Collective Enfranchisement under the Leasehold Reform (Housing and Urban Development) Act 1993
| Author | Piers Harrison/David Lonsdale |
| Pages | 95-138 |
PROCEDURE
5.1 Once the eligibility of a building for collective enfranchisement has been established, there is still a substantial amount of preparatory work necessary. The process may be approached in the following order:
(a) establish which tenants are interested in participating;
(b) make a preliminary assessment of costs;
(c) establish a cost fund;
(d) obtain a valuation;
(e) create the enfranchising company;
(f) prepare draft 999-year leases of flats belonging to participating tenants;
(g) consider what information is required to serve initial notice (this may necessitate service of an information request notice on the landlord – section 11 of the Leasehold Reform (Housing and Urban Development) Act 1993 (1993 Act));
(h) prepare draft initial notice;
(i) participating tenants enter into participation agreement and agreement to grant new 999-year leases;
(j) serve initial notice;
(k) register notice;
(l) assuming claim not contested – conveyance to nominee purchaser;
(m) obtain consent of mortgagee to surrender of existing leases and re-grant of 999-year leases to participating tenants;
(n) surrender and re-grant of leases.
5.2 The above approach pre-supposes that the tenants will want to enter into a participation agreement, that the nominee purchaser will be a party to that agreement and that the tenants will agree that the nominee purchaser will grant
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long leases to the participating tenants on completion. None of this is required by statute – the parties do not have to enter into a participation agreement at all – but it is recommended even in the smallest collective enfranchisement claims because of the certainty it provides. Kim and Another v Chasewood Park Residents Ltd
5.3 It will be prudent to obtain the valuation at an early stage so that it can be agreed between the tenants what sum each should contribute. Where there are leases of varying lengths it will not be straightforward.
PARTICIPATING TENANTS
5.4 The first task for tenants will be to establish who will participate in the claim for collective enfranchisement. The minimum number is not less than one-half of the number of flats held by qualifying tenants, save when there are only two flats so held, in which case both must participate (section 13(2)(b)(ii) of the 1993 Act and paragraph 2 of Schedule 2 to the Commonhold and Leasehold Reform Act 2002 (Commencement No 1, Savings and Transitional Provisions) (England) Order 2002 (SI 2002/1912)).
5.5 There is no requirement to invite other tenants to participate and thus in a building containing, say, eight flats all held by qualifying tenants, the minimum number of participating tenants is four. There is an obvious problem in not requiring a majority of tenants. There have been cases where the freehold has been purchased using the collective enfranchisement process by one group of tenants only for a rival group comprising an equal number of tenants to initiate its own collective enfranchisement bid.
5.6 Section 14(1) of the 1993 Act provides as follows:
(1) In relation to any claim to exercise the right to collective enfranchisement, the participating tenants are (subject to the provisions of this section and Part I of Schedule 3) the following persons, namely—
(a) in relation to the relevant date, the qualifying tenants by whom the initial notice is given; and
(b) in relation to any time falling after that date, such of those qualifying tenants as for the time being remain qualifying tenants of flats contained in the specified premises.
1 Kim and Another v Chasewood Park Residents Ltd [2013] EWCA Civ 239, [2013] HLR 309.
5.7 Qualification for collective enfranchisement is judged as at the date of the service of the initial notice. Section 14 of the 1993 Act states that the participating tenants as at that date are the tenants who gave the initial notice. In relation to any time falling after that date, the participating tenants are those who remain as qualifying tenants. One curious effect of this is that after the service of the notice, the number of participating tenants may fall below the minimum that would have been necessary as at the date of service of the initial notice, for example if there are eight qualifying tenants and four participating tenants at the date of the notice, one of the participating tenants assigns his flat and his successor does not elect to participate.
ASSIGNMENTS
5.8 In the case of assignment, section 14(2) of the 1993 Act provides as follows:
(2) Where the lease by virtue of which a participating tenant is a qualifying tenant of his flat is assigned to another person, the assignee of the lease shall, within the period of 14 days beginning with the date of the assignment, notify the nominee purchaser—
(a) of the assignment, and
(b) as to whether or not the assignee is electing to participate in the proposed acquisition.
5.9 Unlike individual lease extensions, where there must be a contractual assignment of the benefit of the initial notice of claim, section 14(2) of the 1993 Act provides for a form of statutory assignment of the right to participate on condition that the assignee elects to participate within 14 days of the assignment. The Act does not provide any extension of this 14-day period and it must be assumed that if the assignee misses this deadline, he is precluded from participating unless the other participating tenants consent. The statutory assignment not only passes the right to participate but also provides that any arrangements made between the nominee purchaser and the participating tenants will apply with suitable modifications to the incoming tenant (section 14(6)). Nevertheless, in the interests of clarity the tenants should be concerned to ensure that the incoming tenant enters into a direct covenant with the nominee purchaser to comply with the terms of the participation agreement with any suitable modifications. The participation agreement suggested by the Leasehold Advisory Service
2 A draft participation agreement may be found at www.lease-advice.org.
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provision more rigorous by requiring the participating tenants to submit to having a restriction registered at HM Land Registry requiring them to obtain the same prior to registration of any assignment.
PERSONS WHO MAY NOT PARTICIPATE
5.10 Paragraphs 1 to 4 of Schedule 3 to the 1993 Act contain restrictions on participation in collective enfranchisement by qualifying tenants. These provisions are summarised at Appendix A6.
PRELIMINARY ASSESSMENT OF COSTS AND ESTABLISHMENT OF COSTS FUND
5.11 The participating tenants would be well advised to obtain advice or work out for themselves the rough price payable on enfranchisement and the costs of the process at an early stage so that they will know what sums need to be raised at each stage. Those tenants who intend to participate should make a common fund to defray costs until such time as they enter into a formal participation agreement. Thought should also be given as to what stage the participating tenants should be obliged to contribute their share of the purchase price. The Leasehold Advisory Service participation agreement is drafted on the basis that tenants will pay as required, but a more cautious approach would be to require the participating tenants to pay into a common fund in advance as a condition of participation.
NOMINEE PURCHASER
5.12 The 1993 Act requires the tenants to specify a nominee purchaser in the initial notice. This is the person through whom the tenants will act in the enfranchisement process and the body to which the landlord will convey the freehold at the end of the process. Although the nominee purchaser could be one of the tenants or several of the tenants acting as nominees for the other tenants, it is more usual to use a company. Provisions in the Commonhold and Leasehold Reform Act 2002, which envisaged the mandatory use of a Right to Enfranchise (RTE) company, have not been brought into force and it seems likely that they never will be.
5.13 The RTE provisions required the use of a company limited by guarantee, but in practice it is more usual to see companies limited by shares. This is because the presumption for companies limited by guarantee is one member one vote – which is inflexible when one member holds several flats – whereas with a
company limited by shares, the normal rule is one share one vote and it is therefore easy to provide for the situation where one person holds several flats and thus ought to have several votes. Usually, the parties are happy with one flat one vote but sometimes, especially in smaller buildings with flats of different sizes, tenants want to have voting rights which accord with the size or value of their flats. It is possible to do this by making provision in the articles of association of the company.
5.14 The incorporation of the nominee purchaser needs to happen prior to the participation agreement, as the nominee purchaser will be a party to that agreement.
5.15 It is preferable not to use an existing management company or a head lessee as the nominee purchaser, even where the members of those companies are the same as the participating tenants. This is partly to avoid conflicts of interest and partly because those companies will have existing...
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