Category: Blog

What is Collective Enfranchisement?

Leaseholders will own the freehold of the entire building which is why the term ‘collective’ is used. However, this is a complicated and lengthy process so it is advisable to instruct a Collective Enfranchisement Solicitor to do it for you.

It is also advised to get Collective Enfranchisement Valuation done from a surveyor to get an idea of the best and the worst amount that can be offered in the Initial Notice.

The best way to purchase a freehold by a group of participants is via a company set up for this purpose and all participating leaseholders will be members of this.

Why should you own a freehold?

Owning a freehold of your building individually or among a group of residents would mean you have more control over your own building and you will partly legally own the ground and the structure of the flat which can allow you to waive off the ground rent. Also, any lease extensions of the participating flats would be agreed upon between the participants at no extra cost.

If you want to modify your flat in any way or undertake an extension on your flat, a group of residents who own the freehold can look at this more approvingly than an external freeholder.

Additionally, you and your joint owners will gain the right to employ any property management company to take care of the maintenance and cleaning of communal areas, which would not have been possible in the case of an external freeholder.

Who and what qualifies for a Collective Enfranchisement?

Before the process is carried out, the building and the participating tenants must qualify for the Collective Enfranchisement.

Qualifying criteria for the building:

• The building must contain at least two flats
• It must be a self-contained building or be a part of a building with independent services to that part
  At least two-thirds of the flats must be owned by qualifying tenants (whose leases have more than 21 years remaining)
• Not more than 25% of the internal floor area is being used for non-residential purposes, for example, shops or offices. Garages and parking spaces will be classified as residential areas

Qualifying criteria for leaseholder:

• The leaseholder must have a lease which is for a period longer than 21 years
• The leaseholder must not own more than two flats in the building

The Procedure for Collective Enfranchisement

Once you’ve checked that the building and the tenants are meeting the qualifying criteria the next step would be to form a working group and enter into a formal participation agreement which will set out the terms of the purchase and sharing of the Collective Enfranchisement Costs or premium between participating members.

Due to the complex legal procedure, it is recommended to join together and instruct a Collective Enfranchisement solicitor and surveyor to act for you. The surveyor will be able to perform a better valuation of the property and advise the amount to be offered in the Initial Notice.

The solicitor will usually advise you to set up a company for the purpose and all the participating leaseholders will then be members of this company. This will also be the Nominee purchaser who will be mentioned in the Initial Notice.

Once the surveyor has calculated the Collective Enfranchisement Cost the Initial Notice may be served, stating the name of the freeholders, the Nominee purchaser, and the premium you’re willing to pay. The freeholder then has a two-month window to come back and serve a counter-notice saying if they accept the request or not and put forward their terms and conditions if any.

If the freeholder disputes the premium the parties have a further six months to negotiate. If an agreement cannot be reached within this period then the matter can be taken to the Leasehold Valuation Tribunal after that.

Collective Enfranchisement Costs

It is highly recommended to get a valuation of the property done by a Collective Enfranchisement Surveyor before proceeding with the legal formalities so the leaseholders can have an idea of the premium.

Though an exact value of the settlement figure is not really possible to predict, the surveyor should still be able to provide a ‘best and worst’ figure from the leaseholders’ perspective.

Also, note that the leaseholders will be responsible for their own costs as well as the freeholder’s surveyors and legal costs. If the matter gets referred to the Tribunal, each party will be responsible for their own expenses incurred during the Tribunal proceeding

So, you’ve finally found a place you’re comfortable with. The neighborhood is good, no leaking pipes and no creepy noise are coming from the walls at night, and just when you thought it couldn’t get any better than this, you realize that your next rent review is only around the corner, potentially threatening your idea of settling down for a bit. Now that will make you think about how to negotiate a Lease Extension so you can still retain your property while spending less on the cost of a  Lease Extension.

But don’t worry. Not everything has to be sad and gloomy. At LeaseholdValuations.com we hold your hand through the complicated lease extension maze and keep you up to date along the way, making the whole process much less stressful and run smoothly.

If you don’t know how much does it cost to extend a lease, there are various ways you can find that out, which we will discuss further.

When do you negotiate?

There are two ways you can approach this.

• You could take the traditional approach where the leaseholder serves the Section 42 Tenant Notice, which is followed by the Section 45 Counter Notice from the freeholder where they usually decline the amount suggested and put forward their premium. Negotiations happening at the Section 45 Notice stage involve solicitors, surveyors, and additional expenses that they bring with them.
• You could choose the alternate method where negotiations happen before the leaseholder serves the Section 42 Notice. In this case you’re in direct contact with the freeholder or the management company, you can directly write to them stating your intentions of extending the lease and see if they’re open for negotiation. This saves costs that you would normally pay solicitors or surveyors at the Section 42 stage.

