Summary

To sum up, there are three main elements to the valuation: the landlord’s interest, such as income stream from future ground rents; the landlord’s interest – the value of the reversion, when he gets the properties back and the MV of participating flats, where this is payable.

As with lease extensions, MV does not apply where the leases have 80 plus years to run. Where leases have less than this time to run, the leaseholders pay 50 per cent of the marriage value to the freeholder.

Example: each flat is currently worth £500,000, with a 70-year lease left. After enfranchisement, each flat would be worth £600,000. The marriage value is therefore £100,000, of which participating enfranchisers would pay £50,000 each.

How it stacks up (sample)

Here is a sample valuation for each flat valued at £580,000 with a 60-year lease and ground rent payable at £200 pa. The estimated freehold value of this same flat is £700,000.

Ground rent: total value	£5,470
Reversion	£28,140
MV	£43,195
Cost of freehold per flat:	£76,805

This means that each participant pays £77,000 to get £700,000 value.

But there is more to it than that, because a flat sold with a share of the freehold is always more valuable than the same flat sold without this advantage. Also, such a property would rise in value according to the market, whereas with a 60-year lease remaining, it would only lose value.

GET MOVING!

If you ever get a chance like this, do your utmost to persuade the other residents to take it, as next time you want to enfranchise, prices will have gone up. It is common for developers to go bust and a very good time to buy the freehold.

It is also said that the longer the residents sit round a table and deliberate, the less the likelihood there is that they will ever get together to buy the freehold.

The CE process works like this:

• 1.After getting agreement from at least 50 per cent of long leaseholders in the building, setting up the company and getting the requisite valuations, you serve the enfranchisement notice on the freeholder.
• 2.The landlord then serves a counter notice.
• 3.If agreement cannot be reached, there is an application to the LVT. Note: the great majority of enfranchisements happen without recourse to the LVT. Why? Because it can involve the landlord in a lot of legal costs – costs he is usually most anxious to avoid.
• 4.The LVT hearing and decision takes place.
• 5.Completion of the freehold purchase.

The most cost-intensive and complicated of these steps is the first one, which is serving the notice. This notice is served by the Nominee Purchaser (the company set up by you, the leaseholders wishing to enfranchise) and includes the offer for the freehold, based on a professional valuation. This is in itself a specialised endeavour.

The notice must be signed by all the participants, and the landlord has two months to reply. In that time, the landlord has the right to inspect each participating flat and can demand access.

The second phase, where the landlord serves the counter notice, states whether the landlord accepts in principal that the leaseholders qualify to purchase and, if so, states his counter offer. If the landlord does not reply, the leaseholders can buy the freehold at the offer price.

If agreement cannot be reached, phase three – application to the LVT – comes into force. This means that the enfranchisers ask the LVT to set a reasonable price at which the landlord must sell.

The LVT is a quasi-judicial body, growing in size and importance all the time as ever more blocks of flats decide to enfranchise. At the hearing, it will give the price it deems ‘reasonable’ and this leads into phase five, which is completion of the freehold purchase.

At this stage, the landlord must prepare a contract and give it to the nominee purchaser within 21 days of the LVT hearing, or within 21 days of agreement with the purchaser.

Then the place is yours, forever.

What about the non-participants?

Once CE has been achieved, leases can be extended – for a nominal sum – to participants. This does not mean that non-participants, of whom there are always a few, will be allowed to extend their leases for nothing. What happens is that the Company set up by the Enfranchisers now owns the building, not the previous freeholder, and non-participants will retain their short leases. They have become, in effect, tenants of the company and they will not be allowed to own a share. This could make life difficult when they want to sell. Also, of course, they do not have a vote on management issues.

A more serious problem could be that when a building buys the freehold, this includes the non-participating flats, as the purchase price is for the whole block. In some cases, this may represent an insuperable financial stumbling block to purchase.

What usually happens is that the participants buy the freehold between them, and the non-participants are excluded. They are not part of the new company, or the new freehold.

Clearly, it is in everybody’s interests to get as high a proportion of participants as possible. A common attitude, according to Alex Greenslade, of Leasehold Solutions, is for people to say, ‘I’ll do it if everybody else does.’

This is a common, if unhelpful, attitude, and often, reluctant participants need persuading of the advantages of enfranchising. This is where clear and regular communication comes in.

RUN THE COMPANY PROPERLY

Once you have enfranchised, it pays to appoint a professional company secretary, rather than try to do it yourself, as company law can be bewildering for the volunteer amateur. Remember, the company can be struck off and the properties revert to the Crown unless company law is obeyed to the letter, and the commonest companies to be struck off these days are recent enfranchisements. Company secretary work is often undertaken by firms of managing agents, at a cost of a few hundred pounds a year.

And unless there is only a very small number of individual flats in the block, it pays to appoint professional managing agents. The expert advice is: do not attempt to do it yourselves, even on a voluntary basis.

Do you now own the building between you?

Technically, no. The leaseholders own shares in the company which owns the block, and the company has an independent existence of its own.

The company formed to purchase the freehold is limited by guarantee, which means the members are guarantors of the company’s debts, to a nominal sum. The directors of the company must carry out all the duties set out in the lease and raise money to pay for ongoing costs and future works.

Who are the directors?

As the new company is non-profit making, the directors will usually be volunteers who are in effect serving their neighbours. It can be difficult to persuade enough people to become directors, although, as Robert Levene of the Federation of Private Residents’ Associations points out, this does not prevent non-directors from criticising those who do volunteer.

And finally...

Whether you are embarking on RTM or CE, it is most important to establish a sense of community before, during and afterwards. Otherwise, the situation could develop into a Mrs Merton-style ‘heated debate’ on every little issue. The best ways of establishing this feeling of togetherness is to have a regular newsletter or website whereby everybody is kept up to date. There must also be total transparency about costs, charges and company decisions.

This means that those appointed as directors or overseers must be people in whom the others have total trust.