Many freeholders may not be aware but under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders are legally entitled to purchase the freehold of their building. This is known as Collective Enfranchisement and effectively means that tenants can force the sale of your freehold at any time. So, that long-term, secure investment that you made into your freehold property could be cut short very abruptly.
However, as the term Collective Enfranchisement would suggest, leaseholders must come together to purchase the freehold collectively, as the 1993 Act does not provide the individual right to purchase the freehold. This collective group must equate to the requisite majority, which is 50% of the total number of flats in the building, furthermore, both the tenants and the property itself must qualify for Collective Enfranchisement.
What is a qualifying freehold?
For a residential freehold property to qualify for Collective Enfranchisement, it must contain at least two flats, no more than 25% of the property can be in non-residential use e.g. for shops and offices, and at least two-thirds of the flats must be owned by qualifying tenants.
What is a qualifying tenant?
A qualifying tenant is simply a tenant with a long lease, which was originally granted for 21 years or more.
What happens when you’re served notice?
When you’re served a Collective Enfranchisement notice you’ll have 21 days to request evidence that the participating tenants qualify for enfranchisement. Tenants will then have a further 21 days to respond.
How much will Collective Enfranchisement cost?
Aside from losing any income from ground rent or service charges, Collective Enfranchisement will not cost anything for a freeholder. The leaseholders, however, will be responsible for paying their legal fees and valuation costs as well as yours, together with the purchase price for the freehold, Land Registry fees and possibly stamp duty and land tax if the purchase price is over £125,000. Leaseholders may also have to pay fees for the incorporation of a company should they wish to purchase the freehold in such a way.
Can a freeholder refuse to sell the freehold?
A freeholder can only refuse to sell the freehold if the qualifying requirements are not met. For example, leaseholders may ask if you will sell the freehold to them even if more than 50% of the leaseholders do not wish to participate. In this case, it would be entirely up to you whether you accept the sale or not.
How much should leaseholders pay to buy the freehold?
Technically, as the freeholder, you can set any purchase price for your freehold interest. However, it’s very unlikely that leaseholders would be willing to pay over the odds for the freehold title. If this is the case, leaseholders can refer the matter to a First Tier Tribunal who will set what they deem to be a fair purchase price and subsequently force you to sell the freehold for this amount. This process will require both parties to obtain a professional valuation which will be used in negotiations and any legal proceedings.
Selling the freehold on the open market
If the thought of suddenly losing your freehold title is somewhat bothersome, you may find that taking control and initiating the sale is a better option. And selling your freehold on the open market can be very simple and easy if you choose a reputable freehold buyer. Of course, under Part 1 of the Landlord and Tenant Act 1987 tenants will still be given the opportunity to purchase the freehold but this will be under your control. This process is a legal requirement known as the Right of First Refusal and is subject to similar qualification criteria as Collective Enfranchisement.
The Right of First Refusal to purchase the freehold must be offered to tenants by way of a Section 5 Notice, in a prescribed format and following strict timeframes. The purchase price that you would like to achieve must be stated on the Section 5 Notice (among other important information).
Once this price is set, you will not be able to offer the freehold to another party for better terms than offered to the leaseholders for the next 12 months. Therefore, it’s wise to set a price in the Right of First Refusal offer letter that can be achieved on the open market
What happens if you fail to offer the Right of First Refusal?
If you proceed with a private sale without offering leaseholders the Right of First Refusal to purchase the freehold, you leave yourself liable for criminal prosecution and a fine of up to £5000. Furthermore, the qualifying tenants have rights of remedy where they can demand information relating to the sale and force the new landlord to sell to them at the same price that he paid. If you need further reasons to comply with the Right of First Refusal, click here.
How do you value the freehold?
For an instant estimation of your freehold’s value, take advantage of our free online Freehold Calculator. It’s been configured using current market data to provide you with an approximate value of your freehold ground rents in just a few easy steps. This estimation may help you to decide whether to sell or not.
Alternatively, the team here at Freehold Sale can provide you with a free appraisal of your freehold ground rents. We have decades of experience in valuing residential freehold properties and have access to Land Registry to assist us with our thorough searches.
Finally, if you’ve been served notice for collective enfranchisement, you’ll need to seek a professional valuation from a chartered surveyor. Your leaseholders will be required to do the same, and as stated above they will need to cover the costs for both.
Final thoughts
Leaseholders can force you to sell the freehold whether you’ve been a good landlord or otherwise, so try not to take it personally. The best thing that you can do is find a knowledgeable conveyancing solicitor and an experienced chartered surveyor to ensure that you achieve the best sale price and a smooth sale process.
