Kat Callo's blog - Transforming UK apartment ownership

Locking in Commitment to a Freehold Purchase Project by Using a Participation Agreement

One of the most important documents that helps leaseholders succeed in buying their freehold is not one required by law. But failure to use it can be a deal killer and often results in a freehold purchase project failing.

I'm talking about the Participation Agreement.

The Participation Agreement is a document that legally binds participating leaseholders into a consortium for the purpose of jointly buying their building freehold.

It says two important things.

Firstly, it says that each participant is legally bound to pay his/her share of the freehold cost at the end of the process. Secondly, the Participation Agreement says that any participant that sells his/her flat before the freehold purchase has been concluded is legally bound to sell to a buyer that automatically takes his/her place in the freehold purchase process.

The first point above is crucial because it locks in and formalises the commitment by each participant to stay the course and to pay his/her money at the end. When leaseholders exercise their legal right to force the landlord (the freeholder) to sell to them the building freehold, in the process called Collective Enfranchisement, it is impossible to guarantee at the beginning or in the middle of the process what the final cost will be. Participants and their project manager, working with a chartered surveyor, will be able to estimate with growing precision the final cost as the process proceeds, but the eventual bill is only known at the end.

Unfortunately, in some buildings, one or more participants can balk at the final cost and try to argue that an earlier estimate of the freehold price should be binding at the end. The Participation Agreement helps to guard against this kind of sloppy logic, by creating a transparent, legally-binding document that obliges each participant to pay his/her share of the final cost, a cost that is not quantified within the Participation Agreement.

The second key purpose of this document, in ensuring that a leaseholder moving from the building sells to a buyer that takes the seller's place within the freehold purchase initiative, helps to guarantee that the number of participants does not dwindle during the often-year-long Enfranchisement.

The departure from a block of flats of one or more participants after an Enfranchisement has started will not necessarily foil the project. This is because, for one thing, the legal requirement for at least 50% of all flats to participate in an Enfranchisement, is only binding at the moment when the participants serve the initial notice (the "Section 13 Notice") on the freeholder.

The Section 13 Notice must be personally signed by every participant. It is essential for each participant and for the building to qualify for Enfranchisement at the moment when the Section 13 Notice is served, but it is not essential thereafter. If one or more participants move away from the building after the notice has been served, this does not render the notice invalid or mean the Enfranchisement will necessarily fail.

But it can place a crushing financial burden, say, on 10 remaining participants if they have to pay for a freehold that was originally supposed to be purchased by a group of 20 flat owners.

The Participation Agreement guards against this kind of erosion of participant numbers and it creates legal and documented clarity about the obligation, when selling a participating flat, to ensure the buyer agrees to become a participant in the Enfranchisement. This is rarely a problem for the seller, since participating flats are more valuable flats than comparable non-participating flats, because the former will be expected to be granted 999-year leases at the end of the process.

At Rosetta Consulting Ltd when we are project managing a freehold purchase for leaseholders, we insist on using a Participation Agreement. This document is so important that I mention it in Chapters 1, 2, 4 and 6 of my book The Survivor's Guide to Buying a Freehold.

There is no one required template for a Participation Agreement. A good sample Participation Agreement can be downloaded at our website. Go to www.rosettaconsulting.com, click on Publications on the left side menu, then click on Participation Agreement.

Leaseholders often ask me what to do if they have used a Participation Agreement, but one leaseholder still refuses at the end of the freehold purchase to pay his/her share of the cost. Unfortunately, this scenario crops up fairly often.

I recommend following best practice. All participants should be sent a personalised letter by the project manager, identifying precisely the individual share of the cost of the freehold, professional fees and any applicable stamp duty -- with a deadline date at least six weeks down the road.

If any participant refuses to pay his/her share of the cost, the project manager should send a second letter advising that, if the specified amount is not received by the deadline date, then a 999-year "Head Lease" for the non-payer's flat will be sold the day after the deadline to a buyer inside or outside of the building. The letter should also advise the non-payer that he/she will cease on the day after the deadline date to be a participant of the freehold purchase project and a shareholder of the company that is buying the freehold.

Finally, the letter should advise the non-payer that he/she will not be granted a 999-year lease after the freehold purchase and that the new freeholder reserves the right to initiate legal action for breach of contract -- since a failure to pay one's share of the freehold cost is a violation of the legally-binding Participation Agreement.

This may seem hard-handed, but being crystal clear about the rights and obligations of each participant helps to ensure the success of a Collective Enfranchisement.