At this point, they would either agree to your terms or present you with their own offer, which you can compare with our online valuation calculator. If they end up ignoring you, you still have the option of taking the traditional approach and serving them the Section 42 Notice.

You may serve your own Section 42 Notice, but it is a good idea to instruct a solicitor to do it for you because serving a Section 42 Notice is critical, and any errors can allow the landlord to apply to the court to have it dismissed. 

RICS Valuation

Get an RICS Lease Extension Valuation before serving the Section 42 Notice because specialist RICS surveyors can perform a precise valuation of the property and give you a good estimate of how much you should be willing to offer the freeholder to extend the lease while staying in the confines of the Leasehold Reform Act. 

Using an online Lease Extension Calculator

There are ways you can calculate your premium online using an online Lease Extension Calculator, which can give you a rough idea of how much the premium is going to set you back. But remember, it only gives you a rough idea because the calculator will give you an amount depending on what data you have input. The freeholder has the right to raise an argument that you are not qualified to value the property and to give any offers based on your valuation.

In circumstances where you do proceed with serving a Section 42 Notice based on a value obtained from an online calculator, the freeholder may ask you to still get the leasehold valuation performed from a qualified RICS Surveyor. This may again add cost to your budget, so proceed with caution.

Open up a dialogue as soon as you can

It is a good idea to establish direct contact with the freeholder and work out a deal that works for both of you. Start discussing your terms early on because the earlier you begin a conversation, the more time you have to convince the landlord and also find out if the landlord is amenable to a deal or not. Get in touch with them directly and try something like, “I have received an online valuation which shows that the premium should be less than you are offering. Can we discuss this and find something that we are  both happy with?” This can open up your opportunity to discuss your terms with the landlord.

Establishing contact with the freeholder before serving the Section 42 Notice will open up a discussion and will give the freeholder an idea of the kind of premium that you have in mind. Depending on their response, you can judge whether they are willing to bend or not. This can help you further down the line when finalising the deal.

This might not help if the freeholder you’re dealing with is a large company because they usually only respond to formal notices to extend the lease.

Serving a Section 42 Notice

Based on how your pre-section 42 notice negotiation goes with your freeholder, you may now ask your solicitor to serve a formal Section 42 Notice for a lease extension. However, keep the following points in mind before including an amount in the offer.

a) Don’t offer too low: If you offer an impractically low amount, the freeholder may outright reject your offer and claim that your offer is invalid due to it not being “bonafide” or “realistic” So, choose an amount that’s reasonable, and that gives some room for a discussion

b) Don’t offer too high: Obviously, the freeholder is looking for the highest amount possible, and by offering an amount that is too high, you’re leaving no room for negotiation. Consider this a missed opportunity to settle on a reasonable premium.

The best way to go about this is by putting forward an offer that is somewhere in the middle of the lowest and the highest premium received from the surveyor’s valuation.

Receiving a Section 45 Counter Notice

If the freeholder accepts your offer, it’s all sorted. But if they don’t accept the offer, they will propose a revised counter-offer, which will be contained in the  Section 45 Counter-Notice. Now depending on how much different the Counter-offer is and how much you’re willing to deviate from your original offer, there are two possibilities.

If the counter-offer proposed by the freeholder is not significantly different from your original offer and is not setting you back by a huge amount, you may proceed with finalizing the deal. Also, if the difference in the amount is not worth spending extra money on your surveyor for negotiating with the freeholder, you may accept the offer and close the discussion.

If you feel the difference amount is too high, you can get your surveyor to negotiate your lease extension. The negotiation will take place between your surveyor and the freeholder’s surveyor to reach a common ground while comparing both their valuations. Remember that the hourly charges for negotiations are remarkably high, and you may end up paying more money for negotiating than the actual difference in premium. So, compare them wisely before going ahead.

So, consider your budget, what exactly you can afford, and how far you’re willing to go to turn the deal in your favor.

Lease extensions are a daunting task even in the best of circumstances with various strict deadlines in terms of notices and counter-notices, agreement to the premium and specific terms and completion of the documentation procedures. Lease extensions made outside the statutory route may proceed a little more quickly than when carried out under the Leasehold Reform, Housing and Urban Development Act 1993, but it is a complicated process nevertheless. Considering all that, a global pandemic further increases the uncertainty to an already challenging task.

Valuations during Covid-19

Irrespective of whether you’re following the statutory route or the voluntary route for your lease extension, it is a good thing to obtain a valuation report from a lease extension specialist surveyor. This valuation report can be prepared by the surveyor either after a physical inspection or from a Desktop Valuation. Needless to mention, desktop valuations have been unaffected by the pandemic situation.

Desktop Valuation is an assessment that is conducted remotely through resources that are available online and completely eliminates the requirement for a physical inspection. It is helpful for people who are unable to arrange access to the property for the surveyor or in case there are time and budget limitations. However, it is important to note that Desktop Valuations are an open-market appraisal of the property that are derived only from information and tools from online sources and can provide an estimate of the market value from a combination of information and experience since there is no physical inspection involved. On the other hand, Desktop Valuations can be completed quickly without the hassle of arranging access to the property and cutting down the time required for the physical survey.

