Buying Your Freehold
As leaseholders of a block of flats, you may wish to acquire the freehold to your building to give you control to run the freehold as you wish.
- There are two ways in which you can do this:
Via a voluntary agreement with your freeholder; or
- Forcing your freeholder to sell the freehold to you under the Leasehold Reform, Housing and Urban Development Act 1993 (the Act)
Voluntary Freehold Acquisition
You can approach your freeholder to ask the freeholder what their terms for a voluntary acquisition would be. Your freeholder may obtain a valuation and make an offer. His offer would require him to serve Section 5 Notices on each of the tenants and once accepted, the matter would go straight to conveyance and completion of Transfer. We can advise you more fully on any terms your freeholder proposes and the entire process.
Some of the advantages of acquiring your freehold are:
- You can grant yourselves maximum term leases (999 years) and extinguish the ground rent
- Any anomalies in the leases can be amended, i.e. if the leases do not comply with the Council of Mortgage Lenders requirements
- As lessees, you will have autonomy to manage the building as you see fit – this is often the main reason for leaseholders wishing to enfranchise
Statutory Freehold Acquisition (Collective Enfranchisement)
Under the Leasehold Reform, Housing and Urban Development Act 1993 (the Act), you can serve a Notice on your freeholder to force him to sell the freehold to you. There are some qualifying criteria that have to be met to pursue this route:
- Two thirds of the flats must be owned by “qualifying tenants”, i.e. leaseholders who have long leases of 21 years or more
- The participating leaseholders (those who want to and qualify to join in with the enfranchisement) must make up at least 50% of the flats in the building (please note that if there are only two flats in the building then both flats must participate)
- A leaseholder cannot participate if he owns three or more flats in the building and if he does then he is not a “qualifying tenant” and his flats are discounted from the two thirds of qualifying flats
- If the building is “mixed use”, i.e. there is a commercial element (shops, offices, etc), then the total floor area of the commercial element must not exceed 25%
- A building converted into four flats or less with a “resident freeholder” may not qualify. However, the definition of a resident freeholder is quite narrow, so you should check with us if you think this may be the case
There are a number of stages to the statutory enfranchisement process as follows:
If there are a number of participating leaseholders, it is advisable to draw up a Participation Agreement to be signed by all the participating leaseholders before starting the enfranchisement process. This is a contract between all the leaseholders binding them into the process. The Agreement is legally enforceable.
You would usually set up a freehold company to acquire the freehold, in which each flat will take one share. You will assign Directors of the Company and there will be Articles of Association which govern the running of the freehold company. We would assist with the company set-up and deal with all the paperwork.
The first stage is to appoint a qualified surveyor who will inspect the property and produce a valuation report to ascertain the price that should be entered into your Section 13 Initial Notice. This price is referred to as the premium. You should appoint a valuer who is experienced in collective enfranchisement valuations and we will be happy to provide you with free of charge quotations if you wish.
Serving the Section 13 Initial Notice
We will review the title documentation for the flats and prepare the Initial Notice which will include certain essential information about the leases of the flats and leaseholders and also state the company name under which the freehold will be acquired. The Notice will include a marked-up Plan to show exactly what land you propose to acquire and should include the building and any common areas such as gardens or car parks. Once the Notice is served, the freeholder has 2 months to respond with a Counter Notice.
If the freeholder does not serve a Counter Notice within the required time, then an application to Court can be made for an Order forcing the freeholder to dispose of the freehold on the terms set out in your Initial Notice
Receiving the Freeholder’s Counter Notice
The freeholder will appoint their surveyor to inspect the property so that they may produce their valuation and serve their Counter Notice, which will state which provisions of your Initial Notice the freeholder accepts or rejects and for every provision rejected, the freeholder must make a counter proposal. It is usual that the freeholder’s counter proposal for the premium will be much higher than your proposal, but this gives the two valuers a starting point from which to negotiate. The premium that is eventually agreed between the parties will become the purchase price for the freehold.
Agreement of Terms or Application to the First-Tier Tribunal (FTT)
The terms of the freehold acquisition and the premium which is to be paid have to be agreed within 6 months of the date of service of the freeholder’s Counter Notice. If terms are not agreed, then an application to the FTT must be made within this timescale to protect your Claim. It is very often the case that even if an application to the FTT is made, terms are still able to be agreed between the parties, but if this is not the case then the FTT will determine any outstanding terms themselves. Thankfully, it is very rare for matters to have to go all the way to an FTT determination.
Completion and Registration of the Transfer of Freehold
Once the terms have been agreed, the parties have a four-month period within which to complete the freehold acquisition. If either party is unable to do so, then an application to the County Court will need to be made in order to protect the claim from being deemed withdrawn.
A collective enfranchisement claim can take anything between 6-12 months to complete all depending on the speed of agreement of terms and whether the FTT become involved.
The cost of the valuation carried out by a specialist surveyor will depend on the number of flats in the building, but can range from £1,000 – £2,000 for a mid-size block.
Legal costs are usually in the region of £2,000 – £3,000 plus VAT for a small block or £3,000 – £5,000 for a larger block. However, if the matter does have to go to the FTT for determination, then legal fees will increase, but we will always keep you updated as to our estimate of costs.
In addition to your own fees, you are liable to pay the freeholder’s valuation and legal fees, but not his fees in relation to any negotiations or any FTT matters. You should expect your freeholder’s legal fees to be similar to the above, although this depends on your freeholder’s choice of surveyor and solicitor.
If Stamp Duty Land Tax is payable, we will advise you of the amount once the premium has been agreed.
Lease Extensions Post-Collective Enfranchisement
As advised above, one of the main advantages of acquiring the freehold of your building is that you can all agree to extend the participating flats’ leases to the maximum term of 999 years and extinguish the ground rent. You may also wish to make other amendments to the lease, i.e. to modernise the lease or include any additional agreed regulations. We can offer discounted rates when extending a number of leases at the same time.
If you have any questions or would like further advice on the above, then please contact us at email@example.com or call us on 01444 708 640.