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What is Enfranchisement?
Enfranchisement is a legal process that allows leaseholders to collectively purchase the freehold of the property they occupy, often seen in blocks of flats. It grants long-term security and control over a property, as leaseholders effectively take over the rights and responsibilities of the freeholder. This right was initially introduced under the Leasehold Reform Act of 1967 and has since been expanded, particularly under the Leasehold Reform, Housing and Urban Development Act 1993 and Commonhold and Leasehold Reform Act (CLRA) 2002.
Why Pursue Enfranchisement?
Leaseholders might seek enfranchisement for various reasons. Owning the freehold can help avoid future ground rent increases, gain more control over property management decisions and remove the uncertainty that comes with lease expiration. It’s a collective move toward self-management, often pursued by those dissatisfied with the current freeholder or to avoid paying escalating fees.
Eligibility Criteria
To qualify for enfranchisement, several conditions must be met:
- Building Structure: The property must contain at least two flats and the building must be a self-contained structure or a part of a building that could be divided reasonably into two or more units.
- Leaseholders’ Rights: At least 50% of the leaseholders must participate in the enfranchisement process. In addition, leaseholders must have long leases, usually defined as those originally granted for more than 21 years.
- Ownership Length: Leaseholders must have owned their lease for a minimum of two years.
The Role of the Nominee Purchaser
When leaseholders collectively seek to buy the freehold, they often form a company, known as the Nominee Purchaser, to manage the purchase and future ownership. This company, typically made up of the participating leaseholders, acts on behalf of everyone involved in the enfranchisement process. The formation of such a company ensures smoother coordination, helps in gathering funds and allows leaseholders to share responsibility for the ongoing management of the property after the freehold is acquired.
The Process of Enfranchisement
The enfranchisement process can be legally complex, requiring professional assistance, such as solicitors and valuers. Here’s an overview of the process:
- Initial Notice: Leaseholders serve a formal notice to the freeholder expressing their intention to buy the freehold. This notice must include details such as the price the leaseholders are willing to pay, the names of those participating and the name of the Nominee Purchaser. The freeholder has two months to respond.
- Counter-Notice: The freeholder responds by either accepting the terms or contesting them. If the freeholder agrees, negotiations over the price and terms of the sale follow. If no agreement is reached, the leaseholders may apply to the First-tier Tribunal (FTT) to resolve disputes.
- Valuation: The price for the freehold is determined through negotiation and if necessary, a Tribunal can set the price. A critical aspect here is the concept of marriage value, which applies if the remaining lease is under 80 years. Marriage value refers to the additional value created when the freehold and leasehold interests are combined and the freeholder is entitled to a portion of this value.
- Tribunal Application: If disagreements persist after the Counter-Notice, leaseholders can apply to the FTT. This Tribunal will review unresolved matters, such as the purchase price or the terms of the sale and issue a binding decision.
- Completion: Once an agreement is reached, the final step involves completing the purchase, which transfers ownership of the freehold to the Nominee Purchaser.
Costs Involved in Enfranchisement
The cost of enfranchisement is not limited to the price of the freehold. Leaseholders should also factor in:
- Valuation Fees: A qualified surveyor should assess the property to provide a realistic price estimate.
- Legal Fees: Both the leaseholders and the freeholder will incur legal costs, which the leaseholders will need to cover in part.
- Tribunal Fees: If the case goes to the First-tier Tribunal, additional fees may be required.
- Freeholder’s Costs: Leaseholders are liable for the freeholder’s reasonable costs during the enfranchisement process, which may include legal and valuation expenses.
What Happens After Enfranchisement?
Upon successfully purchasing the freehold, leaseholders take on the responsibilities traditionally held by the freeholder. This includes building maintenance, insurance and the management of communal areas. Many leaseholders opt to continue using the structure of a Right-to-manage (RTM) company or a management company to ensure smooth operations.
The newly acquired freehold also opens the door for leaseholders to extend their leases or grant new leases, which can significantly enhance the value of their flats. Moreover, by owning the freehold, leaseholders eliminate future ground rent charges.
Challenges in the Enfranchisement Process
Enfranchisement can be a complicated and lengthy process, especially when not all leaseholders agree on participating. Additionally, negotiating the purchase price with the freeholder can lead to disputes that must be resolved at a Tribunal. The missing landlord scenario further complicates matters, requiring leaseholders to apply to the court for a vesting order, which allows them to proceed even if the freeholder cannot be located.
Enfranchisement offers leaseholders a path to greater control and long-term security over their properties, allowing them to escape the limitations of a leasehold arrangement. However, it’s a complex legal process that requires careful consideration, collective effort and professional assistance. While the costs can be significant, particularly in terms of valuation and legal fees, the long-term benefits of owning the freehold – such as avoiding future ground rent and gaining control over management – make enfranchisement an attractive option for many leaseholders.
Professional advice and thorough planning are essential to successfully navigating the process, ensuring that leaseholders understand their rights, responsibilities and the costs involved. Visit J Bear Properties for guidance or further advice and assistance.
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