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Right to Enfranchise – Is It Right For You?
Right to Enfranchise is sometimes seen to be the ultimate answer for leaseholders, because it puts your destiny in your hands. You get rid of the current freeholder and take over control of everything, via your newly formed Residents’ Freehold Company. But as you’re buying an expensive investment … the freehold title … it’s a route which a large number of leaseholders cannot afford, and they choose an alternative less all-encompassing route. If you’re not sure whether you can afford it, or whether the end result is right for you – read on and then decide when we’ve given you the overview.
Right to Enfranchise came into existence with the enactment of The Leasehold Reform Housing and Urban Development Act 1993 … as amended by the Commonhold and Leasehold Reform Act 2002. It allows leaseholders (in certain circumstances, outlined below) to remove the current freeholder and take over control of everything, not just management as in Right to Manage.
The starting point with Right to Enfranchise is …
Does The Building Qualify?
This article is purely a guide, so we won’t go into the very fine detail of the law here. That would be too lengthy and too boring a read. But in short, the building qualification hurdles are:
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There must be two or more flats in the building.
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The internal floor area of any non-residential parts of the building, must be less than 25% of the total internal floor area.
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At least 2/3rds of the flats must be let on long leases; i.e. an original term of more than 21 years.
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More than of 50% of qualifying leaseholders must participate.
Note: There are some exemptions, such as National Trust properties, railway land, and a few others. So seek specialist advice from a leasehold specialist lawyer.
It is useful for leaseholders to elect a ‘project management team’ to co-ordinate actions and to communicate with the lawyer. This reduces confusion and (importantly) lawyer fees. A group of two or three normally does the job – alongside regular meetings with all participating leaseholders.
Get A Fighting Fund
Right to Enfranchise is not a cheap project, as mentioned above. In addition to the value of the freehold itself, there will be costs and those need to be paid promptly. Principally those costs will be a specialist leasehold lawyer’s fees and a specialist leasehold valuer’s fee. You’ll need to get budget figures for those fees very early on in the process.
The other problem which a fighting fund solves, is people saying ‘yes’ but actually doing ‘no’. If people are really committed to the project, they will put their hand in their pocket and they will contribute to the fighting fund. If they don’t pay – they’re not committed and won’t participate. Knowing who is committed and who is not, is vital for getting past the “more than 50%” qualification hurdle mentioned above.
And while we’re talking money – each participant’s contribution is going to be £000s, because the freehold has a significant value. Most leaseholders won’t have those funds in used five pound notes under their mattress, so loans or top-up mortgages may be required. Starting work on those negotiations early on is useful – although leaseholders don’t need 100% of their contribution in hand on day one.
Why Is A Valuer Needed?
As mentioned above, Right to Enfranchise (RTE) involves buying the freehold. The value of that freehold is open to interpretation. Even though there is a valuation formula – that formula includes ‘yield rates’, ‘deferment rates’ and other exciting things which valuers all view differently … and freeholders all view differently.
In short, you’re freeholder is going to want the highest price possible – whilst you’re going to want the lowest price possible. The freeholder’s valuer will interpret the ‘rates’ in favour of the freeholder. Your valuer will interpret them in your favour. The end result will be a mutually disagreeable figure. It’s a bit of a dark art, rather than a science.
What you want your valuer to do, is to provide three values:
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Lowish: The claim notice figure.
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Medium: Target area / range for settlement.
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Higher: Worst-case scenario.
When crunching your numbers and working out each participant’s contribution, you need to work on the figure for the worst-case scenario. It’s better to have that larger figure in the bank and then get a refund if things work out cheaper – rather than have not quite enough funds and the project crashes to a disastrous end.
If you have enough resources and wish to continue …
Gather Information
The next thing to do is to gather all the information that the lawyer, the valuer and you will need. This includes:
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The lease for each flat > NOT a standard generic lease.
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Any lease extension documents; e.g. ‘new leases’.
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Lease plans for each flat.
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Photographs of the building – all exterior elevations.
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The full names of all leaseholders, as confirmed by the documents.
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Contact details; address, email, phone, etc.
You’ll also need contact information for all occupiers; e.g. tenants of leaseholders … as the process usually involves gaining access to all flats at some point.
