How do enfranchisement leaseholds work?

In short, an enfranchisement leasehold is where tenants can become the freeholder of a property by buying the freehold title from the current freeholder. This allows them to make significant changes to the property.

However, there are certain scenarios where this can take place and a process leaseholders have to go through. In this article, we walk you through it and how you as a leaseholder can start acquiring the freehold of your property in an enfranchisement leasehold.

Imagine having the power to become a freeholder, to truly own your place and shape your destiny. It may sound like a distant dream, but I have exciting news for you – enfranchisement leaseholds can turn that dream into reality.

The path to becoming a freeholder may seem daunting, with the complexities of forming a company, selecting a Nominee Purchaser, and navigating the legal maze. But fear not! In this text, we’ll unveil the secrets to a smooth and successful journey towards freehold ownership.

You’ll discover how to ensure a seamless process by creating a written agreement, establishing a fund, and involving all eligible participants. We’ll even reveal the solution if the landlord is nowhere to be found – a powerful vesting order that empowers you to claim what’s rightfully yours.

As we delve deeper, we’ll unlock the key to purchasing the entire building and its surroundings. Valuation will be demystified, helping you determine a fair purchase price while considering critical factors like lease term and marriage value.

We’ll explore the advantages of buying the freehold, including the ability to grant new leases and liberate yourself from the clutches of the freeholder’s influence. We’ll also unveil the eligibility requirements, shedding light on building criteria and leaseholder qualifications that will set you on the path to ownership.

So, whether you’re a leaseholder longing for independence or an aspiring homeowner seeking a way out of the endless rental cycle, this text is your guide to a brighter future. So, join us on this enlightening journey and unlock the secrets of enfranchisement leasehold. 

What is an enfranchisement leasehold?

Enfranchisement is a legal provision that gives leaseholders the collective right to purchase the freehold of their building.

It was first introduced by the Leasehold Reform Housing and Urban Development Act of 1993, and it was later amended by the legislation you can find here called the Commonhold and Leasehold Reform Act (CLRA) of 2002. 

It is worth noting, however, that while the CLRA contains sections 121 to 124 relating to the right to enfranchise corporations, these provisions were never implemented, and it is unclear whether they will be in the future.

In any case, the enfranchisement legislation allows qualifying leaseholders to compel the sale of their building’s freehold or a portion of it.  When other parties have a stake in the building, such as a head-lease, they must be included in the leaseholders’ purchase.

What does the enfranchisement procedure involve?

Leaseholders have the right to collectively purchase the freehold of their building through a process known as an enfranchisement leasehold. This sounds relatively simple but there is a process behind this that is very important. 

To begin this process, the leaseholders must first form a company in which they will all be shareholders and they must then select a Nominee Purchaser, who will be named in the Initial Notice.

and if the leaseholders and the freeholder cannot reach an agreement, they can apply to the Leasehold Valuation Tribunal within six months of receiving the Counter-Notice.

To summarise, the collective enfranchisement process entails determining eligibility, forming a qualifying leaseholders company, naming a Nominee Purchaser, and hiring solicitors and surveyors to seek expert advice and determine the purchase price. 

Also, in summary, after serving the Initial Notice, the freeholder must respond with a Counter-Notice, and if there are any issues, the leaseholders can seek resolution from the Leasehold Valuation Tribunal.

How can leaseholders make sure the process runs smoothly?

Prior to beginning the enfranchisement process, leaseholders should form a working group to draft a written agreement outlining their intentions. 

All participating leaseholders should sign a formal agreement outlining their actions, voting rights, negotiation and agreement terms, and the financial contributions they must make. 

This is especially important for larger blocks of flats, where quick decisions are required to avoid the enfranchisement process collapsing. It’s also a good idea to talk about what happens after the enfranchisement process is finished.

Participating leaseholders can discuss establishing a fund to cover the costs of forming a company, obtaining necessary documents, and having a valuation performed. This fund must be established prior to serving the Initial Notice. 

What happens if the landlord cannot be found?

Don’t worry if you’re a tenant looking to buy the freehold but can’t find the landlord. The process of enfranchisement is still possible, but with a slight modification. 

You must apply to the county court for a vesting order, which will allow you to take over the freehold. Following the issuance of this order, the Leasehold Valuation Tribunal will assess the price and terms of the transfer, as previously described.

