A Guide to Collective Enfranchisement

Introduction

This guide is divided into 2 sections: the Procedure and the Valuation.

The Procedure

1. GENERAL
There have been several amendments since the Leasehold Reform, Housing and Urban Development Act 1993 (notably the Commonhold Act 2002) which set out the modern rights for tenants to claim the freehold of a block of flats. Below is a brief summary of the points.

1.1. A qualifying leaseholder

• The lease has to have originally been for a term greater than 21 years
• A shorter lease which contains a clause providing a right of perpetual renewal
• There is no longer either a residency test nor an ownership test for collective enfranchisement

1.2 A qualifying building

• There must be a minimum of two flats in the building
• The building must be vertically self-contained from its neighbours
• No more than 25% of the internal floor area to be in non-residential use

The following are excluded from collective enfranchisement, although individual lease extensions may still be possible:

• A building converted into four or fewer flats (and not a purpose-built block) AND the same person has owned the freehold since before the conversion into flats AND he or an adult member of his family has lived there for the past 12 months
• The freehold includes any railway track or structure for railway track
• Buildings within a cathedral precinct
• National Trust properties
• Crown properties (although they have volunteered to comply with the principles of the Act)

1.3 Eligibility

• At least 2/3 of the flats in the building must be let to qualifying leaseholders
• The participating leaseholders must not be less than half the total number of flats in the building. For example, if there are 10 flats in the building, at least 5 of the qualifying leaseholders must participate
• Where there are only 2 flats in the building, both leaseholders must participate

2. PROCEDURE

2.1 The Right to Enfranchise ('RTE') Company

This section of the Act has not yet been implemented, and in May 2009 a consultation paper was issued by the government proposing to repeal these provisions. It is therefore not necessary to discuss the RTE regulations, but instead we recommend you discuss the aims and objectives of setting up a similar nominee company with the group solicitor which will actually acquire the freehold on behalf of the participating group.

2.2 Making the Claim
In order to trigger the statutory procedures for acquiring the freehold, the nominee company must give the landlord (and any intermediate head lessor) a formal Notice of Claim, which is normally prepared by a solicitor.

The Notice must state:

• Details of the property to be acquired, including a plan
• A statement showing that the building qualifies
• Details of any leasehold interests to be acquired, e.g. an intermediate head lease
• The proposed price apportioned as necessary between the freeholder and any intermediate landlords
• The full name and addresses of all the qualifying/participating leaseholders, and details of their leases

The price stated in the Notice must be realistic as, if not, the claim will be invalid. There is no hard and fast rule about what is a realistic price, but it is acceptable to reduce the amount by a small margin to allow the parties some room for negotiation.

2.3 Landlord's Response
The landlord must respond with a formal Counter-Notice ('C-N') within two months, also stating the amount it is prepared to accept for the freehold. If the C-N is not given in time, the participating group are entitled to the freehold on the terms set out in their Notice.

2.4 Negotiation
Once the Notice and C-N have been given, the parties will normally negotiate the price for the freehold. If the price cannot be agreed amicably, the dispute is referred to an independent body, the First-tier Tribunal ("FTT").

3. TIMESCALES
We are often asked how long the whole process takes but it is difficult to predict until it is known how far apart the parties are in their valuations. In our experience, the average time taken is about 12-18 months, but the Act sets out time limits for various phases in the process, and they are:

3.2 Counternotice
The participants cannot require the landlord to give the C-N in less than 2 months. In our experience, landlords normally use the whole of this period to respond.

3.2 Application to the FTT
If the price cannot be agreed amicably, the earliest either party can apply to the FTT is 2 months from the date of the C-N. While either party is allowed to make an application, there is a further rule that if the nominee company does not make an application within 6 months of the date of the C-N (assuming no earlier application has been made by the landlord), the claim is deemed withdrawn. This is a trap that leaseholders fall into all too often, and great care should be taken not to miss this deadline.

3.3 Decision of the FTT
Generally it takes about 4 months for a hearing to be held, and a further 1-2 months before the decision is published, after which either party has a further 3 weeks to apply for permission to appeal to the Upper Tribunal.

3.4 Completion of the New Lease
Once the parties have agreed the price, or the deadline to appeal the FTT's decision has expired, the parties have 4 further months in which to complete the transfer. If completion has not taken place by then, the nominee company must make a court application to protect its right to the new lease at the price agreed or determined by the FTT.

4. THE FIRST-TIER TRIBUNAL
If the parties cannot reach agreement amicably on price or the terms of the new lease, the matter can be determined by the FTT.

4.1 General
The FTT is best described as a less formal version of a court, headed by a lawyer, a valuer and sometimes a lay person as well. The tribunal issue directions in advance with a strict timetable for the submission of evidence 2-3 weeks prior to the hearing date and if the hearing proceeds they listen to the evidence and cross-examination presented by expert witnesses. After a period of deliberation, the tribunal then issues its decision. The decision is binding on the parties, subject to a limited right for either party to appeal.

4.2 Costs
Costs can frequently run to many thousands of pounds, and the FTT now has the jurisdiction to award costs, but usually only if there has been an abuse of procedure. Generally costs cannot be recovered, regardless of who 'wins' the case. Therefore, it is vital that the decision to take a case to the FTT is completely unemotional, nor should it be taken on a pure point of principle unless there is a genuine commercial rationale for doing so.

