Right to Enfranchise

QUARTER 4, 2023
Right to Enfranchise is seen by most leaseholders struggling with a difficult Landlord as the ultimate answer to their problems because it puts the control back in their own hands. A successful enfranchisement would remove the current freeholder from their position and give the ownership and responsibility for the building back to the leaseholders, via the newly formed Residents’ Freehold Company. However, this is an expensive investment – the Freehold Title – and therefore, is a route that many leaseholders would be deterred from.
This blog is designed to give an overview of the process and help you to understand whether this might be the right option for you. It is purely a guide, however, and will not go into the finer detail of the legalities. For any specialist or legal advice, please contact us so that we may engage with a solicitor on your behalf.
Does Your Building Qualify?
QUARTER 4, 2023
Right to Enfranchise came into existence with the enactment of The Leasehold Reform Housing and Urban Development Act 1993, as amended by the Commonhold and Leasehold Reform Act 2002. It allows qualifying leaseholders to remove the current freeholder and take control of everything, rather than just taking control of the management and leaving the freeholder in place as a Superior Landlord, as in Right to Manage.
The first step is to determine whether your building qualifies:
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There must be two or more flats in the building.
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Commercial floor area (if any) must be below 25% of the total internal floor area.
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At least 2⁄3 of the flats must be let on long leases, i.e. an original term of more than 21 years.
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More than of 50% of qualifying leaseholders must participate.
If you meet all of the above criteria, then it would be useful to elect a few people to be the Project Management Team, liaising with the lawyers and keeping the rest of the participating leaseholders updated. This would help to avoid overcomplicating the process, would streamline communication and therefore, reduce the solicitor’s fees!
A Fighting Fund
Right to Enfranchise is an expensive venture. In addition to the value of the freehold, there are the legal and professional fees for the solicitors and the valuers, some of which may need to be settled in advance of the completion of the sale. It is important to obtain quotes for those fees at the beginning of the process so that you can start collecting the appropriate funds to enable you to settle any balances on time.
Another problem which collecting funds in advance would solve is leaseholders initially saying ‘yes’ and then not committing later down the line. This could potentially derail the whole process as you must have more than 50% of leaseholders participating to qualify. Asking for contributions to the Fighting Fund from each leaseholder wishing to participate upfront ensures early commitment, and you will want to encourage as many people as possible to participate because the more people take part, the cheaper the costs per person will be.
The contribution from each participating leaseholder is going to be thousands of pounds overall because the Freehold Title will have significant value. The full sum will not need to be committed upfront, but by engaging early and ensuring commitment early, you will allow the leaseholders sufficient time to gather the funds.
Valuing the Freehold
So, how do you determine the value of the freehold? There is a formula for this which involves ‘yield rates’, ‘deferment rates’ and other exciting things which are all open to interpretation. Naturally, the freeholder is going to want the highest price possible whilst you are going to want the lowest price possible. The freeholder will engage a valuer who will act in their best interests, and the participating leaseholders should engage their own independent valuer to act in their best interests so that the negotiations can result in a mutually agreeable (or more likely, disagreeable) figure.
When crunching the numbers to work out each leaseholder’s contribution, you will want your valuer to give you three possible values:
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The lowest – the value that would work in your favour;
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Medium – the target area/range for settlement;
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The highest – the value that the freeholder will be hoping for, and a worst-case scenario for you.
As with most things in life, you will want to hope for the best but plan for the worst. It would be wise to collect funds on the basis of a worst-case scenario because this will enable the transaction to go through smoothly and without delay once a figure is agreed. It is much easier to refund leaseholders than it is to collect further funds at short notice.
The Information You Need to Provide
If you have made it this far then congratulations! It sounds like the Right to Enfranchise may be for you. So, what’s next?
You will need to provide your solicitor and valuer with the following:
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Contact details for all occupiers (eg. tenants of non-resident leaseholders) for access to the flats;
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The full names of all leaseholders, as confirmed by the Titles;
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Full contact details for leaseholders (address, email, phone, etc);
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The lease for each individual flat;
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Any lease extension documents;
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Lease plans for each flat;
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Photographs of the building – all exterior elevations.
Resident’s Freehold Company
As with any sale, there must be a named buyer, and so one of the first things that you will need to do after instructing a solicitor is to incorporate a new company – the future Resident’s Freehold Company. Not all of the participating leaseholders will need to be named Directors when forming the Company – your Project Management Team can fulfil that role for the initial setup.
Your solicitor should draft your Company Memorandum and Articles of Association. Unlike a Right to Manage company, the Articles of Association are not prescribed in law. You could use standard “off the shelf” Articles, but it’s better to have bespoke ones which include such things as:
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The Resident Freehold Company is formed for the purpose of buying the freehold at [Building address];
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Only long leaseholders at [your Building] can become Members/Shareholders of the Resident Freehold Company;
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Only Members/Shareholders can become Directors of the Resident Freehold Company.
Legislation does not require the Resident Freehold Company to produce a business plan or budget, nor to provide information about how it intends to manage the property. However, this is something that you may wish to consider as many leaseholders will ask these kinds of questions before committing. The overall costs per leaseholder is usually the deciding factor for most people, and often one of the motivating factors for Enfranchisement is that future management will be pro-active and cost-effective compared to the past. So you may wish to set your Project Management Team to the task of quantifying that with actual objective figures.
