Buying the freehold of flats through collective enfranchisement

Leaseholders who are qualifying tenants have the right to purchase, on a collective basis, the freehold of their flats.

A qualifying tenant is one whose lease meets one of the following conditions:[1]

• is for a fixed term of more than 21 years, whether or not it can be terminated before the end of the fixed term by notice by the leaseholder or forfeiture

• contains a covenant or obligation for perpetual renewal (this is converted by statute into a term of 2,000 years)

• was granted as a result of the right to buy or right to acquire on rent to mortgage provisions in Part 5 of the Housing Act 1985

• is a shared ownership lease, granted under Part 5 of the Housing Act 1985, where the share is 100 per cent

For shared ownership properties, the share share at the time of purchase need not be 100 per cent, as long as more shares are bought subsequently through a process known as staircasing, totalling 100 per cent.

In most cases, where a lease is terminated before the end of the fixed term on the death or marriage of the leaseholder, it is not a long lease for these purposes.

The following people are excluded under the Act from being qualifying tenants:[2]

• leaseholders of business leases

• leaseholders of a charitable housing trust

There can only be one qualifying tenant per flat. Joint leaseholders count as one qualifying tenant.

Where a person owns more than two qualifying leases in one building, they are not a qualifying tenant of any of the flats they relate to.

In order to qualify under the Leasehold Reform, Housing and Urban Development Act, the flats must comply with certain provisions:[3]

• the flats must be in a self contained building or part of a building. There is no requirement that a self-contained part of a building should not be divisible into smaller parts so that a minority of qualifying tenants could acquire either the whole or a part of the premises[4]

• there must be at least two flats held by qualifying tenants

• at least two thirds of the flats in the building must be owned by qualifying tenants

Definition of a flat

A flat is defined as separate premises, which form part of a building (that consists of more than one floor) and which was constructed or adapted for use as a residential dwelling.

A new flat still under construction, which had not yet been fitted out, was held not to meet the statutory definition, as opposed to a flat already constructed for use as a dwelling and subsequently rendered uninhabitable.[5]

Certain premises are excluded from the provisions. These are:[6]

• premises where there is a resident freeholder and not more than four units are excluded from the provisions. The excluded premises must not be a purpose built block, and the same person must have owned the freehold since before the premises was converted into flats. In addition, the freeholder or a member of their family must have occupied the premises for 12 months before the conversion[7]

• premises where more than 25 per cent of the floor area is for non-residential purposes, not including common parts

• where the building includes railway track

• property designated as conditionally exempt for inheritance tax purposes[8]

• Crown property, National Trust property or property within an Anglican cathedral precinct[9]

Leaseholders cannot be made to participate in the purchase.

If the remaining leaseholders go ahead without them, they get a new freeholder.

Some leaseholders will not be able to participate, for example those who have given notice terminating the lease or where the freeholder is taking action to terminate the lease.

Leaseholders who are considering collective enfranchisement have the right to information about who owns the freehold and the names of other leaseholders.[10]

If the information requested is not given, action can be taken in the county court.[11]

The first formal step for the leaseholders is to prepare and serve an initial notice, known as 'section 13 notice'. Before doing this, they must decide who is the nominee purchaser, ie the person to whom the freehold (and other interests) is conveyed. This is likely to be a company acquired or formed especially for the purpose.

Before forming this company, the leaseholders need to decide amongst themselves how:

• they are sharing the costs of the acquisition

• they share the costs of maintaining the building after the acquisition

• directors of the company are to be chosen and the voting rights of each member

Because of the potential for conflict between leaseholders, it is advisable for these matters to be the subject of a legal agreement between them. This might also deal with the circumstances in which leaseholders who do not want to join in the purchase may be allowed to do so later.

Alternatively, the nominee purchaser could be an individual, usually one or more of the leaseholders. This is only likely to be suitable where there are a small number of flats: even then, a company is likely to be a better solution.

The initial notice is usually served on the freeholder. The notice should be registered against the freeholder's title in order to protect it against a subsequent disposal of the freehold.[12]

The initial notice to be served by the qualifying leaseholders claiming enfranchisement is described in detail in section 13 of the Act, There is no prescribed form of notice. To be valid the notice must be served on behalf of leaseholders of at least half of all the flats in the building.[13]

In one case, the Court of Appeal held that flats which were still under construction and incapable of being used as dwellings on the date the notice was served, should be disregarded when counting the number of flats for the purpose of the 'section 13' notice. The Court drew a distinction between a flat previously constructed for use as a dwelling and subsequently rendered uninhabitable and a flat which remained in the course of construction on the date the notice was served.[14]

The person who deals with the reply to the initial notice and the person on whom it is served is known as the reversioner. This is usually the freeholder.

The reversioner deals with the transfer of all intermediate interests on behalf of the other estate owners. Intermediate freeholders may choose to act independently and can sometimes replace the reversioner.

A counter notice must be served within the time limit (of not less than two months) set by the leaseholders in the initial notice, and in it, the reversioner will admit or deny the claim. Where the freeholder denies the claim, the leaseholders can apply to the county court within two months of the date of the counter notice for a declaration that the denial is not correct.

If the freeholder fails to serve a counter notice, the leaseholders can ask the county court to determine the terms. They have up to six months from when the counter notice should have been served to court. If necessary, they can make a further application to court to complete the process, for example where the freeholder has disappeared.

Where there is a dispute over terms, the matter can be referred to the First-tier Tribunal (Property Chamber).[15]

Since the Housing Act 1996, a professional valuation is no longer required before the leaseholders serve the initial notice. The valuation provisions aim to put the freeholder and any intermediate freeholders in the position they would be in if they had sold freely in the open market. The nominee purchaser is liable for the freeholder's reasonable costs on completion.[16]

The freeholders costs can, when appropriate, include in-house costs or managing agents fees, in addition to the cost of solicitors and valuers.[17]

The freeholder has a limited right to resist enfranchisement in order to redevelop the property. This right is enforced by application to the court.[18] It requires that at least two thirds of long leases in the flats of the building be due to end within five years. The landlord has to prove that they need possession for demolition and construction.

The landlord has two months after serving their counter notice in which to apply to the court.

Where enfranchisement takes place from a local authority freeholder, the authority is entitled to a leaseback for a 999-year term at a 'peppercorn' rent (ie no rent) of all flats let on secure tenancies. Housing associations are also entitled to a leaseback for all their tenants who are not long leaseholders.

This means that the local authority or housing association continues to be the landlord of the secure or assured tenants in the property.

Other freeholders may choose to have a leaseback of certain parts of the property on a 999-year lease at a peppercorn rent. These are:[19]

• parts containing either flats without qualifying tenants and any non residential unit

• any flat occupied by a resident freeholder

There are issues that leaseholders of flats should consider before seeking to extend the lease or buy the freehold collectively.

The leaseholders may withdraw voluntarily from the procedure as it goes along, but must pay the freeholder's costs and expenses incurred before withdrawal.

In both cases, once the procedure has begun, there are strict time scales to be observed. A leaseholder who fails to observe these may be deemed to have withdrawn from the process. The leaseholder must pay the costs and expenses of both sides at that stage. There may also be a delay before the process can be restarted.

The procedure for both collective enfranchisement and the right to an extended lease is complex and leaseholders should seek legal advice.

For more information, see the Leasehold Advisory Service collective enfranchisement guide for leaseholders.