What is a Nominee Purchaser?

If you and your fellow leaseholders want to buy the freehold of your building, the first step is to identify a buyer. Leaseholders frequently form a company to purchase the freehold and manage the building. 

We can set up the company on your behalf as part of managing the leasehold enfranchisement process. We will also provide guidance on various agreements that can help leaseholders avoid disputes over the purchase of the freehold and future management of the building.

Choosing the nominee purchaser

So, when it comes to purchasing a freehold and becoming a new landlord, the Nominee Purchaser (seen here) is the person named in the Initial Notice. It’s critical to choose this person early on because they’ll be in charge of managing the building once the process is finished.

The Nominee Purchaser can now be a person, one of the tenants, or a corporate entity formed by the tenants themselves, such as a trust or a company.

Typically, tenants choose to establish a wholly owned company, which they propose in the Initial Notice. If this is the case, it is critical that the company be established before submitting the notice. A solicitor, managing agent, or accountant can assist with this process, as well as provide guidance on drafting the Articles of Association, which reflect the company’s purpose and govern voting rights and share control.

Would leaseholders need to employ professional assistance?

Before serving the Initial Notice, leaseholders should consider hiring a solicitor and valuer to provide ongoing support throughout the collective enfranchisement process. Remember that surveyors and solicitors have specific areas of expertise, so choose professionals who have extensive knowledge and experience with enfranchisement legislation, practices, and procedures. 

Because the solicitor and valuer can provide valuable advice and assistance with various tasks throughout the process, their participation can be extremely beneficial to participating leaseholders.

What does the freehold purchase cover?

When you buy a freehold, you’re not just getting a single flat; you’re getting the entire building and its surroundings. In fact, the freehold usually includes not only the communal grounds but also any buildings on the premises. 

This is, of course, only applicable if the lease expressly grants the leaseholders the contractual right to use these areas. So, when you purchase a freehold, you are gaining ownership of not only your own space, but also the property as a whole.

How is the purchase price assessed?

Before beginning the enfranchisement process, participating leaseholders should obtain an initial valuation from a qualified valuer or surveyor. 

While predicting the exact sale price is difficult, an experienced valuer can provide a range within which leaseholders should expect to pay. It’s important to remember that freehold prices are rarely fixed, so knowing the estimated range from the start is critical.

Obtaining valuation advice early on is critical because the legislation requires that leaseholders’ offers be realistic. Furthermore, if a price agreement cannot be reached, a valuer’s expertise will be invaluable for negotiations and providing expert evidence to the First-tier Tribunal (FTT).

Remember that as the remaining lease term shortens, the cost of acquiring the freehold rises and if the freeholder has less than 80 years left, he or she may add half of the ‘marriage value’ to the price calculation. 

The marriage value is the additional value created by combining the leasehold and freehold interests during the enfranchisement process and aside from the purchase price, leaseholders should consider their liability for the freeholder’s expenses within this. 

Each leaseholder’s share of the total cost includes an equal proportion of the eventual sale price, their own costs for hiring valuers and solicitors, and the freeholder’s reasonable costs incurred throughout the enfranchisement process.

Can all leaseholders buy the freehold of their property?

In most cases, leaseholders of flats have the collective opportunity to acquire the freehold if they meet the necessary qualifications. It is important to note that this right exists regardless of whether or not the freeholder wishes to retain ownership. 

However, it is critical to understand that leaseholders cannot separately purchase the freehold of their individual flat and individual leasehold flats, unlike leasehold houses, cannot be converted into freehold properties; they can only remain leasehold with a shared freehold. 

It’s worth noting that, while commonhold is a viable option, it’s relatively uncommon in new developments due to its optional nature.

Individual right to a new lease

Under the law, everyone who is living in a leasehold has the opportunity to buy the share of the freehold if they want to. This involves coming together with other members of their leasehold agreement and forming an agreement.

This is one of the reasons why someone would buy a leasehold as the leasehold title can be transferred from the freeholder and then transferred to the leaseholders who will then be able to manage it.

What are the advantages of buying the freehold? 

There are always some advantages of buying a freehold and forming a shared freehold as listed below.

