Collective Enfranchisement
Collectively buying the Freehold of your block has been a legal right to qualifying leaseholders* since 1993. Leases will continue to get shorter and collective enfranchisement is one solution, if you cannot get the requisite majority on board claiming your statutory right for a lease extension would be another.
If you own a share in the freehold then when your lease eventually expires your flat is still not your own as the ownership of it would revert to the Freehold owning company not to you individually. The mechanism to overcome this is that you as a shareholder in the freehold company can propose a resolution to permit any lessee with a share in the Freehold to extend their leases at Nil premium.
Sometimes granting new 999 year leases is incorporated in the actual freehold purchase transaction for convenience, but it need not be so and excluding this would certainly keep down conveyancing costs. After all a short lease is only a problem when perhaps you are selling or remortgaging and a mortgage lender has a policy that they will not advance the normal loan to value ratio if the lease has say less than 70 years unexpired.
Granting new 999 year leases may be strategically incorporated into the Freehold purchase if there are reasons why you would want everyone at the site to have new leases, ie, if principal terms need varying, for example, there is no interest clause permitting interest to be charged on serious service charge arrears, or if the lease does not provide for collecting service charges due based on a budget and only permits recovering expenditure after the event, and even then perhaps only after a formal audit.
Leases can be varied simply by a deed of variation perhaps varying 2 key clauses:
- to replace the schedule of ground rents payable to fix the ground rent at a peppercorn,
- to vary the term and increasing it by a term of years.
If more fundamental changes are require a complete modern lease could be substituted.
It should be noted in law that a lease variation of substitution cannot be forced on a party it has to be mutually consented to. However, if the resolution to grant new leases on x, y, z terms is approved by a Board of Directors it is only this type of lease/deed of variation that is available, until an alternative is approved. A freehold shareholder cannot be forced to take this type of lease/varied lease and would be bound by the original lease until such time as they chose to participate. A clear incentive would be the ground rent reduction to a peppercorn.
It is getting easier
Increasingly legislation has been changing to benefit the enfranchising lessees. For example qualification criteria have been relaxed and it is no longer necessary to live in the flat ete.
Exercising the right requires a formal legal notice to be served on the Freeholder and all* intermediate landlords. In claiming your statutory right the compensation to which a Freeholder is entitled will include any appurteunt property, possible retained land with development rights (a roof space) perhaps, loss of investment income, loss of commission from insurance premiums.
What is an intermediate landlord?
An intermediate landlord (often called a head lessee) may be the person to whom you pay ground rent now. The intermediate landlord holds a finite leasehold title (as you do) they in turn will have to pay ground rent to the Freeholder. Such interests were often created if the Freeholder granted development rights to an other company who then built the flats.
An intermediate landlord may make profit from his title, this would be because the ground rent he collects from all the lessees in the block exceeds the ground rent he has to pay the freeholder. And/or an intermediate landlord may hold a reversionary interest this could arise because the head lessee was granted an interest in the building for say 125 years and you as an under lessee were only granted a term of 99 years. This would mean that for 26 years the head lessee has a right to your flat before he would have to give it back to the Freeholder.
Should we serve a Notice or open informal discussions?
This question is not easy to answer, some Freeholders will quite rightly refuse to entertain discussions without service of formal notice. It could be argued quite reasonably that without formal notice the Freeholder is left at risk for fees to cover professional advice they need to negotiate with you, as it is professional advice taken to respond to a formal notice that are protected and compensatable as part of the Freehold Purchase premium.
That being said, if your freeholder lives in the block it would be better to have a chat first. Strangely some freeholders still need educating that subject to qualification criteria it is the lessees collective right to enfranchise.
The Notice that you have to serve on the Freeholder and all intermediate landlords invokes statutory timescales for the recipients to respond. Failure to respond may lead to you gaining the right to take a lease extension as per the terms set out in your Notice.
The information you need to serve on your notice will include:
- Details of your lease
- The premium you would like to pay for the lease extension
Understanding what you should offer will require you to take specialist valuation advice. There are rather more factors in a collective enfranchisement valuation for say a block of 30 flats than perhaps 30 typical mortgage valuations. Primarily this is because the valuation methodology is set in statute and secondly because there is an element of assessing compensation due to the landlord and intermediate interests for dispossessing them of valuable title.
Whats in a Freehold Enfranchisement Valuation?
