Collective Enfranchisement Procedure Where Landlord Can Be Located
The following provides you with some general information as to the stages involved in a collective enfranchisement purchase. Please note that it is only meant as a guide and does not cover every part of the enfranchisement process. If you decide to proceed, the process will be fully explained and instructions taken from you at each stage.
1. Preliminary & Eligibility
1.1 The Right
The Leasehold Reform Housing and Urban Development Act 1993 gives the tenants of flats who satisfy certain conditions a collective right to purchase the freehold interest in the building in which their flats are located, along with any common areas, such as gardens or parking areas, which the tenants have a right to use.
The qualifying conditions and the right itself are both the subject of extensive and at times complicated legal provisions and procedures. As such, this information sheet is only intended as a brief overview and not an extensive or comprehensive report. Adcocks will produce an Eligibility Report to confirm that the tenants and the building meet the qualifying criteria. This stage is extremely important because the tenants will be unable to exercise their right to purchase the freehold if they do not meet the eligibility criteria.
However, in brief, the eligibility criteria can be summarised as follows:
1.2.1 The building must be a self-contained building or a structurally separate part of such a building that is divided vertically from the other parts.
1.2.2 The building must contain two or more flats held by “qualifying tenants”. A “qualifying tenant” is a tenant who owns a “long lease”, which is a lease originally granted for a term exceeding 21 years.
1.2.3 At least two-thirds of the flats in the building must be held by qualifying tenants.
1.2.4 No more than 25% of the internal floor area of the building containing the flats must be non-residential.
1.2.5 The building must not be an excluded building. Certain buildings are excluded under the Act, for example: certain buildings that have a resident landlord and National Trust buildings.
1.2.6 The notice initiating the collective enfranchisement process must be given by tenants of at least half the flats in the building, all of whom must be qualifying tenants.
One of the most important factors that will determine whether or not you wish to commit to the enfranchisement process will be the cost of purchasing the freehold itself and the likely legal costs that will be incurred in respect of the enfranchisement process.
We are able to offer an in-house valuation of the price of the freehold at the price quoted in the schedule of fees. We will also give you an estimate of our costs as early as possible.
Briefly, the purchase price is made up of the following:
1.3.1 The open market value of the freehold interest in the building. The valuer will apply a set of complex rules and assumptions before arriving at an opinion about this, but essentially he will be looking to determine the combined value of the term (the value an investor would attribute to the right to collect ground rent from the flats in the premises for the unexpired term of the leases) and the reversion (the value an investor would attribute to the future promise of obtaining the vacant freehold of the building when the terms of the leases all expire in the distant future).
One of the more recent and important cases concerning valuation (Sportelli – 2006/2007) dealt with the “deferment rate”, which is a percentage discount that is applied to the vacant freehold value of the whole building to determine the value of the reversion and reflect the fact that the landlord will not be able to claim the vacant freehold of the building until all the leases have expired. The higher the deferment rate, the lower the price.
Prior to Sportelli, the deferment rate could fall anywhere between 4% – 8%, and prices varied considerably as a result. The Lands Tribunal in Sportelli sought to set a standard deferment rate of 5% across the board. The general effect of this decision was to increase the purchase price payable for freehold interests acquired under the Act. In most cases, Leasehold Valuation Tribunals and Lands Tribunals have followed this decision, but in more recent cases they have shown a willingness to depart from Sportelli, especially where the building is the subject of considerable deterioration or dilapidation. In an important Lands Tribunal case in December 2009, a deferment rate of 6% was allowed in respect of a block of flats in Birmingham. It is generally thought to be significant that the Sportelli decision related to property located in Prime Central London.
1.3.2 Marriage Value: The tenants under existing leases have a special interest in buying the freehold. If the tenants buy the freehold, they may grant themselves 999-year leases at no premium and reduce their ground rent to peppercorn.
The combined value of the freehold interest and all the leasehold interests will therefore be greater after the tenants have enfranchised. The increase in value is known as marriage value, and the landlord is entitled to 50% of this.
There is no marriage value payable in respect of any leases which have an unexpired term of over 80 years. This can have a significant effect on the price. Accordingly, if the unexpired terms in the leases in your building are approaching 80 years, it would be wise to consider negotiating a purchase or exercising your rights under the Act as soon as possible.
1.3.3 If enfranchisement lowers the value of other property belonging to the landlord then the tenants must pay compensation.
Once you have established that you are eligible to enfranchise, you first task will be to arrange for a leader or possibly a small group of tenants to help organise the process and act as the intermediary between Adcocks and the other tenants. This helps to reduce costs, as we are able to liaise with one person who passed the information on to the other tenants.
Adcocks discuss the enfranchisement process with the lead tenant and take some initial details regarding the property and the leases. The lead tenant must ascertain from the other tenants who is likely to want to proceed with the purchase. To meet qualification criteria, at least 50% of the tenants in the building must be willing to proceed, however, please note that this does not mean that they must contribute financially (although it is most common for the participating tenants to split the costs equally).
