Collective Purchase of the Freehold of a Building

The Leasehold Reform, Housing and Urban Development Act 1993 (‘the 1993 Act’) (as amended) makes provision for a group of leaseholders to collectively purchase their freehold (subject to certain conditions). At least 50% of leaseholders must participate in the claim. The leaseholders are self-selecting, meaning that flat owners can chose to exclude other flat owners. Whilst the right to an extended lease only exists once the leaseholder has owned the flat for two years there is no similar requirement in order to participate in the claim to purchase the freehold.

Although this guide is aimed towards tenants we are equally familiar with acting for landlords in respect of their tenants claim to purchase the freehold.

Reasons For Enfranchising

There are various reasons for deciding to buy the freehold of your building. Perhaps the most obvious is to enable the tenants to have full control and management of the block and service charges. Not only will this place the tenants in full control of the block in which they either live or own a flat but it will allow the tenants who participate to grant themselves 999 year leases for a nominal cost at a peppercorn (meaning nil) ground rent. Also, from a selling point of view it has long been considered a flat will be considered more saleable if it is advertised as having a ‘share of freehold’.

Qualifying Criteria

Essentially the tenants can lodge a claim to buy their freehold from their existing freeholder where at least two-thirds of the leases are let to qualifying tenants, the building is self-contained (with no more than 25% non-residential) and at least 50% of the flats participate in the claim. Where there are only two flats in the building both tenants must participate.

How Much Will It Cost?

As in the case of a lease extension the amount the tenants will pay for the freehold will be based upon the ground rents contained in the leases, the length of the unexpired term of the leases and yields. Again, it is important that the tenants acquire the freehold whilst the leases still have at least 80 years unexpired in order to avoid additionally having to pay ‘marriage value’ to their landlord.

The premium for the freehold will be split between the participating tenants in the proportions recommended by the tenants’ valuer. It is advisable that the participating tenants enter into something called a ‘participation agreement’ at the start so that each individual flat owner knows what they will be liable to pay.

You will need to instruct a specialist valuation surveyor. We work closely with a number of reputable London valuers and would be happy to assist and guide you with your choice of valuer.

Fees

In addition to the premium for the freehold you will be responsible for your own legal and valuation fees together with the reasonable costs of your landlord (and any intermediary or headlessee). As this is a highly technical area of the law any professional fees are unlikely to be insignificant. We will always aim to provide the tenants with a fixed fee which will be based upon the complexity of the transaction, how long it will take and whether or not the matter will need to be referred to the County Court or the Leasehold Valuation Tribunal. We consider that we provide excellent value for money.

The Procedure

The participating tenants will generally wish to form a company which will acquire the freehold. The company is known as the ‘nominee purchaser’ and it is this company which will acquire the freehold. Each of the participating tenants will become a member or shareholder in the freehold company and therefore have a say in the decision making process of the company. We can assist in the formation of the company at the outset of the transaction on behalf of the tenants.

The claim is initiated by serving an initial notice on your landlord, specifying the premium you are willing to pay for the freehold. All of the participating tenants are required to sign the initial notice. The landlord has two months in which to respond by way of legal counter notice which will set out the premium it requires and any other terms of the transfer to the nominee purchaser. The parties then have up to six months in which to negotiate the premium payable. If negotiations are unsuccessful then either party may make an application to the Leasehold Valuation Tribunal (LVT) within two to six month following service of the counter notice. If an application is not made to the LVT during this period and the terms of the freehold acquisition are not agreed then deemed withdrawal takes place.

Our team of solicitors have the expertise to act in respect of missing landlord claims, deceased landlord claims where the service of the initial notice will be on the personal representatives and also experience in respect of land vesting in the Crown as a result of ‘bona vacantia’.

It should of course be mentioned that if your landlord is willing to sell you the freehold on a voluntary basis and you are able to agree a premium with your landlord outside the 1993 Act then we will be able to avoid the service of the initial notice. Although this option is considered to be a more straightforward and less costly option there are still certain legal requirements which have to be complied with. This is known as the Right of first refusal.

For further information, please contact:

Claire Allan on 020 7201 3551 or claireallan@childandchild.co.uk or
Khalid Sharif on 020 7201 3580 or khalidsharif@childandchild.co.uk