The sale of a 999-year Head Lease in this case means essentially that a third party, whether someone inside or outside the building, is buying the freehold of the non-payer's flat. Then, if the non-payer or a subsequent leaseholder of the non-paying flat wishes later on to buy a lease extension, he/she must buy this from the Head Leaseholder.

Hopefully, you won't need to resort to sending the scarey-sounding letter to any non-payer. But it is amazing how quickly this kind of letter, when sent to a participant that is refusing to pay his/her share of the freehold cost, with a copy sent to his/her solicitor, results in payment being sent.

Britain's Monarch Cooperates in Land Reform -- in Peaceful, Nano Steps

It's tricky explaining to people what I do for a living.

When I say to Britons that my company helps leaseholders of flats buy the freehold of their building, they often understand what this means.

But when the interlocuteur is not British or UK-based, the above explanation is incomprehensible -- since the concept of leasehold flats and freehold ownership of apartment buildings is almost unique to the UK.

To the average French, Brazilian, Kenyan or Vietnamese person, for instance, I explain that apartment owners in the UK do not actually fully own their apartments. They only own a time-specific contract for limited use -- a lease. I explain that, despite a lack of joint ownership of their apartment building with their neighbours, it is the leaseholders -- not the building owner (ie- the landlord or freeholder) -- that pay all building maintenance and repair costs. I also explain that powerful home-owner legislation in the UK in 1993 provided leaseholders with the legal right collectively to force the landlord to sell to them their building freehold -- and that we help take leaseholders through the purchase process.

I often tell the puzzled listener that what we do at Rosetta Consulting Ltd is like taking part in land reform -- but a version of land reform that is happening two centuries after other European countries and is peaceful and is taking place in nano stages.

There's an interesting irony here. Centuries ago, European monarchs fiercely resisted land reform. But, today, Queen Elizabeth is acting quietly behind the scenes to cooperate with England's modern land reform movement -- that is, the purchase of building freeholds by apartment owners.

Queen Elizabeth's support is particularly interesting since -- unbeknownst to many people -- the Crown officially owns all land in England -- and has done so since William the Conqueror arrived in 1066 and laid claim to all the land in England.

After the Norman invading army defeated King Harold at the Battle of Hastings on 14 October 1066, William showed recognition to his followers by distributing to them large landed estates across England. As William's supporters were "freemen", not serfs, they became "freeholders" of the King's land, in exchange for military, religious and other services rendered to their monarch.

Being the freeholder in the UK today of a house or apartment building is, for all intents and purposes, just as good as being the full owner. That's unless you discover buried treasure in your garden and cannot find the owner, in which case, by law, you must deliver the treasure to the Crown.

But back to Queen Elizabeth's behind-the-scenes support for modern British land reform. When the Leasehold Reform, Housing and Urban Development Act 1993 gave leaseholders of flats the powerful right to force their landlord to sell to them the freehold of their building, freehold land held by the Crown was exempt from this legislation.

But the Crown made clear at the time, via a statement made in Parliament by the then housing minister, that, if leaseholders in a block of flats would otherwise have qualified to buy their freehold, then the Crown would respect the spirit of the law and would agree to sell.

And this is precisely what the Crown has quietly been doing for many years.

Apartment owners in several blocks of flats have succeeded in buying their freehold from the Crown Estate. In many cases, the Crown is much more responsive than other ancient landed estates in London to initiatives by apartment owners to buy their building.

So, if your block of flats is owned by the Crown Estate or the Duchy of Cornwall, and you and your neighbours want to buy the freehold -- don't despair. You will probably be able to buy it.

But be sure to go through the normal official process of Collective Enfranchisement, which starts with the serving of a "Section 13 Notice" on the freeholder. The Crown used to sell some building freeholds on a purely negotiated basis, but, in recent years, it has required that leaseholders of flats follow the proper Collective Enfranchisement procedure.

Your Own Worst Landlord -- Yourself!

Many leaseholders of flats rejoice once they have succeeded in buying their building freehold and in getting rid of the old landlord (freeholder).

But what a shock when, in some buildings, apartment owners discover that they, collectively, are a worse landlord than the old one!

Leaseholders in England and Wales are on a steep learning curve.

While apartment owners in other industrialised countries have long been aware that ownership of an apartment brings responsibility -- just like the ownership of a house -- this is still a relatively new concept in England and Wales, where freeholds of most blocks of flats are still owned by absentee third-party landlords.

