Kat Callo's blog - Transforming UK apartment ownership: Forget about Unanimity When Organising a Freehold Purchase

One issue has puzzled me repeatedly during the years that I have been working to help leaseholders of flats buy the freehold of their building. It is an issue that has come up again and again in the hundreds of blocks of flats that I have researched across England and Wales when project managing freehold purchases, writing my books and updating my blog.

It is the insistence of leaseholders in a block of flats on securing 100% participation in a freehold purchase initiative.

This quest for unanimity has puzzled and disturbed me, because unanimity is unnecessary and often difficult to achieve. Insisting on the participation by every flat in the building results in some freehold purchases being delayed for years.

Since the passage of the Commonhold and Leasehold Reform Act 2002, a minimum of just 50% of all flats in a building must take part in a freehold purchase -- known as a "Collective Enfranchisement" -- in order for the building to qualify for this statutory process.

This means that, in a building with, say, five flats, at least three flats must participate. The exception to the 50% rule is a building with just two flats. In this case, both flats must participate.

I agree that it is ideal to have the leaseholder of every flat in a building join an Enfranchisement, since this spreads costs most evenly and broadens the sense of responsibility in the freehold purchase project and in running the building after the Enfranchisement.

But it is unusual, particularly in a large block of flats, for every leaseholder to join a freehold purchase initiative.

The most common reason for the owner of a flat to decline to join an Enfranchisement is lack of funds. A senior citizen that has no budget with which to pay for his/her share of the freehold, no access to mortgage funding and no heirs lacks a financial ability to participate and lacks a long-term incentive to boost the value of his/her flat by securing a 999-year lease after the Enfranchisement.

So, my advice is, just let it be. Do not try to force any leaseholder in a building to join an Enfranchisement. If some leaseholders do not wish to join, that's fine.

One needs a significant amount of motivation and consensus to organise, see through and conclude a freehold purchase. Having participants on board that are not fully committed or cannot actually afford to pay at the end can easily scupper an Enfranchisement.

But who will pay for the share of the freehold of non-participating flats? Many leaseholders across the country put this question to me.

There are two main financing models for addressing non-participating flats.

The first model, which is the only model that I recommend, is for the participants to pay the full cost of the freehold, including the cost of non-participating flats. The good news is that the cost of the share of the freehold of a non-participating flat is almost always much less than that of a participating flat. This is because Enfranchisers do not pay "Marriage Value" for any non-participating flat.

Marriage Value is the anticipated increase in the value of a flat once the freehold has been bought. The net value increases because Enfranchisers usually grant themselves 999-year leases and this makes their flats more valuable. As part of an Enfranchisement, the leaseholders must jointly pay 50% of the Marriage Value to the landlord.

Marriage Value is usually the largest cost component in freehold purchases where leases are short. But it is important to remember that there is no Marriage Value counted for any flat that has a lease of 80 years or more. And there is no Marriage Value counted for any non-participating flat.

This means that participants jointly buy the freehold of the entire building, that they pay more for the share of freehold regarding participating flats than for non-participating flats and that -- after the Enfranchisement -- they have the right jointly to sell lease extensions to non-participating flats.

I have seen several buildings in which participants were able to recover a significant chunk of their original freehold-purchase investment, because the value of lease extensions sold years later later had increased as non-participants' leases got shorter and as the market value of flats rose.

The second common model for funding the purchase of the share of freehold for non-participating flats -- a model I do not recommend -- is to find a "white knight" inside or outside the building.

A white knight investor, in this scenario, is someone that pays the cost of the share of the freehold of one or more non-participating flats. This means the investor is buying a part of the freehhold. To be precise, he/she is normally buying a 999-year "Head Lease" to the relevant flat from the resident management company that has been formed to purchase the freehold.

I do not recommend this model mainly because it introduces a level of organisational complexity that can quickly become a deal killer for the average resident management company that is run by time-starved volunteer directors. In a worst-case scenario, it can introduce into a residential building an outside financial investor whose vision of how the building should be managed post-Enfranchisement may be misaligned with those of resident leaseholders.

Some leaseholders ask me whether they should try to arrange for the smaller, less expensive flats in their building to take part in an Enfranchisement and for larger, more expensive flats to be non-participants -- in order to try to minimise the amount of Marriage Value payable to the landlord.

The answer to this is a firm No.

This is because a landlord can seek to have an Enfranchisement declared invalid if there is evidence of the Nominee Purchaser (the entity that is going to buy the freehold) discussing behind closed doors the possibility of selling a share of the freehold to a non-participant after the Enfranchisement.

This power of the landlord to bring an end to an Enfranchisement in this way is called the Section 18 rule, based on the relevant clause of the Leasehold Reform, Housing and Urban Development Act 1993.

So, to recap, keep things simple. Invite all leaseholders in the building that are qualified to participate to join in an Enfranchisement. But don't fret and certainly don't delay the process if you get less than 100% participation. As long as you have at least half of all flats joining in -- just get on with it.