2. Commitment to Purchase
Assuming the Eligibility Report confirms that you are able to exercise your right to enfranchise, the lead tenant should call a meeting with the tenants in the building to decide who would like to participate in the purchase.
Tenants commit themselves to the purchase by signing up to a letter of intent and/or entering into a Participation Agreement between the participating tenants. This confirms the tenant’s participation and usually gives all participating tenants piece of mind. At this stage, participating tenants are asked to contribute financially.
The Participation Agreement defines the rights and obligations of the tenants and the enfranchising company (see below). Once the enfranchisement process has begun, it is important that all the participants remain committed. It is crucial, for example, to ensure that the purchase money is collected and paid to the landlord within the specified time limit.
3. Nominating a Purchaser to purchase the Freehold
The nominee purchaser is the person named in the Initial Notice, who will acquire the freehold and become the new landlord.
The nominee purchaser can be an individual, a trust or a company, It is advisable to incorporate a company (usually one limited by shares) to act as the nominee purchaser, especially if there are a number of participating tenants. If the nominee purchaser is to be a company, the company must be formed before the Initial Notice is served.
4. Initial Notice
The enforcement process is triggered when the Initial Notice is served. The notice must be in a prescribed form and contain certain information. We will draft and serve the notice for you and ensure that the conditions are met.
As soon as the notice is served, we will register the notice at the Land Registry or as a land charge if the landlord’s title is unregistered. This protects your interest because if the landlord tries to sell the freehold, the purchaser will be alerted to the fact that you have served a notice on the landlord to exercise your right to purchase the freehold.
5. Landlord’s Initial Response
When the landlord receives the notice, he will undertake enquiries to ensure that you have the right to purchase the freehold. Within 21 days of receiving the Initial Notice, the landlord may request evidence of the participating leaseholders’ title to their flats. If your leasehold interests are registered, this can be confirmed by sending a copy of the Official Copy of Register Entries for the title.
If the landlord requests this information, we will have 21 days to respond.
6.1 The landlord must serve a counter-notice by the date specified in the Initial Notice, which must be no less than two months from the Initial Notice.
6.2 The counter-notice must state whether or not the Landlord admits your claim and, if not, he must give his reasons for disputing it.
6.3 The grounds for disputing the claim are limited. The Landlord may dispute the claim if:
– the notice is invalid, because it does not contain the correct information.
– the Landlord believes that you do not satisfy the eligibility criteria.
– the Landlord wishes to substantially redevelop the premises.
If the Counter-Notice disputes qualification and you believe the grounds of dispute are ill-founded, the nominee purchaser must apply to the court within two months of the Counter-Notice for a declaration that Initial Notice is valid.
6.4 If no notice in reply is served by the landlord, you will need to apply to the court to assert your right. The application to the court must be within six months from the date at which the notice in reply should have been served, otherwise the Initial Notice will be deemed withdrawn.
7. Interim Negotiations
7.1 If the Landlord admits your claim he will either accept the price and terms proposed in the notice of claim or propose an alternative price and/or terms. The latter is more likely. It is usually necessary to negotiate some or all of the terms of the purchase; most notably the price.
7.2 In some circumstances, if the parties are unable to agree the terms of the purchase, the matter will be referred to the Leasehold Valuation Tribunal, who will decide the terms on behalf of the parties. Either party may make an application to the LVT no sooner than two months after, but within six months of the date of the Counter Notice.
8. Conveyance of Property
When terms have been agreed, the freehold is transferred from the freeholder to the nominated purchaser, this is known as the conveyancing process. We will draft the Transfer Deed, for signature by the freehold owner and the Nominee Purchaser.
9. Completion of purchase and registration of title
Once the freehold has been transferred to the nominated company, Adcocks will register the transfer with the Land Registry.
10. How much will I have to pay to purchase the freehold?
Your decision to purchase the freehold may be dependent on how much it will cost. You will be expected to pay the following:
10.1 the purchase price for the freehold (to be determined by a valuer);
10.2 the landlord’s reasonable costs whether or not the matter proceeds to completion, this includes:
10.2.1 legal fees relating to the following
(i) any investigation reasonably undertaken in relation to the tenant’s claim
(ii) deducing, evidencing and verifying the title of any interest to be acquired
(iii) making out and furnishing certain legal documents which may be required by the nominee purchaser
(iv) any conveyance of the property to be acquired
You would not normally be expected to pay for any costs incurred by the landlord in relation to LVT, Lands Tribunal or court proceedings.
10.2.2 valuation fees, but not the landlord’s negotiation costs for agreeing the purchase price; and
10.3 your own legal fees; and
10.4 your own valuation fees and negotiation fees.
The landlord’s costs payable by you must be reasonable. In the event of a dispute the Leasehold Valuation Tribunal can determine as to whether any element of the landlord’s costs should be included and, if so, what is a reasonable amount.
We will scrutinise carefully any bill submitted by the landlord for payment by you to ensure that any costs relating to negotiations are not included. The Leasehold Valuation Tribunal tends to take a fairly conservative approach to the assessment of costs which is of help to a tenant.