Collective Enfranchisement - Getting Started
Outlining the qualification criteria and procedure in relation to collective enfranchisement (buying the freehold) of a residential leasehold building (flats)
By Mark Loveday, barrister at Tanfield Chambers and a judge of the First-tier Tribunal (Property Chamber), and Ibraheem Dulmeer, solicitor at Leasehold Advisory Service
A “share of the freehold” is a phrase which appears countless times in sales particulars up and down the country. But in the words Frank Sinatra used in his first commercial recording back in 1932, these words may mean “all or nothing at all”.
Owning the Freehold and Leasehold
A person who owns both a lease and a share in the freehold wears two different legal hats. It is important to recognise the lease is not defunct. The lease is still the essential document and leaseholders should ensure they have a copy and understand it. Both parties must continue to observe the terms of the lease. For example, the freeholder still has to maintain the building in accordance with the lease and raise service charge demands. The freeholder must also still comply with legislation, such as the duty to consult about major works in section 20 of the Landlord and Tenant Act 1985. Merely owning a share in the freehold does not mean the leaseholder can avoid these things.
Individuals and companies
Once the freehold interest has been acquired (for example, by collective enfranchisement or the Right of First Refusal or by a negotiated purchase), one has to think about how the interest will be held. There are essentially two options.
First, the freehold interest may be held in up to four names of individual leaseholders, an approach frequently adopted with small blocks of flats. The registered owners act as trustees for themselves and any other owners who are not registered. A declaration of trust deed will usually be needed to avoid complicated and convoluted trust law disputes which sets out the share held by each flat and the relationship between the beneficial owners and the trustees. Decisions by trustees must be unanimous and this may lead to problems where there are differences of opinion and approach between the owners of the freehold. For example, someone might find it necessary to do a set of works and others may disagree. Although these differences can ultimately be dealt with by the Court, trust law is notoriously complex and expensive to resolve.
Secondly, leaseholders may incorporate a company with all or a number of flat owners being shareholders or members of the company. The articles of association act as the constitution of the company setting out how decisions are made and the functions of directors. A majority of the shareholders can then pass resolutions at meetings and delegate power to the directors to make day to day decisions on their behalf. A company must be incorporated and comply with the requirements of the Companies Acts and file confirmation statements (formerly known as annual returns) at Companies House. A company requires comparatively more administration than a trust, but Company law disputes in the courts can again be fairly complex to resolve.
“All or nothing at all?”
The obvious advantage of having a share in the freehold is that it gives the flat-owner a direct say in what happens on his block or estate. In some (but not all) circumstances, owning a share in the freehold may include valuable additional rights such as the right to a lease extension for nominal consideration. Such rights may well appear in a participation agreement or deed, or the trustees or directors may have power to grant lease extensions under the trust deed or articles.
But there can be real challenges. Having flat owners with shares in the freehold can at times lead to deadlock over crucial decisions such as to whether to incur large service charge bills on major works. In effect, disputes between leaseholders and landlords become disputes between neighbours. The leases will also continue, hence leaseholders may still require permission to sub-let or carry out alterations. They may still have to pay for lease extensions, since the right is not granted automatically. What’s more, with some large developments the impact as a single ‘share of freehold’ may be more limited: having only one of 350 shares in a company is unlikely to provide a leaseholder with much control over his estate or block.
The phrase ‘with share of freehold’ does not therefore necessarily give an advantage to the buyer of a flat. It is imperative to ensure that in selling a flat with a share of the freehold, the implications of owning the freehold and its challenges are understood. Ol’ Blue Eyes may have been singing about love not leases, but the words may still mean all, or nothing at all.