Collective Enfranchisement: Pros and Cons
Overview Pros and Cons Qualification Valuation Procedure Alternatives Services & Costs
For leaseholders of flats, a property with freehold-share represents a secure family inheritance. Such properties are also more marketable as buyers prefer freehold properties.
For freeholder's wishing to realise the best cash value for their asset, this will generally be via sale to the leasehold occupiers of the property.
The terms of a freehold transaction may be agreed informally. Alternatively, qualifying leaseholders can compel the freeholder to sell the freehold via the statutory process of Collective Enfranchisement.
Whichever route is chosen, it is critical that both sides have an accurate valuation of the freehold asset.
Statutory Collective Enfranchisement
- The value of the freehold asset is fixed at the date on which the leaseholders serve the freeholder with their legal Notice of claim.
- The premium payable for the freehold asset will be within the range defined by statute and case precedents.
- If the value of the freehold or the freeholder's legal/surveyor's fees cannot be agreed, the matter can be referred to the First-tier Tribunal (Property Chamber) for arbitration. The leaseholders are generally only liable for their own costs at Tribunal.
- If the leaseholders withdraw from the statutory process they may then become liable for the freeholder's costs up to that point.
- The statutory route can take a year or more to complete.
Informal Freehold Purchase
- The value of the freehold asset will increase during the process as lease lengths continue to reduce. The freeholder may change the price or terms of agreement at any time.
- The premium payable for the freehold asset will be at the freeholder's discretion and may exceed the statutory value.
- The leaseholders are generally responsible for the freeholder's costs. Whilst these costs may be lower than for the statutory route, they are unlikely to be negotiable, or refundable, if the transaction does not complete. If a leaseholder proceeds down the statutory route after failed informal negotiations, they may be required to pay additional costs
- The process can be concluded relatively quickly, although not if negotiations fail or either party withdraws from the transaction.
Pros of Collective Enfranchisement
- Increased sale value due to improved marketability. Some buyers will not consider purchasing a leasehold property due to problems with previous properties.
- The leasehold property stops deteriorating in value over time. After freehold purchase, the leaseholders jointly control the freehold and can grant themselves new leases of up to 999 years with no ground rent to pay.
- Creation of a secure family inheritance.
- The leaseholders will gain control of property maintenance which, if the leaseholders are proactive, can be more efficient and less costly than a commercial managing agent. Alternatively, a new managing agent can be appointed.
- Mortgage companies are likely to approve loan extensions to cover the cost of freehold purchase as the property is then recognised as a more secure asset.
- Following the Commonhold and Leasehold Reform Act 2002 legislation, a freehold purchase can take less than a year.
Cons of Collective Enfranchisement
- The entire freehold must change hands at the same time. Leaseholders who participate in the process will hence have to pay not only for their share of the freehold, but also for a proportion of the cost due to non-participating leaseholders. Pro-Leagle can provide you with a Freehold Valuation detailing the likely cost.
- Some leaseholders may initially decide to participate in the freehold purchase but later change their minds. To counter this, a Participation Agreement is generally used to bind all interested leaseholders into the freehold purchase process. Pro-Leagle can assist you with this.
- Within the current rules, once you have served your official notice on the Freeholder setting out how much you should pay, you will be required to pay the Freeholder's 'reasonable costs' associated with dealing with your request. This essentially means he or she can take legal advice and/or request a further survey to be undertaken at your cost.
- Your existing leases will normally contain provisions on property maintenance to avoid your property falling into a state of disrepair. You will have to consider whether you should manage the property yourselves or whether to employ a Managing Agent for this purpose.