Participation Agreements In Collective Enfranchisement
When leaseholders come together to jointly buy the freehold of a residential block of flats [in a process called collective, leasehold or freehold enfranchisement], it can be a fairly complex process.
It may looks really straightforward on paper; leaseholders come together, they decide to conduct the freehold purchase of their block, they appoint a specialist surveyor, have a valuation done, appoint a specialist solicitor to deal with the legal paperwork and then monies are exchanged with ownership transferring to the participating leaseholders. But this kind of shared freehold project can be complex – and particularly difficult to handle if your flat is part of a large block
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Your enfranchisement – How our solicitors can help
Our specialist five strong leasehold team does nothing but lease extension and enfranchisement work. That makes us one of the most specialist teams in the country.
Our lawyers work on all types and sizes of enfranchisement – from the freehold purchase of a single house to a recent Right of First Refusal enfranchisement involving 93 participating leaseholders in a block of 150 flats.
Leasehold update – Stay informed about the proposed changes to the Leasehold and Freehold Reform Act 2024, which was passed on the final day of the previous Parliament on 24 May. In the meantime, the information provided on this page regarding freehold purchase remains applicable.
Click here to read the Leasehold Reform Latest News
Freehold purchase – the practical problems
But in reality the actual process can be slow and subject to setbacks. Collective enfranchisement is a process requiring all participating leaseholders to be on the same page, especially when the time comes to complete the purchase of the freehold. And that’s exactly why a participation agreement is so very important.
Holding a large group of individuals together for up to a year or two throughout the process can be difficult, especially where there turn out to be problems such as disputed service charges or other financial issues which may cause some of those participating to threaten to pull out. In fact the larger the block, the more difficult the project will potentially become – and the more important a well drafted participation agreement becomes.
That is why the participation agreement is not just useful but is often essential to a successful collective enfranchisement – although having this kind of agreement is not an actual legal requirement.
Click here to find out more about lease enfranchisement and what it can do for you.
What is an Enfranchisement Participation Agreement?
The agreement is a formal document committing those involved to jointly exercise their right to buy the freehold of their block.
A participation agreement is enforceable by law (much like any other binding contract). However it is best to include the right for those leaseholders involved to withdraw included should the cost of freehold purchase go above and beyond the initial valuation.
When a flat is jointly owned by two or more people, it’s also important that each of them should sign the Participation Agreement. Failing to do so can lead to problems.
NB A participation agreement is just as important if you’re buying your freehold under the right of 1st refusal, or ROFR. A simplified participation agreement can also prove very useful in Right to Manage applications.
Click here to find out more about the Right of 1st Refusal
Click here to find out more about the Right to Manage and how it can benefit you.
What should we include in our Participation Agreement?
A well drafted agreement will include some, if not all, of the following details;
- a commitment that each participating leasehold will pay his or her share of the premium payable to the freeholder for purchasing their share of the freehold, as well as the legal and surveyors costs of both the leaseholders and the freeholder.
- the level of costs each participating flat needs to pay – this needs to be set out clearly, so that the collective enfranchisement process is not hindered at a later date, by people arguing about the costs that they have to pay. Each tenant’s expected financial input should be clearly stated as percentage or figure in the PA.
- the agreement should also detail exactly how non-participating flats and tenants will be handled
- when the participants will need to produce the funds agreed upon to acquire the freehold
- which solicitors and surveyors will be used to help with the freehold purchase. Getting the right experts on board from the outset can really help ease the enfranchisement process
- details about whether it’s okay for a majority of those taking part to be able to accept an offer from the freeholder of the purchase premium- or whether the consent of 100% of those involved is to be required. This can be really important because it is not unusual, especially with large blocks, for less than 100% of those taking part to all agree on any offer made by the freeholder – so it can help to have set out in advance exactly how many of the leaseholders need to approve that offer for it to be agreed
- state that if any participating leaseholder chooses to sell their flat before the freehold purchase is complete, they must only sell to a buyer who will automatically take their place in the enfranchisement process . This is particularly important with small blocks, or where there are only just enough leaseholders involved to qualify for the enfranchisement process in the first place. This provision allows the block purchase to stay on track regardless of any sales of flats in the interim.Even when the potential withdraw of a participating flat wouldn’t scupper the whole process, the requirement that any purchaser joins in the enfranchisement protects all of the participating leaseholders against suddenly finding out their share of the cost has increased because others have dropped out as a result of selling their flat.Leaseholders dropping out is one of the greatest risks a collective enfranchisement effort can face.
