Property Entrepreneurs

FAQs - Buying the freehold of flats with other tenants (collective enfranchisement)

Since 1993, tenants of blocks of flats have the right to collectively acquire the freehold of their building.

Below are some answers to commonly asked questions.

Why should we buy the freehold?

There are a number of reasons but the main one is to enable the participants to grant themselves long leases for a nominal price with the removal of ground rent.  The length of the new lease can be any length.  You are not bound to grant just 90 years. 

Second, control of the management over the building will be taken over by the tenants (although some buildings already have this arrangement in place with a formal Management Company).  Third, there is a psychological benefit in being part of a tenant-owned building and, in our experience, it is a good selling point with buyers.

What are the qualifying criteria?

The main criteria are:

  • the building must be a self-contained block of flats (which includes a converted building as well as a purpose-built one).  If it is not self-contained but could be so with a minimum of effort, then it may still qualify
  • the building must have no more than 25% non-residential use
  • two thirds of the flats must be held by qualifying tenants
  • a qualifying tenant is a tenant who owns a flat under a long lease, namely one which when originally sold was for a term of more than 21 years
  • the number of participating tenants flats must be at least 50% of the total number of flats within the building.

Unlike the individual right to a lease extension or enfranchisement of a leasehold house, there is no requirement to have a minimum period of ownership.  If a number of the flats are owned by the same person or company, then this may create difficulties as a qualifying tenant cannot own more than two flats.

How much do we have to pay?

This is complicated.  It will depend on various factors including the amount and the level of ground rents and frequency of review, the length of the unexpired terms of the leases and whether there is development potential usually in the roof or basement (if there are unused storerooms).  If any of the flats of participating tenants have leases of less than eighty years unexpired it will be necessary to pay a "marriage value".  So if your block has any leases approaching eighty years then you should not delay in bringing a claim.  It might also be possible to reduce the price by reducing the number of participating tenants.

What are the other costs?

The main costs will be the professional fees - solicitors and surveyors/valuer - together with the landlord's costs and company formation costs.  There will also be the usual payments in respect of the conveyancing such as Land Registry fees and incidental searches.  SDLT will also be payable but there is a relief which could help reduce the rate applicable. 

You should bear in mind that there are a number of variables which could cause the costs to increase. For example, whether it is necessary for the claim to be referred to the First Tier Tribunal (FTT) and whether the claim is dealt with fairly speedily by way of negotiation with the freeholder.  Clearly there are economies of scale which can benefit large groups of participators.

Do we have to pay the freeholder's costs?

Yes.  The legislation requires the participating tenants to pay the reasonable costs of the freeholder (and any intermediate landlord) of assessing the right of the tenants to bring the claim, dealing with the tenants notice and statutory procedure, and handing the valuation and conveyancing work.  Costs will comprise solicitors’ and surveyors’ fees.

Do we need to form a company?

Although there is no legal requirement to do so, we would always recommend this unless the block has fewer than four participants.  Normally this would be a company limited by shares.  If the block has fewer than four participants, then we would recommend a trust structure.

How do we start the process?

A residents’ committee should be formed and one or two of the key people nominated to drive the matter forward.  It is then a good idea to invite a solicitor to attend a meeting of the committee to answer questions, to explain what is involved and to advise on the pros and cons.  In a large block, the logistics of bringing a claim should not be underestimated.

Do we need a binding commitment from participating tenants?

We would always recommend this.  An agreement known as a "participation agreement" should be prepared.  This will bind all of the participants together and set out how the costs and the price of the freehold will be divided and the consequences of not honouring the agreement.

How long will it take?

You will need about two to three months to obtain legal advice and a valuation and to report back to the other residents and generally organise yourselves to be in a position to go forward with the claim.  The claim is started by a notice served on the freeholder and any intermediate landlord.  The freeholder will then be required to respond by a specific date, being approximately two months later.  If the freeholder is prepared to co-operate, then the claim can be concluded quickly, say within two to three months of the counter-notice. 

Otherwise, the claim will need to be referred to the First Tier Tribunal (FTT). The earliest date to apply to the FTT is two months from the landlord's counter-notice.  The absolute last date is six months.  Failure to observe this last date will result in the claim being lost and, although a new claim can be brought later, at least 12 months must elapse before doing so. 

If the claim is referred to the FTT, then it could take 9/12 months from when the claim was first made to have it concluded.  Should the matter be referred to the higher courts, then the time could stretch out to years.

What is required once all the terms are agreed?

Usually the landlord's solicitors will prepare a transfer of the freehold and this may contain restrictive covenants.  The nature of any restrictions will form part of the matters to be agreed or, failing agreement, to be determined by the FTT.  Once agreed, funds will need to be collected and the matter completed, with the transfer being sent to the Land Registry for registration.  We would recommend that any new leases to be granted to the participants are dealt with at this time, rather than wait for later.  We have seen problems with Corporation Tax and Capital Gains Tax if leases are not granted shortly after completion of the freehold purchase

Useful links

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

Penningtons Manches Cooper LLP