4.3 Impartiality
Being a quasi-court, all expert witnesses must conduct themselves in accordance with the Civil Procedure Rules. The valuer must be truthful, unbiased and open-minded, and he cannot withhold any evidence that could prejudice your case.

The Valuation

5. INTRODUCTION
The price to be paid for the freehold is a combination of the following 3 component parts:

(i) The diminution in the investment value of the property to the landlord arising from the sale of the freehold.
(ii) A half share of the marriage value released by the sale, and
(iii) Compensation for any loss or diminution in the value of any other property that is directly attributable to the freehold sale

The price for the collective enfranchisement will always contain (i), frequently (ii), and occasionally (iii), depending on the circumstances of the individual case. Each element will need to be ascertained separately for the landlord and any intermediate landlord.

5.1 The Valuation Date
The date on which the Notice is served (i.e. when it is received by the landlord) becomes the relevant valuation date for the purpose of calculating the price.

6. DIMINUTION IN THE INVESTMENT VALUE OF THE PROPERTY

6.1. This comprises the loss to the landlord for being denied the total ground rents payable through the present term AND the loss of the landlord's reversion when he would expect the leases to expire.

6.2. The investment value will therefore be dependent upon the lease terms (and the rent review provisions in particular), the yield rate applied to value the term, the long leasehold value of each flat with vacant possession, and the deferment rate. The deferment rate is the discount rate for assessing the future reversionary investment value to the landlord should he sell it today.

6.3. There are various assumptions to be considered about the flats; firstly, they are to be assumed in good repair but unmodernised (except for the non-participating flats which can be assessed as is), and secondly, any improvements carried out by the tenants (or their predecessors) may be disregarded (except for the non-participating flats again). Generally, improvements have to be tangible additions, such as extra bathrooms, where one had not existed before, so the replacement of a kitchen or bathroom may not qualify.

6.4. Once the total long leasehold values of the flats has been established, the figure is discounted in direct proportion to the number of years before the landlord regains possession. Case law has now established a generic deferment rate of 5% for flats where the lease has between 20-71 years unexpired at the date of claim. Only in very exceptional circumstances can this be challenged.

6.5. The House of Lords have declared that 'hope value' can also be included in the landlord's value in relation to the non-participating flats. This is the hope that the new collective landlord will be able to grant individual lease extensions of the non-participating flats at some time in the future, thereby releasing extra marriage value (see below). However there is little direction in case law yet to say how this hope value is to be assessed.

6.6. On larger blocks of flats there are often issues concerning appurtenant property such as garages, gardens, stores, porter's accommodation and car parking. The question of qualification is usually the first hurdle, and then the each element must be valued.

7. MARRIAGE VALUE

7.1. The Concept
Marriage value is only payable in relation to the participating elements of the claim. The simplest way to explain the concept of marriage value is to say that the sum of the values in relation to the participating elements of the claim only, including both the landlord and participating tenant parts, does not equal the value of the whole. The difference between these two figures is known as the marriage value. It is often misquoted as the difference between the value of the existing leases and the freehold with vacant possession, but this takes no account of the landlord's interest, and is wrong.

7.2. The extra value that is released by each participating tenant obtaining a share of the freehold is the marriage value, and the Act provides for it to be shared equally by the landlord and the nominee company. However, if any existing leases have more than 80 years left to run at the valuation date, then no marriage value is payable. In addition, any non-participating flats are assessed at zero marriage value.

7.3. It should be noted that the Act requires us to value the property as if the nominee company had no rights to buy or extend the leases, often misquoted as the "no Act world". Clearly, if the existing leases have no prospect to extend their leases or buy the freehold, then they would have a lower value compared with a property that could. Therefore this "hope" needs to be stripped out of the existing leasehold value, but the amount varies depending on the length of the lease.

7.4. As there is little market evidence of non-enfranchisable leases, valuers often refer to previous settlements of claims that have taken place over the years, and from which several graphs of relativity have been produced. There remains a degree of uncertainty surrounding this part of the valuation, and settling the value of the collective enfranchisement will be largely down to negotiation.

7.5. Obviously, besides the length of the leases, there are other factors that affect relativity. Predominantly these are the rent, repairs/service charge, permission to alter the flats or not, the restrictions on assignment/underletting, and the user clause. Clearly, the lower the relativity, the greater the marriage value and the more expensive the collective enfranchisement.

8. COMPENSATION FOR ANY OTHER LOSS
The landlord is entitled to recover any other losses that he may incur as a consequence of the freehold acquisition. This is generally a relatively rare occurrence in central London, although development value either on the building or within the grounds, can have a drastic effect upon the final price. Usually the landlord has to demonstrate a very compelling case to succeed in including 'other loss'.

Disclaimer

This document is intended for general guidance only, it does not cover all aspects of enfranchisement, and therefore no liability for its contents is accepted. Please contact this firm if you wish to discuss a specific case.

We are unable to offer an Online Calculator for a block of flats as each case is usually completely unique to the next. Instead we ask that you to contact us for a discussion and fuller appraisal of your property.