Residents’ Freehold Company [RFC]
At the end of the RTE process, the freehold is purchased by your specially formed company, not by the leaseholders directly. Therefore, shortly after the lawyer has been instructed, a new RFC needs to be incorporated.
Unlike Right to Manage, the Articles of Association are not prescribed in law. You can use a ‘company off the shelf’, but it’s better to have bespoke Articles which include such things as:
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The RFC is formed for the purpose of buying the freehold at [Building address].
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Members/Shareholders of the RFC can only be long leaseholders at the Building.
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Directors of the RFC can only be Members/Shareholders
Not all participating leaseholders are needed to form the company, so the ‘project management team’ can usually fulfil the role of initial directors.
Participation Agreement
It is not a requirement that all leaseholders are invited to participate (unlike RTM). However, the more who take part, the cheaper the cost per participant … so logically, getting 100% participation is better for all.
At this early stage, the lawyer will prepare a bespoke Participation Agreement. This is signed by all who have agreed to take part (and have sufficient money to do so) in order to:
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Legally bind the participants to complete the process (or their executers to do so if necessary).
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It maintains the numbers participating; i.e. maintains the “more than 50%”.
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It sets boundaries; e.g. a project financial upper limit.
Plans and Budgets
The legislation does not require the RFC to produce a business plan or budget, nor to provide information about how it intends to manage the property. However, it is prudent for the ‘project management team’ to do so – as this is usually important information which leaseholders ask for before agreeing to participate. In particular with RTE, the likely cost of the freehold needs to be clarified – and hence the cost per person – as this is usually the major deciding factor for leaseholders.
In additional to getting ‘the three numbers’ from their specialist valuer, a prudent group will also instruct a managing agent to assess the building’s needs, analyse the historic service charge financials, and then prepare a fully costed service charge budget – which will reflect the way the way the building is to be run in the future, as opposed to the way it has been run in the past. That is a fair amount of work and the managing agent will probably need to make a charge for the time involved, and their expert advice.
Often one of the motivating factors for RTE is that future management will be pro-active and cost-effective … compared to the past. Quantifying that with actual objective figures is very useful.
A prudent group of leaseholders will have a detailed service charge budget AND the cash to fund the RFC’s expenses for the claim process … AND … enough cash to fund the service charge expenditure over two or three months (in case funds are not transferred quickly by the outgoing managing agent).
Notice of Claim
Having overcome all the initial hurdles mentioned above, notice needs to be served in accordance with Section 13 of the Leasehold Reform Housing and Urban Development Act 1993 (as amended). The notice must be served on the freeholder of the building, and all interested parties; e.g. a Head Leaseholder.
This ‘puts a stake in the ground’ so far as the valuation is concerned. Firstly, it states the leaseholders’ claim figure (the lowest of the three mentioned above). Secondly, it fixes the date for the various valuations to be done.
From this point onwards, the leaseholders are responsible for the freeholder’s reasonable costs in dealing with the claim … even if the claim eventually fails or aborts.
A valid notice requires:
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Details of the property AND a plan; e.g. HMLR freehold title number XXXXXX and its plan.
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A statement of grounds for the claim.
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Details of the leasehold interests to be acquired.
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The price … which must be “reasonable”, hence the valuation.
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State the names and addresses of qualifying leaseholders.
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Provide sufficient details to identify each qualifying leaseholder’s flat, and provide lease terms.
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State the name and address of the Nominee Purchaser; i.e. the new company.
The notice must be signed by all participants.
Landlord’s Counter-Notice
The freeholder (almost always) serves a counter-notice. There are only three possible responses to the claim, either:
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Yes, I accept your claim.
OR
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No, I reject your claim, because …..
OR
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Yes, I accept your claim, but the price is too low.
Where the counter-notice accepts the claim but indicates the price is too low – the two valuers negotiate. They have a maximum of four months to do this. If agreement can be reached – fine, the purchase moves forward. But if they cannot agree a figure – the leaseholders can apply to the First-tier Tribunal (Property Chamber) for a determination of value.
Collect Funds
By the time the claim notice is served, the leaseholders need to have paid over their funds to the RFC’s solicitors. This is because the freeholder might say “Yes, I agree your claim, complete NOW”. So, funds need to be ready for completion at that point.
