abortive transaction. In certain circumstances, the Initial Notice will be deemed to be withdrawn. It is therefore advisable that professional legal and valuation advice is sought from the outset.
What happens next?
The landlord must give a Counter-Notice to the Nominee Purchaser within the time limit specified in the Initial Notice which must be not less than two months after its service on the landlord. The landlord may either admit the right to collective enfranchisement or deny the right. The right may only be denied on limited grounds, such as the invalidity of the Initial Notice or where the landlord has an intention to redevelop the premises. The redevelopment ground only applies if not less than two-thirds of the leases have less than five years left to run.
If the landlord admits the right, the Counter-Notice must state which proposals are accepted and which (if any) are not accepted. It must specify, in relation to each proposal not accepted, the landlord’s counter-proposal.
If the landlord denies the right to collective enfranchisement, the Nominee Purchaser may apply to the court for a declaration that the Initial Notice is valid. The application must be made not later than two months after the giving of the Counter-Notice.
If the landlord admits the right to collective enfranchisement but the terms cannot be agreed, an application may be made by either party to a Leasehold Valuation Tribunal for a determination of the matters in dispute.
What if the landlord fails to serve a Counter-Notice?
The Nominee Purchaser may make an application to the court for a vesting order determining the terms of acquisition. An application must be made not later than six months of the date on which the Counter-Notice was required to be given.
What if the landlord is absent?
Special provisions under the 1993 Act apply where the landlord cannot be found or his identity cannot be ascertained. In such a case the Nominee Purchaser must make an application to the court for a vesting order and the premium is paid into court.
What happens next?
Once the right to collective enfranchisement has been established and the terms agreed or determined, the landlord has an obligation to prepare the draft contract for the conveyance of the freehold and to give it to the Nominee Purchaser within 21 days. The Nominee Purchaser then has 14 days in which to amend the draft, otherwise it is deemed to be approved. The landlord then has a further 14 days to make amendments.
The landlord can require the Nominee Purchaser to pay a deposit on exchange of contracts of £500 or 10 per cent of the purchase price, whichever is greater.
Once the final form of the contract has been agreed, contracts are exchanged and completion takes place.
How long does the process take?
In a relatively straightforward case, it normally takes around six months to acquire the freehold from start to finish. It can take longer if it is necessary to make an application to the court or Leasehold Valuation Tribunal.
What about the landlord’s costs?
The Nominee Purchaser is liable for the reasonable costs of the freeholder and any intermediate landlord. Payment must be made of the costs incurred in:
(a) undertaking an investigation and verifying title;
(b) providing information required by the Nominee Purchaser;
(c) valuation of the premises; and
(d) conveyance of the freehold to the Nominee Purchaser.
The Nominee Purchaser is not liable for the landlord’s costs of negotiation of the valuation, nor is the Nominee Purchaser liable for the landlord’s costs of Leasehold Valuation Tribunal proceedings.
Free quotations are provided on request.
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These notes are intended for general guidance only and individual advice should be sought as appropriate.
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