How to Organize for an Enfranchisement
You have established that there are enough tenants to qualify the building. What do you do now?
Enter into a participation agreement
Providing the participating tenants have agreed to proceed with no exceptions. All participating tenants should enter into a formal participation agreement. The agreement will govern the relationship between all tenants. This is prior to and during the collective enfranchisement procedure for the building. It includes items such as rights of voting, negotiation and agreement of terms. Most importantly, it covers the individual tenants’ financial contribution. This facilitates in future that there are no difficulties between parties.
This can be particularly important where there are large blocks involved as disputes can cause difficulty or delays. A prior agreement makes future disputes easier to resolve. It could also be useful to record an agreement on what happens after acquiring the freehold. For example, the new freeholder would grant lease extensions to all participating tenants in the purchase. This is often the main reason why leaseholders choose to purchase the freehold.
In small blocks or where the amounts are small, it may be possible to dispense of an agreement by everybody paying their share up front. If you have a structure in place then tenants have to agree means of finance to move on to the next stage.
What do you do next? Choosing the nominee purchaser
The nominee is the person named in the initial notice, who acquires the freehold and becomes the new landlord. The participating tenants must decide on who the nominee purchaser is at an early stage. He or she must conduct the business at the later stage of the process and on completion will be responsible for the management of the building.
A nominee purchaser can be a person or one of the tenants, or a corporate person, a trust and more than likely a company formed by the tenants for the purpose. There are currently no controls for the qualification and selection of a nominee purchaser. In addition, tenants are free to choose whoever or whatever agency they wish.
The most common format is a company wholly owned by the tenants. If this is the case the company must be established before it can be submitted on the initial notice. There are various companies that will be able to help you with this. Companies House is also a helpful tool. They can advise on how to establish a company. As well as producing Articles of Association that reflect the purpose of the company and govern voting rights and controls of shares.
Leaseholders may find it useful to establish a cost fund or fighting fund to cover the initial steps. These will be the valuation, the information gathering and arranging of the nominee purchaser. These are all applicable in the early stages.
Do I need a professional advisor?
Is it believed to be critical for the presenting and serving of an initial notice. It is important to appoint either a valuer and/or a solicitor to help with the various stages of enfranchisement.
The valuer will provide as follows:-
(a) Providing valuation advice to fully appraise the tenants on the possible outcome of negotiations.
(b) Advise on the offer amount for the initial notice.
(c) Respond to landlords counter-notice.
(d) Negotiation and settlement of the price.
(e) Advice on the structural repair and condition and implication of future maintenance costs and service charges.
(f) Advice on future management.
Why do we need a solicitor?
a) Preparation of the information for the action
b) Setting up the company
c) Service of the initial notice
d) Response to landlords request for substantiation of a claim
e) The conveyance of title
f) Amendment of the terms of the leases after enfranchisement
Assessing the purchase price
An initial valuation of the property by a qualified valuer or surveyor is strongly recommended. This is to provide the enfranchising leaseholders with an idea of the final purchase price prior to commencing the action.
There is a formula based within the 1993 Act which a surveyor will use to give an estimate of the premium payable. The participating leaseholders will have to jointly pay to buy the freehold.
No valuation will be 100% accurate. It can be virtually impossible for a valuer to provide an exact valuation of the eventual settlement figure. However, the valuer should be able to give the best and worst case scenarios. Using local knowledge and anticipating areas of claims and counterclaims when doing so.
There is no such thing as a fixed price for a freehold. Leaseholders should be aware from the beginning that prices can range to avoid future surprises.
When considering the likely purchase price the leaseholders should consider the freeholders’ costs as well. Leaseholders will share the cost of the freehold as well as the freeholder’s reasonable legal and valuation costs.
Summary
It is so important to ensure that the participating tenants have the correct legal advisors as well as valuers with local knowledge that can help you.
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