In the majority of cases, the freeholder disputes the price and there is a slight delay before completion – but you cannot rely on that delay occurring in your case. Be prepared!
Prepare For Taking Over
From the day of completion onwards, the RFC is responsible for everything – yes, everything. The project management team therefore have to ‘get their ducks in a row’ ahead of time and be ready to ‘hit the ground running’.
New managing agents need to be in place, with a signed Management Agreement, and their systems fully set up. Service charge funds won’t be available on completion day, so the RFC needs to be prepared to cover cash flow for the first month or two, until the old managing agent completes their reconciliation of finances and actually hands over the cash.
The existing buildings insurance cover will probably cease on completion day, so the RFC needs to have arrange new cover in advance. Insurance brokers, alongside the managing agent, can get all the documentation in place – and the building can be ‘put on cover’ from completion day. This is vital!
And there are all the usual day-to-day operations to be catered for too. Current suppliers and contractors will no longer be employed by the out-going freeholder – and new contracts will need to be put in place, ready for completion day. Think about:
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Repairs, redecorations, maintenance of the building structure and common parts, including cyclical maintenance and maintenance of plant.
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Improvements to the building (only where allowed by the leases).
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Provision of services – lighting, cleaning, gardening, caretaking, etc.
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Levying and collecting service charges, accounting, etc.
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Compliance with statutory requirements relating to management; e.g. Health & Safety.
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Day-to-day management of the building.
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Management of non-residential parts of the building.
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Functions relating to forfeiture and possession.
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Company secretarial functions of the RFC.
Completion
In addition to all the day-to-day management activities for the building, the participating leaseholders have the opportunity to extend their leases as part of the Right to Enfranchise process. This needs to be agreed with the lawyer acting for the RFC, so that fees can be quoted for this exercise (in addition to the RTE process) … and to extensions are completed swiftly after completion day (within six months to avoid tax issues).
Participating leaseholders may also change their ground rent to a peppercorn (£zero) at no extra cost.
And there may be deficient clause in the leases which can be changed/rectified, to improve future management of the building. But that won’t apply to all RTE projects.
In Summary ...
Buying the freehold of the building means you take control of your destiny. That is the best position for leaseholders to be in. But it comes at a cost – because you’re buying a valuable asset, and that costs a significant amount. It is not affordable for all – but if you can afford it, it can be very worthwhile.
Right to Enfranchise gives you control of everything – and also responsibility for everything … the good and the bad. So, you need to do your research carefully and thoroughly. You need to have professional specialist advice. There may be ‘skeletons in the cupboard’, so to speak, and you need to find out about them before you move forward with any RTE project. It’s better to be safe rather than sorry.
Remember to communicate through the project management team, or one person in that team. Communications to and from the specialist lawyer, the specialist valuers, and other professionals, is chargeable. Time is money! So, it’s best to have all participants contact the management team – for opinions and questions to be collated – and then sent to the professionals just once. Likewise, information from the professionals should be sent to the management team – and then the team can pass on the information to the participants generally, or individually, as appropriate. A little thought and organisation can save thousands in fees.
Lastly, Right to Enfranchise is a complicated area of leasehold law. You are going to be investing £000s in the project and you therefore have a lot of ‘skin in the game’. Getting it right is important – especially where a freeholder is having their asset ‘removed’ from them and they may well put up a strong fight, trying to keep that asset. The freeholder will have experienced, professional, specialist advisers working for them – fighting to stop your claim if legally possible. You therefore need to have an equally experienced, professional and specialist team fighting for you. It’s expensive – but it’s worthwhile – in fact it’s vital!
At Casserly Property Management we don’t project manage Right to Enfranchise cases. We do, however, provide expert analysis of the service charge budget requirements and the on-going property management requirements (for a reasonable fee), so do contact us if you need those services.
If you'd like an introduction to a specialist leasehold lawyer, just click on the button below.
Finally, we wish you success with your Right to Enfranchise project. It will be hard work. It will take a year or so. But the future can be far brighter, far more pro-active, and far more cost-effective.
Best wishes,
Paul
Paul Casserly
Casserly Property Management
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