A guide to Enfranchisement

If you are a leaseholder of a flat and are concerned about how your block and its shared parts are being managed or importantly the shortening of the lease term, one recourse maybe to purchase the freehold. While this sounds simple, in essence you need to buy out the freeholder at a reasonable sum. The law provides for owners of flats to force the freeholder to sell to the long leaseholders, who have invested often a far greater amount to purchase their leases in order to become full masters of their own property.

The first thing to do is to check your lease. This legal document governs your relationship with your fellow owners and lays down their obligations to the owner of the freehold and vice versa. In many cases, it provides for the freeholder to be responsible for the upkeep of the common areas and shared parts of the block. In others, the residents are responsible through a residents management company. However in all cases it will stipulate the length of lease term and responsibilities that the freeholder is required to provide.

It is common for tenants to be concerned that they are either not getting value for money from a managing agent that is appointed by the freeholder or they are concerned that the quality of the work is poor. The managing agent can then be replaced by using a Right To Manage procedure, however the freeholder still has a right to be involved in the maintenance by having a seat on the board of any new right to manage company.

The process of buying out the freeholder is often called ‘collective enfranchisement’ and is laid down under Section 13 of the Leasehold Reform, Housing and Urban Development Act 1993, which is similar to the Right to Manage process. A minimum of 50% of leaseholders must take part. Then a nominee purchaser company needs to be established. Once the premium is agreed the funds need to be gathered from all participants to push the process forward. Since this initial hard work is much the same for Right to Manage as for Collective Enfranchisement, but the latter often adds more value to the flat, primarily because of the reversionary interest, which attracts many flat owners opt for Collective Enfranchisement, provided they can afford to go down this route.

If an immediate premium is not agreed informally by the freeholder then formal initial notice is served on the freeholder, but before doing so, a participation agreement would have to be signed by those wishing to participate. This is best drawn up by a solicitor or legal advisor. The next step is to have the block of flats professionally valued. You will need a specialist surveyor to come up with a robust valuation. If you submit a figure that is not considered reasonable in the notice to the freeholder, it may be deemed invalid. This means wasting time and money so it is better to get it right first time around.

You can involve a managing agent even at this stage. Many property managers will be keen to help you complete the collective enfranchisement process, particularly if they are likely to be chosen as new the managing agents. Although be careful to keep your options open, but you can also take advantage of an experienced managing agent particularly if they have been involved in a number of freehold acquisitions in the past and perhaps can guide you through the whole process.

From when the first formal notice is served, the law insists on this clear timetable for the freehold acquisition if you take this ‘statutory’ route. It is theoretically possible to come to an informal agreement with the freeholder and it may be worth approaching them once you have the surveyor’s valuation. This is rarely a preferred course of action when looking to buy the freehold, since there is no compulsion for the freeholder to co-operate. In most cases, freeholders do not want to sell the freehold willingly, unless they have to and this is why a Section 13 process can often be a better option in compelling the landlord to play ball.

When it is apparent that you will soon be taking control of the freehold of your block, you should be involving in choosing your managing agent more deeply. Do not wait until you have the freehold to start thinking who will look after the gardens or change the light bulbs in the hallways.

You may choose to keep the managing agent that had been appointed by the freeholder. These incumbent managing agents are often keen to retain a job and you will very likely be able to negotiate better terms when you are their client. However, you may wish to bring in another managing agent after a tender process or through referral, as once the freehold is completed all contracts become null and void and have to be renegotiated in particular the building insurance for example.

However you appoint your managing agent, it is best to think about this element early on in the process. This will ensure that the transition of the freehold is as seamless as possible.

© 2012 Colin Cohen Property Management, All Rights Reserved.