This is where we, as your Managing Agent can help. We can assess the building’s needs, analyse the historic service charges, and then prepare a fully costed service charge budget which will reflect the way the way the building is to be run in the future, as opposed to the way it has been run in the past.
What Your Solicitors Will Do
Although collecting early funds from leaseholders will help to ensure commitment, no one will be legally bound until the Participation Agreement, prepared by the solicitors, is signed. Once the participating leaseholders sign this Agreement, the number of participants and who they are cannot change. The Agreement will also set the boundaries of the deal, for example the upper financial limit for the project.
Once the participating leaseholders are locked in, the Resident Freehold Company is incorporated, and any other hurdles mentioned above are overcome, your solicitors can draft and issue your Notice of Claim. This Notice needs to be served in accordance with Section 13 of the Leasehold Reform Housing and Urban Development Act 1993 (as amended). The notice must be served on the freeholder of the building, and all interested parties, eg. a Head Leaseholder.
A valid Notice requires:
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Details of the property AND a plan; e.g. HMLR freehold title number XXXXXX and its plan.
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A statement of grounds for the claim.
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Details of the leasehold interests to be acquired.
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The price that you intend to pay for the freehold as per the valuation that you commissioned, which must be “reasonable”.
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State the names and addresses of qualifying leaseholders.
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Provide sufficient details to identify each qualifying leaseholder’s flat, and provide lease terms.
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State the name and address of the Nominee Purchaser, i.e. the new company.
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The signatures of all participants.
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A date because the date of the Notice fixes the timeframe for the Freeholders to respond and a value to be negotiated.
The solicitors will also hold all of the leaseholders’ funds for the sale in trust, which must be transferred to them BEFORE the Notice of Claim is issued. This is because of the (admittedly very low) possibility that the freeholder says “Yes, I agree your claim, complete NOW”. So funds need to be ready for completion without delay. It is also worth highlighting that from this point on, the leaseholders are responsible for the freeholder’s reasonable costs in dealing with the claim, even if the claim eventually fails or aborts.
Freeholder’s Counter-Notice
The Freeholder has two months from the date of your Notice to respond by serving a Counter-Notice. There are only three possible responses:
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Yes, I accept your claim.
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No, I reject your claim because….
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Yes, I accept your claim, but the price is too low.
Given that you will have stated your lowest valuation on the Notice of Claim, it is highly unlikely that the Freeholder will give the first response. In the instance that the give the third response – I accept your claim but the price is too low – the two valuers will then begin to negotiate. They have a maximum of four months to reach an agreement, and if they cannot in this timeframe, then the leaseholders have the right to apply to the First-tier Tribunal (Property Chamber) for a determination of value.
Completion
Once the sale is complete, the leases need to be updated with the new Freeholder name. Therefore, all participating leaseholders will be offered the chance to extend their leases whilst changes are being made. This should be agreed with your solicitor in advance so that the extensions can be completed swiftly after completion day (within six months to avoid tax issues) and because there would be an additional fee for this exercise.
You should also think about whether there are any defective clauses in your leases which should be rectified whilst changes are being made, and whether you wish to amend the Ground Rent to a peppercorn (£0), which most people do.
Take Over
And then that’s it! From the day of completion onwards, the Resident Freehold Company is responsible for absolutely everything. So your Project Management Team would be wise to get their ducks in a row ready to hit the ground running.
Your new managing agent will need to be in place with a signed Management Agreement and their systems fully set up. If we are your appointed agent, we can also provide Company Secretarial services for the new Resident Freehold Company.
Service charge funds won’t be available on completion day, so the Resident Freehold Company needs to be prepared to cover cash flow for the first month or two until the old managing agent completes their reconciliation of finances and hands over the cash.
The existing buildings insurance cover will cease on completion day, so the Resident Freehold Company needs to have arranged new cover in advance, which we can do on your behalf. We would get all of the documentation in place so that the building can be covered from completion day. This is vital!
And there are all the usual day-to-day operations to be catered for too. The previous freeholder is no longer in a position to fulfil existing contracts for the management of the building. Those contracts become ‘frustrated’ in legal terms and must end. New contracts for services and maintenance must be taken out in the new client name. Any site staff who were employed by the freeholder will need to be TUPE’d. We would support you with all of this administration.
So, is this for you?
Right to Enfranchise is a complicated area of leasehold law. As we said at the start, this blog is intended as a guide only, to help you to decide whether this might be an option for you. If you feel that it is, then we highly recommend proceeding by obtaining some specialist advice – and we will gladly put you in touch with experienced, professional advisers. You will need to do your research thoroughly and be sure that you understand exactly what you are taking on because having control of everything means the good and the bad. Nevertheless, the freeholder is likely to put up a fight to try and retain their asset, so be prepared for a long process and some hard work. But know that the future will be more pro-active, more cost effective, and much brighter.
At Olympus Management, we don’t project manage Right to Enfranchise cases but we will gladly support you through them, providing expert analysis of the service charge budget requirements and the ongoing property management requirements, so do contact us if you need those services. If this is the route for you then we wish you every success.