How will the leasehold reforms affect collective enfranchisement claims?

If your property is leasehold and you have a short lease or persistent problems with your managing agent, you may be aware of the collective enfranchisement process. This is the procedure in which where leaseholders join together to purchase the freehold of their building and then manage it, usually granting themselves 999 year leases in the process. Not only does this deal with the short lease problem, but it also ensures the leaseholders have direct control over maintenance budgets.

If you are looking for legal assistance, there is more information on our fixed fee enfranchisement service here. If you are in the research stage, please read on.

There are a number of factors that need to align to make this possible, including having a group that is able and willing, and has the funds to bring the claim whilst staying the course for a process that can take upwards of a year. For an in-depth look at enfranchisement, head to our guidance note.

How does collective enfranchisement work?

In short, collective enfranchisement allows a group of qualifying leaseholders in a building to jointly buy the freehold from the existing freeholder, at a price calculated under a relatively complex formula set out in law. The leaseholders usually form a company for this purpose and take one share each in the company.

The leaseholders must also pay the freeholder’s legal and valuation costs of selling the freehold to them and whilst there is a general requirement for those costs to be ‘reasonable’, there are no set figures or guidelines for this.

The process involves instructing a valuer to agree a fair price, serving a formal notice on the freeholder, and completing a transfer deed once terms are agreed. Finally, the transaction is registered at the Land Registry.

Under the law as it stands, it is common for the leaseholder group to cover the cost of a non-participating flat. For example:

·       4 flats in a building

·       3 flats participating

·       1 non-participating

All flats had leases of 78 years remaining and hence, there was some urgency to extend the lease terms. By working together, the group will have shared the legal and valuation costs of buying the freehold three ways and then extended their leases to 999 years. When they sell their flats, they will be able to transfer a share certificate in the residents management company, indicating a share of freehold.

They will also benefit from ongoing savings of service charges and lower insurance, by shopping around.

When is marriage value payable?

The group would unfortunately have needed to cover the cost of the non-participating flat, including the marriage value that relates to that flat, perhaps in the region of £15,000-£20,000 - a significant chunk of the freehold premium on top of their own costs and share of the premium.

It can be difficult to understand if buying the freehold of a block of flats is feasible at all for the above reason, and so it can be useful to get a ball park figure for the premium before you incur legal and valuation costs. For a collective enfranchisement calculator, head to this article.

In this kind of scenario, it can be a barrier to enfranchisement unless someone or several people in the group are willing to de-facto become the freeholder of that flat, pay the premium for their share of freehold but then take the ground rent and any lease extension premium relating to this flat later down the line. Such a person is not always present in the leaseholder group and this stop an enfranchisement action before it starts.

Will collective enfranchisement change under the leasehold reforms?

This is where things could get very interesting under the Leasehold and Freehold Reform Act 2024 (LAFRA 2024).

Whilst LAFRA 2024 requires secondary legislation to bring in most of the headline reforms, it is anticipated that we are one step closer to this happening following the government’s victory in defeating the Judicial Review challenge to the planned changes.

The first big change under the new rules that affects enfranchisement will be that the landlords legal and valuation costs are no longer payable by the leaseholders. This will instantly remove thousands of pounds from the equation.

In addition, in the scenario outlined above, the leaseholders will be able to require the freeholder to take a 999-year leaseback of a non-participating flat. This removes the question of funding a non-participant’s share of the freehold premium and could unlock a previous attempt that was held back by a lack of available funds or lack of anyone prepared to invest in the freehold reversion of the non-participating flat.

Finally, the premium itself should be lower, once marriage value is abolished from the valuation basis. Though note some premiums could be higher, depending on how the valuation basis is set by the government.

Taken together, it is easy to see that the process should open to more groups of flat owners and less expensive, opening up the possibility of a share of freehold through collective enfranchisement that may have previously been out of reach.

The benefits of serving a s.13 notice to buy the freehold

Whilst an outlay will be required to take advantage of the new rules, once they are brought in, it should make it easier for leaseholders to reduce their annual property costs, by seeking more competitive insurance premiums, negotiating on major works contacts for big ticket items such as roof repairs, and in avoiding regular administration fees in requesting consent to sublet for each new tenancy.

An unfortunate side effect of reforms to collective enfranchisement

Whilst the removal of marriage value will ultimately benefit leaseholders, it will be an unwelcome development for those that had to pay someone else’s marriage value to enfranchise the freehold in recent years. Simply speaking, a leaseholder that can bide their time may wait until LAFRA 2024 is brought in by secondary legislation and then pay a good sum less to the new (lessee owned) freehold company to extend their lease term and remove their ground rent.

It is also uncertain whether there will be amendments to the reforms before they take effect, and we continue to grapple with the question of when the much-anticipated legislation will be brought in by Parliament. At present, the only firm commitment we have is for the new laws to be enacted by the end of the current Parliamentary term, which ends in August 2029.

Fixed fee collective enfranchisement legal service

Peppercorn Law offers a fixed fee collective enfranchisement service, helping leaseholders take control of their building—especially where short leases are causing value to fall or where poor management has led to rising service charges and unresolved maintenance issues.

If you’re considering buying your freehold, our expert support can guide your group from start to finish. You can learn more and see how we work on our collective enfranchisement service page.