To grasp this you need to understand that whilst each lease is valuable to its leaseholder today, at whatever it could be sold for in the market place, each lease is also valuable to the Freeholder who
- receives investment income from it (the ground rent)
- has the hope value of a premium from you (for buying a lease extension)
- holds the reversionary interest (the value of a vacant flat in XX years time)
- probably makes commission from placing insurance on the block
- may have unleashed development potential (roof spaces, rights to build over garage blocks, dis-used air raid shelters capable of development)
This is a specialist area of valuation that needs some understanding as the valuation methodology involves the following elements:
- Market values of the flat for flats with less than 80 years unexpired on the basis of (a) a short lease with ground rents payable as covenanted under the lease
- long lease with peppercorn ground rent payable
- The value of the landlord's interest (a) ground rent receivable as covenanted under the lease
- present value of the reversionary title (a vacant flat) at the end of the lease
- Marriage value ie, the difference between 1(a) and 1(b)
- Secondly, Appurtenant Property in the context of the Leasehold Reform Housing and Urban development Act 1993 [section 1(7)] means:
"(.)appurtenant property, in relation to a flat, means any garage, outhouse, garden, yard or appurtenances belonging to, or usually enjoyed with the flat." - The value of any other income, insurance commissions etc.
Understanding valuation science
The science of valuation enables us to calculate the "present value" of the future right to each vacant flat and enables us to value the ground rent (an income stream for a term of years.
As valuers we have to select from market evidence and settled caselaw the appropriate capitalization rate upon which to base our valuation of the ground rent. In simple terms this could be a rate derived from or comparable to gilts yields (gilts are government bonds), interest rates paid on bank credit balances, the bank base rate + a premium for the perceived risk of investing in property etc.
As valuers we have to select from market evidence and settled caselaw the appropriate deferment rate upon which to reflect that it may be a number of years until the investment can be reaslised.
There are arguments that the capitalization rate for ground rent payable to an intermediate landlord should be capitalized at a different rate to ground rent payable to a Freeholder. We can talk you through such arguments, but essentially it all relates to the perceived quality of each as a provider of investment income.
As valuers we have to draw from market evidence and settled caselaw the improvement rate which is the rate by which the value of the flat would increase from being granted a statutory 90 year lease extension. This is subjective and the most argued point at Leasehold Valuation Tribunal, critical factors will be the length of the lease unexpired lease and what is the typical length of an unexpired lease in the area. For example in an area where short leases are common place it could be argued that the improvement rate would be less than where short leases are uncommon. Remember the improvement rate is 0% if your lease has more than 80 years unexpired.
As valuers we have to assess the any development rights in the property. This requires an understanding of development build costs, building regulations ie, is a top floor walk up flat actually possible without provision for a secondary means of escape, planning densities for the area, borough, planning prescedents locally and likelihood of a planning consent being forthcoming to increase the amount of accommodation built on the site. There needs to be an understanding from the lease as to what is "demised" and what is "allocated" and what the permitted use is. For example if a roof space is allocated for storage purposes, a collective enfranchisement application may release it for potential development.
Next steps
- We need to build an understanding of how many types of lease there are at the block, in an ideal world all flats would have been sold off on or around the same time and therefore leases would all start on the same date and be for the same number of years, with ground rent typically varying depending on the size of the unit. However, we have been involved in scenarios where there are up to 10 different types of leases, together with other complications such as garages on separate titles with varying ground rents payable also.
- Flats with leases with less than 80 years unexpired
Since parts of the Commonhold Act 2002 came into force in July 2003 there is no marriage value to pay if your lease has more than 80 years unexpired. Accordingly the valuation can be undertaken as a desk job to reflect the time saved you will receive a 35% reduction on scale valuation fees.
We will still need a copy of each typical lease (unless all leases are the same). From the lease we will derive the ground rents covenanted during the term (it is common for the ground rent you pay today to rise as the lease gets shorter).
A desk job cannot be carried out without us receiving a sketch plan of each flat (normally there is such a plan within each lease).
3 Flats with leases of more than 80 years unexpired
Essentially we need to be able to inspect the property and the building in which it is situated to understand the fit out quality, size etc. Without doing so it would be impossible to carry out the marriage value part of the valuation.
We will still need a copy of each typical lease (unless all leases are the same). From the lease we will derive the ground rents covenanted during the term (it is common for the ground rent you pay today to rise as the lease gets shorter).
Advice on selecting a valuer
You should feel happy that the valuer you appoint understands current caselaw and the changing decisions on investment yields. The valuer should be able to discuss his or her methodology of yields selection. You should understand the number of similar cases that the valuer undertakes and more importantly to you what happens after the valuation.
- How many are settled without further reversion to the valuer?
- What information is provided in the valuation report to enable private negotiations?
- What typical development rights scenarios has the valuer come across in carrying out Freehold Purchase valuations?
- What is the valuers fee structure for negoations?
- What is the valuers experience of presenting a case at Leasehold Valuation Tribunal?
At Ringley Chartered Surveyors our valuation provides a full commentary on:
- comparable evidence to support our opinions
- analysis of how we select the investment yield
- recent court decisions re: marriage value (the difference in value between a short lease and a virtual freehold)
- advice on what you should serve as the price on your initial notice
Fee structure
Fees are well spent if a valuer with appropriate expertise has been selected. There are many unqualified surveyors dabbling in this type of work and you should always understand the age, experience, qualifications and competency offered by the firm you select.
