Buying your freehold:
Some questions answered
In this article Mark Chick, a solicitor at Bishop & Sewell LLP specialising in enfranchisement, answers some questions that often come up when buying your freehold:
“I went straight to the pub for a G&T when I first heard what was involved, but we had a great solicitor who was experienced and explained everything in an easy to understand way, and things worked out fine”.
“The most important thing about the procedure is to use a solicitor who is experienced”.
“It has added real value to my flat and more important, we as flat-owners now have control over our own building”.
What is Collective Enfranchisement?
‘Collective Enfranchisement’ means buying your freehold. If at least 50% of the long leasehold flat owners in a building club together they can force a sale of the freehold. It is a right that arises out of the Leasehold Reform Housing and Urban Development Act 1993.
Does my building qualify?
As long as at least two-thirds of the building is let out on ‘long leases’ (99 or 125 year lease when granted), and if there is a commercial element, that this does not take up more than 25% of the property, then your building will qualify.
Can I just buy my flat’s share of freehold?
No. The right to buy the freehold is a right to buy the freehold to the entire of the building. The ownership of this has to be split up between those taking part. The easiest way of doing this is to use a company to own the freehold and then the flats all own a share in the company.
Do we need a participation agreement?
This is a question I often get asked in practice and the answer is, almost invariably, ‘yes.’
What is a participation agreement?
A collective freehold purchase involves a commitment from all of the participants to act together in the purchase of the freehold. The participation agreement sets out the legal relationship between those taking part.
Normally there will be a company (called a ‘nominee purchaser’) incorporated by the flat owners to hold the freehold after completion. The agreement sets out the legal relationship between the proposed participants and the company.
What sort of things does it cover?
There are no hard and fast rules and it is possible to customise the agreement to suit the particular features of your transaction. If you are thinking of buying your freehold, you should establish the ‘key terms’ agreed between those taking part as soon as possible and then formalise these in a written agreement.
A good agreement will cover include the answers to the following questions which are set out under the headings below:-
What are the financial obligations of each flat owner taking part?
How much will each individual flat owner taking part have to pay towards their own share of the purchase price?
This depends on a number of factors, not least how many flats take part and also whether the price is to be divided equally between all those taking part. Who is going to decide on how this is done? Will there be fixed proportions or will someone (e.g. the valuer) have the power to decide?
Are larger flats (or more valuable ones) going to be asked to pay more? If so, how will this be calculated? - By reference to flat size and/or value, or by some other means?
How are the transactional costs of the process (legal and valuation fees for the freeholder and the flat owners) going to be allocated?
Are these to be split equally (the simplest mechanism but not necessarily the fairest), or will some other basis (e.g. flat value) be used?
What happens if people want to pull out?
It may be a good idea to ensure that there is some sort of cut-off point in terms of time, price or numbers that might trigger the possibility of the process being abandoned if the capital cost of buying the freehold appears to be too high.
Who is going to pay for the costs of those not taking part?
Are these costs to be split equally or will some other mechanism being applied? – e.g. will one or more of those taking part pay in more money and get something in return. Or will everyone’s contribution be increased and then any future income shared out?
What do I get in return for my money?
The agreement may also cover things that will happen after the freehold has been purchased – e.g. the issue of a share in the company and also the right to extend the lease on your flat to 999 years.
What about outside funding?
Is the company going to obtain funding from outside sources? – for instance an individual investor, or a bank mortgage (which is sometimes possible if the ground rent income is high enough). If there is an outside investor, what will be the basis of their return? Will they obtain head leases over some of the flats, or have the benefit of another area of value in the property?
There may be more than one class of share in the company (one for investors and one for those taking part) with different rights. The funds subscribed may be documented in a loan agreement to make dealing with future income more straightforward.
So, remind me again, why do I need an agreement?
As well as the points above, serving a notice has consequences in cost terms both for the flat owners and for the landlord
If the flat owners pull out of the process having served a notice, they will become liable for the landlord’s legal and valuation costs. Clearly it is better to have all those who commit to the process signed up to a binding agreement so that there is a clear understanding that if they pull out they will have to pay their way.
“Do we have to admit a non-participant to a freehold purchase transaction?”
The short answer is ‘no.’
Once the freehold purchase process has started under the 1993 Act there is no statutory provision whatsoever requiring those participating to admit any other flat owner in the building to their number.
Similarly, under the 1987 Act once the acceptance notice has been served there is no requirement for the qualifying majority to admit any newcomers.
In practice newcomers are often welcome, as they may assist in sharing the overall cost of the process but there is no requirement as the law currently stands to admit anyone who was not part of the original process.
Therefore if the freehold to your building is being offered to you – or you are considering taking control of the process by serving notice on your landlord - you should consider this point (among other factors) when deciding whether to join in or not.
I want to develop the roof space – how might this impact on our plans to buy the freehold?
This can be a potential problem. Firstly you should check that you do not own the area already. This will need a qualified person to read your lease and advise on this.
Once you have established who owns the area, the position needs to be considered with your fellow participants. If you are the only person with access to this area, then provided the other people purchasing the freehold with you agree, it should be possible to obtain rights over this area and also permission from the freeholder so that you can develop this area.
Please bear in mind the following:
- If the roof space does not already belong to you then you will need to buy it from the eventual purchaser of the freehold. Sometimes this issue can be resolved by allocating the part of the purchase price relating to the roof area to you – in effect increasing your share of the freehold purchase cost. If you go down this route you may need a specialist valuer or surveyor to provide an opinion on the price to be paid.
- Owning the area means being granted a lease of the roof area. The company / nominee purchaser will have to agree to do this.
- Under the terms of the lease the consent of the freeholder may still be required (and most likely will be) before any work can be carried out.
- There may well be other applicable restrictions outside the lease or the title that must also be overcome before any work can commence. e.g. planning permission or building regulations consent. If the property is listed or in a conservation area further constraints may apply.
- If you intend to do this after the freehold purchase completes it is as well to sound out the views of your likely co-directors in the freehold owning company in advance. If there is going to be disagreement then there is the potential for a ‘conflict of interest’ to arise and the same legal advisor may not be able to act for all of you.
Mark Chick is partner at Bishop & Sewell LLP where he is a solicitor specialising in leasehold law. He is also a director of ALEP (the Association of Leasehold Enfranchisement Practitioners). If you would like to discuss any of the issues raised in this article please firstname.lastname@example.org
or visit www.bishopandsewell.co.uk