Leasehold Enfranchisement versus Right to Manage
1. Leaseholders normally consider such matters when they are having problems with a freeholder. For instance, they are either unhappy with the amount and manner in which service charges are being incurred or they are unhappy in the manner in which the block is being managed by the existing managing company / freeholder or more likely a combination of both. In these circumstances, the law does allow leaseholders, subject to meeting certain criteria to either take control of the block through what is known as the enfranchisement process or alternatively the right to manage process. Both procedures have advantages and disadvantages and below we set out briefly what matters will need to be taken into account.
2. Quite simply this process involves a group of leaseholders banding together for the purposes of the common intention of collectively purchasing the freehold interest from the landlord. This right is provided as a legal right under the Leasehold Reform Act (1993).
3. Very few firms have the expertise to deal with such matters and thereby it is important that you instruct an experienced solicitor to assist you with such matters as there are many areas of complex law and procedures to navigate through and thereby it is imperative that good sound advice is received right from the outset.
4. To be eligible to exercise your right to enfranchisement, there are certain conditions that must be satisfied and these are as follows;
I. There must be at least 2 separate flats making up the block within the freehold
II. No more than 25% of the freehold building can be used for non-residential purposes, such as commercial shops
III. At least 2/3 of the freehold flats must be let to qualifying leaseholders. Please note a qualifying leaseholder is defined as a leaseholder who holds the flat for a term of 21 years or more
IV. At least 50% of the leasehold flat owners must participate in the application for enfranchisement
ADVANTAGES OF LEASEHOLD ENFRANCHISEMENT
5. The single most beneficial advantage of undertaking the enfranchisement process is that the leaseholders will gain full ownership which will give you the freedom to run the block as you so wish. These benefits can include the following;
I. As you now own the freehold, you will no longer have to pay any ground rent
II. In respect to service charges, you can now organise the service providers yourself who you can ensure can provide better value for money than how such matters were organised by the previous owners. This alone will provide much benefit to leaseholders and will be hugely beneficial in terms of any cost outlay in acquiring the freehold through enfranchisement.
III. You will be entitled to grant yourself lease extensions on a virtual freehold basis i.e 999 years and thereby increasing the value of your leasehold reversion at either no cost or minimal cost.
IV. Ultimately, by taking the above said steps, you can potentially add significant value to your property when the time comes to sell your property on the open market as such arrangement will be more attractive to any potential purchaser than otherwise without the same.
V. There are other ancillary benefits that you can organise / amend in respect to your lease conditions, such as allowing pets to occupy the property or renting the property without any conditions as such restrictions can be removed now that you are in control.
DISADVANTAGES OF LEASEHOLD ENFRANCHISEMENT
6. Often we hear that the biggest problem once a successful enfranchisement has been completed, is keeping the leaseholders together as a single joint group. Depending upon whether the block contains a small number of leaseholders or a large number of leaseholders will normally dictate the likelihood of conflict occurring between the leaseholders once the enfranchisement process has been finalised. Usually, we find that in small blocks it is easier to reach agreement rather than in larger blocks containing many individual leaseholders. However, in both cases, to minimise such risk, it is possible to deal with such issues provided all concerns are agreeable to entering into a separate agreement regulating their respective roles, obligations and other terms.
7. A further disadvantage of the enfranchisement process is that relative to the right to manage process, it is more costly. As you are effectively forcing the existing owner to sell the freehold interest to you under this process, not only will you be responsible for your own legal costs and other administrative costs, but with enfranchisement, you also have to add the freeholder’s surveyors costs to value the price of the premium as well as the cost of the premium itself. However, the actual cost will of course vary significantly for specific cases and thereby to get a better idea, do contact our offices and we will be able to assist you in respect to the cost and benefit of this procedure to your individual case. However, in the long run in most cases enfranchisement will in our view deliver better value due to the significant value that can be added as it allows flexibility to manage and grant to yourselves pretty much what you like and what you can agree upon.
RIGHT TO MANAGE
8. An alternative to right to enfranchisement is exercising the option of what is known as the right to manage. Usually, the reasons for undertaking this option will be the same as considering enfranchisement, namely from practical point of view because you are unhappy as a leaseholder in respect to some aspects of the existing arrangements such as the level of service charges or the manner in which the block is being managed. Accordingly, the law as it stands allows you to exercise the option of the right to manage your block as an alternative to leasehold enfranchisement provided you meet certain criteria.
9. The right to manage is available to all leaseholders, in all blocks where the following criteria is fulfilled;
I. A minimum of 50% of the leaseholders within the block must participate within the process
II. At least 2/3 of the leaseholders must be qualifying leaseholders, that is to say they have lease terms of at least 21 years or more granted to them.
III. No more than 25% of the block can be used for non-commercial purposes i.e commercial shops or any other commercial premises cannot make up more than the said percentage.
10. The above said briefly sets out the main aspects of the criteria, however this area of law can be quite complex if you do contact our offices we will be able to assess your case upon the merits of your individual circumstances so as to ensure you will be eligible and thereby to make certain, we would encourage you to contact our offices so that the first steps to undertake the above said can be assessed as early as possible.
11. In addition to the above said, you will be required to incorporate a special kind of limited company to exercise the right to manage in which each of the participating leaseholders will take membership. Please note the landlord will also be entitled to take membership of the right to manage company and thereby all those connected to the block will have the right to be part of the newly formed company.
12. As part of the procedure, certain notices have to be served and your landlord does have the right to object and should this occur the matter will need to be referred to the Property Tribunal for determination. In this respect, such matters are relatively complex and thereby to minimise risk and complexity if this is something that you wish to consider, then we would invite you to contact our offices so that a proper assessment of your case can be undertaken and your application managed in a way that can deliver results with minimal cost and effort.
RIGHT TO MANAGE – ADVANTAGES
13. The main advantage of undertaking the right to manage route as opposed to the enfranchisement route is that as you will not be purchasing the freehold reversion, there will be no upfront cost in respect to the freehold premium which can be significant. Although you will still be responsible for your own legal costs and disbursements such as any land registry costs and in some cases surveyors fees. You will also be responsible for paying the landlord’s reasonable fees and disbursements.
RIGHT TO MANAGE – DISADVANTAGES
14. Under the right to manage process, the right to manage company has to generate funds through service charges and thereby it can only operate and protect funds that it receives from leaseholders. This entails that it can potentially have a difficult relationship with those leaseholders who have not taken part.
15. Additionally, unlike enfranchisement, the freeholder will still be in situ and thereby the company can have a difficult relationship additionally with the freeholder whose permission will still be required for alterations and lease extensions. The said would not be the case if the enfranchisement route had been adopted.
16. Enforcement of paying service charges can also become a problem with leaseholders who do not respect the authority of the new management company. Thereby, the awkward situation can arise whereby a leaseholder is a member of a right to manage company and that right to manage company is now pursuing them for unpaid service charges and thereby such matters need to be kept in mind.
17. Consideration also needs to be given to whom will be running the management company as this can be a time-consuming affair. In particular, it needs to be highlighted that there needs to be individuals who are willing to give up their time for the purposes of administration and organising maintenance of the block.
18. The above said has been stated briefly and thereby there will be a plafora of issues that will need to be considered but in reality each case needs to be assessed on its individual merits and thereby if this something that you are considering undertaking, our team will be able to assess your case on an individual basis and provide expert guidance so that you can decide which option is best for your particular individual circumstances.