At Ringley our fees are: (cases where no intermediate landlord exists)
| Block size | Minimum fee |
|---|---|
| 1-3 flats | minimum fee £500 |
| 4-8 flats | fees £150 per flat or £850 |
| 9-12 flats | fees £150 per flat or £1,500 |
| 13-20 flats | fees £150 per flat or £2,000 |
| 21-30 flats | fees £150 per flat or £2,600 |
| 30-40 flats | fees £150 per flat or £3,200 |
Where development rights are considered complex and involve liaison with architects, carrying out planning research, research as to build costs etc. then a supplement will be payable on a time basis. An indication will be provided to you prior to proceeding with such additional work.
Cases where there is an intermediate landlord
Where due to an intermediate interest such as a headlease we have to consider additional valuation factors under paragraph 8(1) of Schedule 13, or paragraph 8(3) such as where an intermediate interest receives a profit in ground rent or has a reversionary interest of more than 5 days it may be required to be valued as a wasting asset which would according to case law require a sinking fund and tax to be allowed for. Valuing an intermediate interest adds an additional 10% to our standard fee structures.
If all typical leases have in excess of 80 years unexpired we can carry out the valuation as a desk job enabling you to claim a 35% discount.
These fees reflect the amount of research necessary to fulfill the valuation methodology set down in law and to enable us to provide you with not only a valuation but elemental reasoning behind each part. From all this we are able to piece together the eventual "valuation" "premium that should be paid" The leaseholder claiming his rights is the party that in law is responsible for both parties costs and it is my understanding that if the residents have served Notice then the Landlord's surveyors fees form part of the purchase price together with reasonable legal fees.
Advice on legals
Need a company to buy your Freehold through and believe such company should reasonably represent the objectives, then don't buy a company "off the shelf". Speak to Ringley's in-house legal team who have ready constituted management companies available for £175 + Vat. These management companies are constituted to be limited by guarantee rather than by share captial to make future sales simpler. The articles of association are simplified for future meeting requirements and the objectives of the company tailored to running estates.
Freehold Purchase is a specialist area of law and you should choose the solicitor who will serve the notices for you carefully. If the timescales required for the various stages are not adhered to or the specified matters within the Act not disclosed then this can be to the detriment of one or other party.
Some solicitors whom we have worked with in the past who know this type of law include:
Mr John Miller of Miller Clayton
131 Baker Street, London W1U 6SE
Tel: 020 7935 2586
Mr John Cruikshank
Cruikshanks Solicitors
Sir Peter Blake House
10 Sherlock Mews London W1U 6DR
Tel: 020 7487 4468
Advice on negotiations
Whilst a Ringley valuation does include evidence, a valuation commentary, advice on what to serve on your initial notice, or counter notice, should you not be able to close the deal we can negotiate valuation differences on your behalf.
Negotiation are carried out by a Director or FRICS qualified Surveyor and are chargeable on an hourly rate. We would usually give you a time/cost initial budget based on the complexities perceived in the case in question. We would account our time to you if negotiations are not concluded within this initial budget.
Where it becomes apparent that not all valuation parameters can be agreed outside of the Leasehold Valuation Tribunal a synopsis of what it is recommended that can be agreed prior to a hearing will be advised to you.
The next stage would be to carry out evidential preparation which essentially includes scouring all local sales, obtaining land registry copy entries to confirm lease details in fact, then seeking confirmation about accommodation, unit layout/size etc to get floor plans and condition details via trawling through the agents selling in the marketplace or by door based research. We would need to allocate perhaps 1 1/2 days to achieving this. Negotiations would continue up to the hearing with the intent of agreeing as many facets of the valuation as possible to keep the hearing relatively simple.
Advice on going to a Leasehold Valuation Tribunal
If negotiations fail to be fruitful then we can lodge an application to the Leasehold Valuation Tribunal for a determination. Lodging an application costs in the region of £350. You will also be responsible for the costs of Ringley representing you at the hearing this will be based on an hourly rate for a Director or FRICS qualified Surveyor.
Understanding Tribunal procedure
After lodging your application your case will be allocated a case reference number and listed for a pre-trial hearing. At pre-trial hearing the tribunal will make directions on what evidence they want to hear and set timescales against which the case is to be conducted. Our attendance at the pre-trial review is not essential but often this is a good time when face to face negotiations can take place with the other side to agree any facts that can be agreed and agree what cannot be agreed between the parties. This assists all concerned in which areas to focus the evidential part of the hearing day on. For example, it could be that yields become agreed but that the value of the flat is what is referred to the Leasehold Valuation Tribunal for determination.
The cost of presenting a case at Leasehold Valuation Tribunal depends on the number of days the case is listed for and what can be agreed between valuers in the period running up to the case.
As an enfranchising residents committee you could represent yourself should you choose to do so. As a group of residents you are at risk for your professional costs, the application costs and the Freeholder costs. As a Freeholder professional advice flowing from a valid Notice claiming a lease extension is to be compensated to you as part of the Lease Extension rights.
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