Grant new leases

Leaseholders who participate in enfranchisement have the ability to grant new leases once the freehold is acquired, though there are some restrictions to consider. This provides an opportunity to remove certain clauses or add new ones that would benefit leaseholders. It’s important to note that the current terms in existing leases may not meet the requirements of mortgage lenders, so updating the leases can solve this problem. It is critical to note that leaseholders who did not participate in the enfranchisement process will not have their leases changed unless they agree to any proposed changes.

End the involvement of the freeholder

Another consideration is whether all leases should have the same terms with the freeholder. However, most leaseholders who now collectively own the freehold have the advantage of being able to modify their leases to their advantage. 

They are likely to eliminate ground rents entirely and significantly extend the length of their leases. This is one of the great pros of being a leaseholder and a reason why someone may want to buy one.

So, given the leaseholders are able to go about this in the right way and find a nominee purchaser, this is a likely situation if the leasehold expires.

What do leaseholders need to consider at an early stage?

To get the enfranchisement process started, the leaseholders who are most excited about this opportunity should organise a meeting and invite all eligible participants. 

Unlike the Right to Manage, participating in enfranchisement incurs significant costs unless a nominee purchaser is chosen to acquire the freehold and handle the financing on behalf of the leaseholders. 

It is critical to provide a thorough explanation of the financial implications to all leaseholders during this meeting. It should be made clear that non-participation has no effect on their leasehold interest but results in them not gaining a share of the freehold.

Participating leaseholders should consider the following before beginning the enfranchisement process:

• Check the eligibility of the building.
• Ensure that an adequate number of leaseholders participate.
• Obtain a purchase price estimate.
• Select a Purchaser Nominee.
• Choose and hire professional advisers

The eligibility that needs to be checked for enfranchisement purposes?

To ensure enfranchisement eligibility, leaseholders should check to see if the building meets the legal requirements and if there are enough qualifying leaseholders. The following are the requirements for a building to be considered:

• The building must have at least two flats.
• Qualifying tenants must own at least two-thirds of the flats.
• Have a lease that was granted for more than 21 years, regardless of the remaining lease term.
• Maintain a lease for at least 21 years with a perpetual renewal clause.
• Have a 100% ownership share in a shared ownership lease.
• Continue a long lease in accordance with the Local Government Housing Act of 1989. 

Are there enough participating leaseholders to qualify and to finance the purchase?

To proceed with enfranchisement, an adequate number of qualifying leaseholders is required. Participating leaseholders must account for at least half of the total number of flats in the building. For example, if a block has twenty flats, a minimum of ten flats owned by qualifying leaseholders must participate in enfranchisement. If the block only has two flats, both qualifying leaseholders’ flats must participate.

There are several reasons why it is preferable to have more leaseholders express an interest in participating. For starters, it would reduce costs for all participants. Furthermore, having more leaseholders involved means that more perspectives and ideas will be brought to the process and, as a result, the management of the building, which will become the responsibility of the Nominee Purchaser (unless a Right to Manage company is already in place).

What are the leaseholders’ rights to participate?

It is in everyone’s best interests to have as many leaseholders as possible involved in the freehold purchase. It should be noted, however, that there is no legal requirement to invite all leaseholders to participate. 

Regardless, the LA (Local Authority) recommends that leaseholders who initiate the enfranchisement process notify all other leaseholders and occupants of their intentions as soon as possible. 

There doesn’t appear to be a reason to exclude anyone from the enfranchisement process unless leaseholders express their disinterest in participating explicitly.

In conclusion

Enfranchisement leaseholds allow tenants to become freeholders by buying the freehold title so they never have to deal with a section 20 again where a freeholder increases service charges. 

The process involves forming a company, selecting a Nominee Purchaser, and hiring professionals like solicitors and valuers. As you might be able to tell, the process is fairly hard so you could argue it is a disadvantage of buying a leasehold property.

Leaseholders can ensure a smooth process by creating a written agreement, establishing a fund, and involving all eligible participants. If the landlord cannot be found, a vesting order can be obtained. Purchasing the freehold grants ownership of the entire building and its surroundings. Valuation is important to determine the purchase price, taking into account factors like lease term and marriage value. 

Most leaseholders of flats have the opportunity to acquire the freehold, but individual leasehold flats can only be converted to shared freehold. Advantages of buying the freehold include granting new leases and eliminating the involvement of the freeholder. Eligibility requirements involve building criteria and leaseholder qualifications. Sufficient participating leaseholders are needed, and it is recommended to include all interested parties.