Is collective enfranchisement a good move?

A growing trend for developers to provide the owners of new-build flats with 999-year leases gets round the issue of having to extend a lease but still leaves residents having to pay service charges, warns skip hire broker Proskips.

A possible solution is for the current owners of properties in a block of flats to get together and buy a share of the freehold. Known as collective enfranchisement, this gives the right for tenants of flats acting together to purchase the freehold and any headleases of their building.

In order for the building to qualify, it must be an independent building or be a part of a structure that is capable of independent development.

The building must also contain two or more flats held by qualifying tenants and have at least two thirds of the flats held by qualifying tenants.

Qualifying tenants must have been granted a least of more than 21 years and not own three or more flats in the building, says Knightsbridge estate agent, Plaza Estates.

When it has been established that the building qualifies and at least 50% of the building’s tenants qualify and wish to go down the collective enfranchisement route, a number of hurdles must be overcome.

The valuation formula for the purchase price is dependent on a number of variable factors. Buildings with, say, a commercial element or the presence of a caretaker’s flat, development value on the roof or a confusing title structure with intermediate/head-landlords can add to the complexity of the process.

As well as the cost of purchasing the freehold, which can be high, there is the need to create a new company that has directors willing to put in the work and effort to manage its affairs.

If only half the owners in a block want to participate, then the cost to each leaseholder will effectively double compared with the cost of a plan that attracts participation from 100% of owners.

Another downside to owning the freehold is that repairs are up to the joint freehold owners to organise – and pay for, says Best Gapp, estate agent in Belgravia. However, on balance, the advantages of owning a freehold property tend to outweigh the disadvantages. These include…

  • Flats with a share of the freehold are usually more desirable than leasehold properties and tend to be worth more.
  • Once the freehold has been acquired, full ownership of the building goes to the participating leaseholders, often via a company formed specifically for this purpose. Leaseholders can then select managing agents directly accountable to them or decide to self-manage. Either way, problems such as excessive insurance commissions or awarding contracts which may not give best value can be reduced.

However, it should be remembered that managing a building is a complex task with a host of laws and regulations to learn, ranging from asbestos to fire safety. For a leaseholder taking on the role of a company director, familiarity with the numerous duties and responsibilities this involves is essential.

Furthermore, disputes between co-freeholders are a common source of tension as is the task of chasing flat owners who have yet to pay management fees – especially if they happen to be your neighbours.

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