collective enfranchisement

A (very) brief summary of ‘collective enfranchisement’

Posted in Landlord and Tenant.

‘Collective enfranchisement’ is the right for the owners of flats in a building, and sometimes part of a building, to join together and buy the freehold of that building. To consider if you have the right to enfranchise the freehold you should first consider the main points set out below.

Before deciding to take over the freehold of a block of flats, remember the leaseholders will then have the additional burden of being responsible for the insurance and maintenance of the building and common areas and leaseholders should ensure there is sufficient knowledge time and money available to adequately attend to these additional duties.

  • The right is a collective right for the tenants who hold long leases, over 21 years (qualifying tenants) to buy the freehold of the building together with any common areas, such as gardens and parking areas, which the tenants have the right under their leases to use in common with others;
  • Non-residential parts let to business tenants do not qualify for the right to collective enfranchisement and cannot participate;
  • The building must contain two or more flats held by qualifying tenants and at least two thirds of all the flats in the building must be held by qualifying tenants;
  • No more than 25% of the internal floor area (excluding common parts) can be occupied or intended to be occupied for non-residential use;
  • The notice initiating the collective enfranchisement process must be given by the tenants of at least half the qualifying flats in the building
  • The purchase is made by a ‘nominee purchaser’. There are, at present, no restraints on who the nominee purchaser may be. Typically, it will be a special purpose company owned by the tenants who participate in the enfranchisement. There is no requirement to invite all of the tenants to participate;
  • There are statutory provisions for the non-residential parts to be leased back to the original freeholder on a 999-year lease at a peppercorn rent;
  • the freeholder must specify leaseback proposals in its counter-notice. Failure to do so will mean that the entitlement to a leaseback will be lost;
  • the purchase price is predominantly made up as follows:
  • the open market value of the landlord’s interest in the building.
  • ‘Marriage Value’ – the tenants will acquire an unencumbered freehold out of which they may grant 999-year leases at no premium or money rent. That structure will usually be worth more than the sum of the value of the existing leases and the freehold subject to those leases. The amount of that extra value is known as marriage value. The longer the unexpired residue of a lease, the lower the marriage value will be. The landlord is entitled to half the marriage value, except where a lease has 80 years or more left to run, when it is assumed that there is no marriage value in connection with that lease and so none is payable
  • SDLT relief is available to anyone who exercises the right to collective enfranchisement.

There is quite a lot of information around the process and the above is merely a very brief summary for initial consideration.