If you’re considering going through enfranchisement, collective enfranchisement or leasehold enfranchisement have a look at our article below to see if it’s right for you.
What is enfranchisement?
Enfranchisement is the process you go through to buy the freehold of your property. The term is often used in conjunction with lease or leasehold extensions because the objectives can often be similar, but there are major differences.
In fact, enfranchisement is normally split into two different categories:
Leasehold enfranchisement and buying the freehold of a house
This applies to leasehold houses where the leaseholder owns the property but rents the ground from a freeholder. Leasehold houses are relatively rare as most houses come under freehold ownership as standard. However, they are becoming more common, for example many developers sell new build houses on a leasehold basis these days.
Buying the freehold of a house is fairly straightforward as it only involves 2 parties: the leaseholder and the freeholder. However, as with all enfranchisement this doesn’t necessarily mean that the process is easy.
Eligibility criteria for leasehold enfranchisement
To start the leasehold enfranchisement process for a house, 3 conditions must be met:
- Your initial lease was granted for more than 21 years
- You must have owned your lease for more than 2 years and be the current leaseholder
- The house must be reasonable considered a house and be divided vertically from any adjoining properties
If you don’t meet these 3 criteria, you can’t apply for enfranchisement.
This is when a group of flat owners get together to exercise their right to buy a share of the freehold and establish their own management company.
It’s much more common to own a flat on a leasehold basis than it is a house. However, collective enfranchisement is slightly more difficult to apply for than leasehold enfranchisement. This is because strict criteria apply to whether a property is eligible for enfranchisement, and how many people need to get together to buy the freehold.
Eligibility criteria for collective enfranchisement
It’s never been easier to buy a share of the freehold of a block of flats. However, this is only from a procedural perspective.
Before you can even consider collective enfranchisement, there are a slew of criteria you, your neighbours, and the property you live in must meet:
To qualify for collective enfranchisement a building must contain a minimum of 2 flats.
Furthermore, the building must not:
- Dedicate more than 25% of internal floorspace to commercial use
- Be part of a cathedral precinct
- Be a National Trust property
- Include an active railway, railway bridge or tunnel in the freehold
- Come under ownership of the Crown, however there are exceptions to this
If a building doesn’t meet these requirements, you won’t be able to proceed.
With regards to leaseholders for collective enfranchisement:
- 50% of the leaseholders must come together to buy the freehold*
- 75% of all the flats in the building must be owned by ‘qualifying tenants’
*If there are only 2 flats in the building, then both leaseholders must agree to buy the freehold together.
A qualifying tenant holds a lease which meets any of the following:
- A lease which was initially granted for more than 21 years
- A lease that was granted with the right to buy
- Leases which terminate on death or marriage
- A lease that holds a right of perpetual renewal
- Shared ownership leases where the tenant owns 100% of shares
- Long leases that are continued on expiry that fall under the Local Government Housing Act 1989
A qualifying tenant must not:
- Live in a flat provided by a charitable housing trust
- Own more than 2 flats in the same building
- Have a commercial lease
If any of these 3 exceptions are true, the tenant no longer counts as a qualifying tenant.
Resident Landlord Exemption
You can’t apply for collective enfranchisement if all 4 of following apply:
- The freeholder or an adult member of their family has lived in the property in the past 12 months
- The building is a conversion into 4 flats or fewer
- The freeholder has owned the freehold since prior to the building’s conversion
- The building isn’t purpose-built for flats
However, you may still be able to negotiate a sale with the landlord informally.
What happens to the leaseholders who don't want to buy the freehold?
These leaseholders can’t stop the freehold purchase going ahead. They also won’t have a say in the management and maintenance of the building. Nor will they have the automatic right to purchase a share of the freehold later down the line.
Is it worth buying the freehold of a house or block of flats?
This is entirely dependent on what you want to achieve. For some people, it’s incredibly important to feel like they own their property outright. But for others, there may be financial reasons.
Many people will choose to buy the freehold because:
- They don’t want to pay ground rents, especially if they will automatically increase annually
- For flat owners, they want a greater say in the management and maintenance of the building
- Their lease is expiring and it can be as much to extend a lease as to buy it
- They wish to sell their property and a freehold or share of freehold property can be more attractive
- There are clauses in their lease that offer the freeholder a share of a property’s sale price
If you’re buying the freehold because you want to sell your property for a higher price, always consult a valuer first. Sometimes the cost of enfranchisement can outweigh the additional value gained from buying the freehold.
What is ground rent?
It’s common practice for landlords to impose ground rents in leases on leasehold properties. These cover the rental of the ground that the property occupies, despite you owning the property.
Historically, these have been low, for example £100 or £200 per year. However, some landlords and developers include ‘rising ground rents’ in leases.
These ground rents start low but increase on an annual basis. This means you might start by paying £100 a year, but in 20 to 30 years’ time, you might end up paying £1,000 or more.
Furthermore, this can severely affect re-sale value and interest. If you purchase the freehold, you have to pay these ground rents anymore, but if you own a flat, you will still need to pay maintenance charges.
How much does enfranchisement cost?
The cost of leasehold or collective enfranchisement can change depending on whether you go through the formal or informal process. The main costs for a leaseholder are:
- Your landlord’s reasonable legal costs
- Solicitors’ professional fees for advice and paperwork
- A surveyor’s fee to value and advise on the freehold
- The price of the freehold itself, known as the ‘premium’
- Stamp duty if the premium is greater than £125,000 per property
- Company formation costs for collective enfranchisement
These costs are not fixed. Instead, they will vary depending on how much negotiation there is, and whether or not the landlord agrees to the sale.
In principle, a landlord can’t stop a valid application for enfranchisement, however they can try to block it on grounds that the application isn’t valid.
If this is the case, your enfranchisement application will be referred to the First Tier Tribunal, which is a court. This is normally where solicitors’ fees will increase as you’ll need to prepare for a hearing.
All in all, enfranchisement can cost anything from £2,000 to £10,000s excluding the lease premium. When it comes to collective enfranchisement, if more leaseholders get together to buy the freehold, the costs will be spread across more people, meaning lower individual fees.
Furthermore, you should expect the whole process to take between 9 to 18 months to complete.