It can be emotionally satisfying and cathartic for apartment owners to lay the blame on an absentee landlord for a building's substandard management. But, when you and your neighbours buy your freehold, there is no one left to blame but yourselves if the building continues to be poorly run.

One of the sins committed most frequently is for a board of directors of a resident management company to fail to put into place processes and procedures to help ensure proper building management after the freehold has been purchased. The issue here is about following recognised best practice, not reinventing the wheel.

A nightmare scenario, which is often related to the above lack of proper procedures, is for one or more directors to behave as if he/she/they own the building.

I receive a lot of complaints from leaseholders across the country that describe one or more directors in their building as refusing to hold general meetings of the company or to consult properly with shareholders on strategic company issues.

In a well-run building, the directors remain mindful that -- according to Companies Act -- it is the shareholders, not the directors, that own the company and thus own the building freehold. It is also, of course, the shareholders that appoint the directors to run the company and that have the power to remove any director.

I am sorry to say that when things go very badly wrong in a resident-owned block of flats, there can be and have been instances of abuse of power by one or more directors and even embezzlement of company funds.

The challenge is to strike the right balance in assembling a board that has directors with the integrity, skills, commitment and teamwork approach needed for this often thankless volunteer part-time job. 

A good director is not someone that is willing to say yes to any request by a leaseholder in the building or by another director. Indeed, any well-run resident management company needs directors with back bone. The company must be ready and willing, for instance, to take legal action against any leaseholder that fails, unreasonably, to pay his/her service charges -- since any such failure places an unfair burden on other leaseholders and places at risk the freeholder's ability to run the building properly.

The good news is that leaseholders of most resident-owned blocks of flats in England and Wales are happy that they got rid of their old landlord. Now they fully own their home and are in charge of their destiny.

There is also an encouraging trend for homeowners in "share-of-freehold" buildings to become more and more saavvy about the do's and dont's of running a block of flats.

Deciding Whether to Get the "Right To Manage" or Buy Your Freehold

A growing number of owners of flats in England and Wales are joining forces to secure more control over their residential building. Many grapple with the choice of whether to gain this control by acquiring the "Right To Manage" their block of flats or by buying the building freehold.

It's a good idea to do a quick cost/benefit analysis before heading down either route, since both options take months to complete.

Leaseholders of flats won the right to force their landlord (the freeholder) to hand over the right to manage their block of flats -- without proving any fault by the landlord -- with the passage of the Commonhold and Leasehold Reform Act 2002. This initiative requires setting up a special company, a Right To Manage or "RTM" company. Participating leaseholders in the building become members of the company, similar to shareholders.

To get the process started, the RTM company serves a Right To Manage notice on the landlord, advising that the RTM company will be taking over management rights at the building. If the landlord wishes to contest the claim, he/she must serve a Counter Notice on the RTM within one month. If the landlord does not challenge the claim, then the RTM company secures the right to manage automatically three months after the date of the notice.

The advantage of going down the right to manage route is that participants are not buying any property. Therefore, the cost of the RTM option is basically the cost of any adviser fees, setting up and running the company, sending the required invitation to participate to all leaseholders and serving the notice on the landlord.

By law an RTM company must use prescribed Memorandum and Articles of Association, that is, the company must use special "MemArts" created for this purpose. The MemArts define the rules of what the company can and cannot do. Prescribed wording must also be used when sending the invitation to participate to leaseholders in the building. An RTM company is, by definition, a company "limited by guarantee". This means that it has no share capital and is not allowed to have any share capital.

The downside of securing the right to manage is that, after the process has been completed, the landlord -- while having lost the authority to manage the building -- still owns the freehold. So it is the landlord, for instance, that continues to have the right to sell lease extensions to owners of flats in the block.

When leaseholders decide instead to buy the freehold of the building, they are choosing the "big bang" solution. By purchasing the freehold, they collectively acquire the right to manage the building, to grant themselves 999-year leases and to own and control the block.

The disadvantage of buying one's freehold is that one is purchasing a piece of real estate and, therefore, it can be costly. The higher the value of flats in the buildings and the shorter the leases, the more expensive will be the freehold.

Some leaseholders use the right to manage path as a first stage of empowerment. In setting up the RTM company, they gain experience in running a corporate entity, in working together and in putting in place best practice procedures for building management. Then, some time later on, they commence the second and final stage of empowerment -- by buying the freehold through the process of Collective Enfranchisement.