But lately, the housing market has been unlocked with strict government guidelines, which means physical inspections can be carried out as long as everyone follows strict measures to ensure safety, such as following social distancing and good hygiene measures. A physical survey is an advisable option, provided the inspection can be carried out safely with all the protocols in place and provided you’re not self-isolating.

However, if you prefer not to risk somebody being in your property or are self-isolating then you can always opt for a desktop valuation, which can be just as accurate as a physical inspection, as under the law there are certain things the valuer must assume about the internal condition of the property and so does not necessarily need to physically inspect your property.

What should you expect during your valuation?

In order to keep up with the latest government guidelines concerning the Covid-19 situation, a few extra points need to be taken care of by the surveyor as well as the occupants to permit a safe and smooth inspection.

• The surveyor will ensure that nothing has been changed since the appointment was booked
• If anyone is self-isolating in the household, has been diagnosed with Covid-19 or is showing any symptoms, the surveyor will not be able to carry out the inspection and it has to be booked for a later date
• If possible, it is safer for both you and the surveyor if you’re able to leave the house during the survey. Otherwise, you may wait in the living room while the surveyor completes the inspection. If none of this is possible, please follow the surveyor’s instructions as and when they ask you to move so the inspection can be carried out easily
• The Surveyor will start by inspection of the outside front of the house then move to the outside rear. Following that they will move on to sides, outbuildings, garages, then completing the inside of the loft, upstairs, downstairs hall, ground floor WC and finally the living room
• All lights must be on to reduce contact with switches
• All internal doors, loft hatches as well as garage doors must be kept open to prevent physical contact with doors and handles
• Social distancing measures of at least 2 metres must be maintained and any kind of physical contact should be avoided. No handshakes must be exchanged and the surveyors must be equipped with the appropriate PPE
• Other government guidelines specific to your part of the country must also be followed

The damage inflicted by Covid-19 has been massive and is yet to be evaluated, but at the same time, it is important now, more than ever, to plan ahead and ensure that our financial positions are such that we can be prepared for such unforeseen situations in the future.

For the safety of everyone, Leasehold Valuations must be carried out with all protocols and frequent hand washing and good hygiene must be encouraged.

This is the first of a series of blogs that will try to explain, in layman’s terms, how the process to extend your lease is undertaken for lease extension purposes.

We will not cover every single type of lease nor every single possible situation, as that will simply not be possible during a short blog. However, if there are any questions you may have that aren’t covered in these blogs then please feel free to contact us for a free friendly professional consultation.

A separate series of blogs will explain the process for a freehold purchase (or enfranchisement to use the correct terminology).

In order to understand how valuations are undertaken it is necessary to understand a bit about the background, not only the process of extending your lease, but also how the law evolved to get us here and why certain processes need to be followed correctly in order to ensure a successful outcome.

The type of lease extensions we will be discussing are only the ones relating to residential properties (flats and houses) and only applicable to properties in England.

Leases of commercial premises (shops, warehouses etc) are governed by different legislation and are totally different in the way they are valued and calculated.

What is a lease?

A lease is a legal document between the landlord of a flat/house (hereinafter called the Lessor) and a tenant (hereinafter called a Lessee) that gives the Lessee a right to own the flat/house in question for a specified number of years (usually 99 years and above but it can be any length over 21 years). During the term of the lease it is quite normal to pay a ground rent, which may or may not increase periodically throughout the term.

For example, a typical lease may be for an original term of say 99 years paying £50 per year for the first 33 years and then increasing to £100 per year for another 33 years and then £150 per year for the final 33 years.

What is a lease Extension?

At any time during the term of the lease the lessee can exercise their legal right to extend the lease by an additional 90 years. So, for example, if you have 50 years left on your lease you can extend it to 140 years (50+90) and reduce your ground rent to effectively NIL for the whole 140 years.

However, before embarking on this process certain criteria must be satisfied. These criteria will be expanded on in the next blog.

In order to start the process certain notices have to be served and the landlord must be compensated for the loss to his investment (i.e. the landlord will receive less rent and also has to wait a further 90 years to get his property back).

Who pays the fees?

As the lessee is requesting the extension the legislation states that the lessee is responsible for both his/her own surveyor’s and solicitor’s fees as well as the landlord’s “reasonable” fees. We suggest you allow a budget of say £3,500 for all fees.

So, as you can see, this is not a cheap process but getting the correct professional advice from the outset is important if you want to extend the lease for as little as possible, with the least amount of complications and receive the correct advice.

Some people choose to opt for professional advisers who are perhaps cheaper but as the saying goes “you get what you pay for”.

To get the right advice from experienced professionals, who will also guide you through this Complex process please contact us.