Click here to read more about the process for collective enfranchisement - A clause, stating that as soon as reasonably practicable after completion of the freehold purchase, the new Freehold Company will grant to each of the participating leaseholders a 999 year lease at a peppercorn rent (i.e. effectively nil ground rent) on the same terms as the current leases.
- finally, it’s often very useful, though not essential, to have a nominated person or nominated few people to deal with both the solicitors and the surveyor on one hand, and the remaining participants on the other. This can make a real difference – especially in large blocks – with the appointed professionals only have to deal with one or two nominated leaseholders, rather than dealing individually with all of leaseholders those taking part
NB a simpler form of participation agreements can be used when exercising the leaseholders’ right to manage.
Click here to read more about right to manage company formation.
Using a Participation Agreement after the freehold has been purchased
Arguably, the acquisition of the freehold itself is only half the battle. That is why having a well drafted participation agreement can also be extremely useful after the freehold purchase has actually gone through, especially in terms of block management when your building is under your control.
In fact when preparing your PA, or getting your solicitor to do so, it is always a good idea to give plenty of thought towards the future – to try to not only agree on what is needed to initially acquire the freehold, but to further agree what you will need to do in your fledging years as joint freeholders.
Problems will arise, that is almost inevitable – so it really pays to consider and address potential issues in a enfranchisement participation agreement
Everything from the appointment of building staff (including managing agents) to building improvements and fully fledged redecorating plans can be set out in advance in your PA.
Struggling to keep enough people on board for a successful enfranchisement?
This is a common problem – with more problems with motivating your fellow leaseholders the larger the block you live in. The actual cost of buying your freehold can also be a problem
The alternatives? That depends on your motives for enfranchisement.
If you’re looking enfranchise to take control of your block – then exercising your legal right to manage may be the answer. It gives you control of the management of your block – that of course doesn’t help you with owning the freehold.
A third alternative is to apply to court for the appointment of a block manager.
Click here to read about court-appointed property managers
On the other hand if increasing your security, increasing the value of your flat and make it more saleable are the issues – then lease extension may be what you’re looking for. And the advantage of a lease extension is that it relies on no one apart from yourself. And what’s more, if your ultimate aim is freehold purchase, then extend your lease at that stage will make the price you have to pay for any eventual enfranchisement, much much lower.
Click here to find out more about how what lease extension can do for you.
Residents and leaseholders – you need to know the difference
It’s particular important point to note here however that just inviting residents may not accurately identify the leaseholders. Many flats these days are owned by buy to let landlords – and it’s the flat owner, not the resident, who can exercise the right to buy their freehold.
FAQs
Is a participation agreement legally binding?
A correctly drafted and executed participation agreement is legally binding. It should include provisions that allow some flexibility for participants, for example, giving them the ability to withdraw if they need to and setting out how disagreements will be dealt with.
The agreement can be a useful roadmap and, in our experience, it is not usually necessary to take enforcement action as the signatories generally have the same end goal.
What is a participation agreement?
A participation agreement is a contract that sets out what is expected of those who want to join in the collective enfranchisement process.
Putting a participation agreement in place at the outset ensures that those taking part know what is expected of them. It can help everyone to take the process seriously and commit to seeing it through.
There are several costs involved in collective enfranchisement and ensuring that everyone understands this and is willing to pay can prevent the purchase from falling through. Having a comprehensive agreement can also reduce the risk of disputes.
What are the criteria for collective enfranchisement?
To qualify for collective enfranchisement, the following must apply:
• The property contains at least two flats
• At least two-thirds of the flat owners are owned by qualifying tenants who wish to participate in the collective enfranchisement process. A qualifying tenant is someone whose lease was for at least 21 years when it was initially granted
• At least half of the flat owners want to buy the freehold, or both flat owners if there are only two flats
• The property has no more than 25% commercial usage
There are some exceptions, including where the property is a conversion with four or fewer flats, the freeholder carried out the conversion and the freeholder or a member of their family has lived there for the past year.
Is it worth buying the freehold on a 999 year lease?
Even if you have a 999-year lease, the freeholder has control over many aspects of your property, including:
• Arranging repairs and maintenance
• Putting buildings insurance in place
• Deciding how much you need to pay for service charges and sinking fund contributions
• Charging fees for giving consents, such as consent to sublet or make alterations
• Charging ground rent
• Enforcing the covenants in the lease against other flat owners
If you purchase the freehold, you can deal with these matters yourself or, if you are in a block of flats, together with your fellow flat owners.
For this reason, it can be beneficial to buy the freehold even if you have a lengthy term remaining on the lease and do not need to extend it.