The two-stage process has some advantages, especially for aleaseholder group that is hesitant to spend money and is unsure about whether to buy the freehold.

But, if you and your neighbours are certain that you wish to purchase the freehold, then you should just get on with it and Enfranchise -- rather than heading down the right to manage route. By moving straight to Enfranchisement, you are likely to save yourself time, money and effort.

Amongst other things, you save yourself having to set up a second company. When leaseholders are preparing to buy their freehold, they should set up a company limited by shares. This is a corporate structure that provides greater flexibility than a company limited by guarantee, since it has share capital and shareholders.

There is no perfect fit solution for every residential block of flats. For some buildings, right to manage is the optimal path. For others, it's all about buying the freehold, getting rid of an unperforming landlord and replacing short leases with new 999-year leases.

Take a good look at the various options available for improving conditions in your building and then choose the strategy that works best for your leaseholder group.

How To Buy Your Building Freehold When You Can't Find the Landlord

A reader asked me recently how she and her neighbours can buy their building freehold, given the fact that no-one can find the owner of the block. Buying a freehold when the landlord (ie- freeholder) cannot be located can be frustrating and time-consuming -- if leaseholders fail to follow best practice and to take the required steps. In the case of this reader, she has spent a full nine months trying to get this sorted.

The phenomenon of the "absent landlord", that is, a freeholder that cannot be located despite a serious search, is a well-known scenario in the world of freehold purchases in England and Wales. In some cases, a freeholder cannot be found because he or she has died. In other instances, a freeholder, whether a person or company, has simply gone away and abandoned the legal responsibility to manage the relevant block of flats.

Most leaseholders of flats have the powerful legal right collectively to force their landlord to sell to them the freehold of the building, and to do so within deadlines laid down by law and at a fair-market price following a statutory valuation formula. To start the official process, the participating leaseholders serve a "Section 13" notice on the landlord, notifying him or her of their planned purchase and presenting an offer price for the freehold.

But how do you serve a "Section 13" notice when you can't find the landlord?

Have a look at the many "absent landlord" cases that are decided on a regular basis by the Leasehold Valuation Tribunal (LVT) and you will see how widespread is this problem. (To see these cases, go to www.lease-advice.org, click on LVT Decisions, scroll down and click on 1993 Act Determinations. Put "absent landlord" or "Section 26" in the search category and you will see LVT decisions regarding buildings the freeholder of which could not be found.)

So what are the steps to follow when buying a freehold if one is dealing with an "absent landlord"? A first step is for the participating leaseholders to get the freehold of the building valued by a chartered surveyor that specialises in Collective Enfranchisement (ie- a statutory freehold purchase). A next step is to apply to your local County Court for a "Vesting Order". The Vesting Order is a legal dispensation that says you the participants may skip the usual required step of serving a Section 13 Notice on the landlord -- since no landlord can be found.

With the Vesting Order in hand, you then apply to the LVT and ask the LVT to decide on the price at which the participants will buy the freehold. This is called a Section 26 procedure, ie- a freehold purchase when the landlord cannot be found. The good news is that the LVT will consider your offer price, but it has no counter offer price to consider, since there is no landlord to dispute your freehold valuation.

The LVT will decide on the price that you and your fellow participants must pay for the freehold. This money gets paid to the County Court, usually to a district judge.

Some leaseholders tell me their previous landlord sold the freehold of their building to a new landlord, that they can find the new landlord, but that the freehold is still registered under the old and now "absent" landlord. Please remember that it is a legal obligation for a sale of a freehold to be registered at Land Registry, the government department that holds a record of all leasehold and freehold titles in England and Wales. It is the Land Registry freehold title that identifies the legal freeholder of a building.

If you are do not know who owns your building freehold, you can usually find out online for just £6.00. Go to www.landregisteronline.gov.uk. In the box "Find a property", click Detailed Enquiry. Fill in the full address for the building and click Submit. This should show you a list of the freehold title and also every leasehold title in the building. To download a PDF of the freehold title and plan (ie- drawing), click "Information available", click Buy re the Title Register and the Title Plan, and then follow the online purchase process before downloading your PDF.

So, for leaseholders wanting to buy their building freehold and that are struggling to figure out how to do this in the absence of a known landlord -- struggle no more. And please don't try to reinvent the wheel, as you will waste time, effort and legal fees on this. Chapter 3 on "Buying the Freehold" in my book Making Sense of Leasehold Property addresses the issue of how to buy a building freehold when you can't find the landlord.

I hope your freehold purchase goes well.