Qualifying tenants have a right to compel the sale of the freehold of their building to themselves from the landlord. This right is conferred by the Leasehold Reform Housing and Urban Development Act of 1993 (amended by the Commonhold and Leasehold Reform Act of 2002). The process entails a formal procedure whereby, an Initial Notice is served upon the landlord by a Nominee Purchaser on behalf of the participating tenants.
For a successful enfranchisement claim, it is imperative that all the participating tenants are aware of the legal and financial steps that the process entails and they reach an agreement as to how it will be managed before initiation. This usually means entering into an agreement to follow set guidelines and procure the required funding to finance the procedure of the claim.
The procedure and funding
Firstly, tenants must make sure that the building qualifies to be able to initiate a collective enfranchisement claim. Thereafter, given that there can be a significant number of participants (the number must meet certain minimum requirements for the Initial Notice to be valid), it is important that everyone involved is agreeable to the legal and financial obligations and benefits that are applicable to them and also to how the claim will be managed. Often a formal ‘participation agreement’ will be created for this purpose.
It is then advisable to pre-define the proposed benefits of the claim by appointing a Solicitor and a Valuer for guidance. Importantly, a Nominee Purchaser must also be appointed to handle the process on behalf of the tenants before the Initial Notice is served on the Landlord. The tenants can establish a company to collectively be a Nominee Purchaser, or a person can be appointed for this job.
A fund must be set up to tend to the initial steps of the process including valuation, information gathering and the appointment of the Nominee Purchaser prior to service. Thereafter, the fund will be used to progress the transaction and to pay for the associated costs.
Determining the costs
The appointment of a valuer will help in gauge the ‘best’ and the ‘worst’ valuation possible (i.e. the approximate price the tenants must pay for the freehold), and appraise the tenants of plausible negotiation outcomes. This will not be an exact figure but an approximate projection of a reasonable spectrum of expected value.
In the event the collective enfranchisement claim is successful, the tenants will need to have a management plan for the building. Although the legislation does not mandate the production of any business plan or budget for the management of the building, it is usually wise to analyse this on a cost-benefits basis before the Initial Notice is served. The final plan should include a draft cost-budget and deal with issues such as the recruitment of a management agent.
Additional costs of collective enfranchisement claims typically include professional fees for solicitors, surveyors and managers along with the costs of the landlord, conveyancing and company formation costs. It is important to note that the tenants are liable for the landlord’s reasonable costs after the Initial Notice has been served, even if the claim does not complete.
A considerable investment is required for a collective enfranchisement claim to be successful so it is wise to confirm the source of funding before initiating the process. Finance is usually provided by the collective resource-pool of the participating tenants out of personal funds or mortgage extensions.
An initial cost-benefit analysis is, therefore, an important step before initiating the legal process of a collective enfranchisement claim. A well-drafted plan is also essential to carve out any legal rights and obligations and to budget costs that are reasonably expected to be incurred in the process.
In order to procure funding for the claim, individual tenants may need to approach their mortgage companies who can extend loans to cover the cost of freehold claim along with any valuation and legal costs that may arise out of the process.