Leaseholders of flats have the right to buy the freehold of a property as an individual or as a company and there are advantages and disadvantages to both routes. In both instances the process begins by serving a notice on the landlord but the decision about the nature of the acquiring party should be made well before the starting gun is fired.
Acquiring the freehold as a company
It is possible, provided that certain specific requirements are met, for tenants to buy the freehold of a block of flats as a collective group. This can be done by setting up a company in which all the participating, qualifying tenants are shareholders or members. The company must be registered with Companies House prior to making a claim to acquire the freehold. A participation agreement, setting out the tenants’ obligations and rights should also be drawn up and signed. The company then becomes the nominee purchaser and if it successfully acquires the freehold, it becomes responsible for the management of the building.
There are numerous advantages for tenants in acquiring the freehold as a company. Firstly, the articles of association of the company will set out how participating tenants will make any future decisions. This can be greatly advantageous and avoid a whole host of problems which can arise in relation to decision-making. Secondly, if a freeholder wishes to transfer their share of the freehold they do not need the authorisation of the other shareholders.
It is unlikely that tenants attempting to acquire a freehold collectively, as opposed to individually, will be able to secure a collective mortgage, even with a company in place. Thus, it remains necessary for tenants to ensure that they have the financial capacity to purchase the freehold on an individual basis.
It will be necessary to file an annual return at Companies House to keep the company running. The annual return confirms the current details of the companies membership and directorships etc. The current cost for filing one online is £13. Someone should be tasked with these administrative tasks.
It will also be necessary to file dormant accounts for the company every 18 months or so. Companies House will notify you in writing of the company's filing requirements at the registered office address. You may also need to inform HMRC that the company is not trading but is a management vehicle for the building.
Acquiring the freehold as joint individuals
You cannot have more than four individuals on the title of the freehold interest at land registry, therefore with larger enfranchising blocks of flat the only option is to use a nominee company.
It is possible to acquire the freehold of a property as joint individuals but this shares many of the disadvantages of using a company as well as introducing other issues. The main problem is that each time a transfer occurs every freeholder must authorise it.
This can be problematic because disputes can arise between the freeholders if one of the freeholders seeks to transfer their freehold share to someone considered less than ideal by the other freeholders. In addition, it can add unnecessary complication if other freeholders simply cannot be located. Whatever the issue, it may prevent a transfer being made and the sale of a flat going ahead.
These problems can to some extent be reduced if the joint individuals enter into a deed of trust to set out how decisions are to be reached between the individual freeholders. Furthermore, if the deed states that decisions are to be made by a majority vote, this simplifies the decision making process even further.
Comment
Whichever route is chosen to acquire the freehold, it is essential that tenants seek expert legal advice well in advance of the service of the initial notice to the landlord. The process of collective enfranchisement is complex and, once started, must follow a timetable that is guided by the enfranchisement legislation. Mistakes can be costly and cause unnecessary delays.
