When it comes to wanting management of your building and communal areas, it can be difficult to decide whether a right-to-manage claim or a collective enfranchisement claim would be the right option for leaseholders. Ultimately, either option can enable leaseholders to take ownership of the management of their building.
Collective enfranchisement
Collective enfranchisement was introduced under the Leasehold Reform, Housing and Urban Development Act 1993 and is where a group of leaseholders come together to collectively purchase the building and communal areas from the freeholder.
In order to claim this right, the block must:
- Be a self-contained building, or part of a building.
- Contain two or more flats with leases over 21 years.
- Not contain commercial units that occupy more than 25% of the total floor space.
- Contain at least two-thirds of flats that are owned by leaseholders, whose lease was granted for an original term of over 21 years (qualifying tenants).
- Include at least 50% of qualifying tenants participating in the claim.
Right to manage claims
RTM claims were introduced by the Commonhold and Leasehold Reform Act 2002, enabling leaseholders to come together and obtain the management responsibilities for the building and communal areas, without owning/purchasing the freehold itself.
Similar to enfranchisement, in order to be able to claim this right, the group of leaseholders must be able to satisfy the following criteria:
- The building must be a self-contained building, or part of a building.
- There must be at least two flats within the building, held on a lease of more than 21 years.
- At least two-thirds of the flats must be let to leaseholders, whose lease was granted for an original term of more than 21 years (qualifying tenants).
- Commercial units cannot occupy more than 25% of the total floor space.
- A minimum of 50% of the flats in the building must participate.
If the freeholder is a local housing authority, then it will not be possible to make either an RTM or collective enfranchisement claim, and the same applies if the block falls under the “resident landlord exemption”.
Although uncommon, a property may be subject to other exemptions which fall outside of the scope of this article, therefore we would always advise that leaseholders take legal advice on their building specifically in the first instance.
The key differences
The main difference between collective enfranchisement and RTM claims is that, with collective enfranchisement, the leaseholders will own the freehold and have the management responsibilities (provided there is no third-party management company written into the lease), whereas in an RTM claim, just the management responsibilities will be obtained by the participating leaseholders.
Another of the most considerable differences between collective enfranchisement and RTM claims is the cost. When it comes to enfranchisement, the cost is generally much higher. The leaseholders must bear the costs of legal and surveyors fees for themselves and their freeholders alongside the premium (purchase price of the freehold). Whereas the cost for an RTM claim is limited to legal fees and minimal disbursements.
The pros and cons of RTM
Not only is an RTM claim cheaper, it is also a statutory right. This means that leaseholders (as long as they satisfy the criteria above) have the right to claim management of their block and communal areas without needing to prove any complaint or issues with their landlord or management company.
This is beneficial in many claims where leaseholders wish to avoid confrontation and lengthy complaints procedures. Also, because an RTM claim is a statutory right, leaseholders do not have to pay the freeholder or management company a premium to obtain this interest.
Inevitably, this can then improve the management of the building and allow the leaseholders to have their say on service charges and general management responsibilities.
Similarly, when leaseholders are unhappy with the way their building is managed, an RTM claim provides an avenue to change management. Whether it’s excessive service charges or non-compliance with management practices, the RTM allows leaseholders to collectively address these issues directly and to change them. Once the RTM company is in place, it is then up to the leaseholders to take full control over all expenses.
From block insurance through to maintenance and major works, all leaseholders involved in the management can hold meetings, which enable them to make these decisions as a collective.
Although there is no premium figure payable to the landlord when undertaking an RTM claim, the leaseholders would be liable for the freeholder’s legal costs. If the RTM claim is defended, this can become expensive for the leaseholders and make enfranchisement appear as a more attractive option.
Generally, leaseholders seek RTM claims to gain control of their building and communal areas, improve management style and costs, and avoid the process and costs involved with purchasing the freehold. This can be a great option if these are your overall goals.
Once the RTM has been set up, the company would then need to manage the building. This includes, but is not limited to, maintaining the building, complying correctly with statutory company responsibilities and directors’ obligations, collecting arrears and ensuring the statutory obligations for managing a building are met. To ensure compliance with all of these aspects it is recommended that a specialist managing agent is instructed to deal with the day-to-day running of the management company.
The pros and cons of enfranchisement
Despite the additional cost, collective enfranchisement has many other benefits. These include being able to sell your share of the freehold alongside your leasehold property, reducing your ground rent to a peppercorn, extending your lease to 999 years for a nil premium and (with consent of other leaseholders) making other variations to the lease. This can add value to your property and generally make it more appealing to a potential purchaser.
In addition to this, the participating leaseholders may be responsible for the management of the building and common areas; this can reduce the risk of landlord and management company conflicts.
Much like an RTM claim, collective enfranchisement can allow leaseholders to gain control over the management of the building. However, in addition to this it also allows them to gain greater control over their own leasehold flats. This is because, when the freehold company is owned by leaseholders, the leaseholders can then grant their own lease extensions of up to 999 years with a peppercorn (effectively nil) ground rent. This would make the property more attractive to a potential buyer in the future as the lease is not close to the 80-year mark and has no excessive or doubling ground rent provisions. Similarly, the leaseholder would then be able to sell the flat with a share of the freehold interest, passing the right to manage the building as a freeholder on to the new owner.
Where should leaseholders start?
When starting the process of collective enfranchisement or an RTM claim, the participating leaseholders will need to decide how they will join together in their capacity as the freeholder/management company. Generally, leaseholders choose to incorporate a company made up of the participating leaseholders, which makes all the participants shareholders. When purchasing the freehold, the participating leaseholders will have the choice to either hold the freehold as individuals or in a company name.
What impact will the Leasehold and Freehold Act 2024 have?
The Leasehold and Freehold Reform Act 2024 has now received royal assent. However, the Act has not yet been implemented and currently we do not know when it will be. The new Act aims to change the way collective enfranchisement works.
Currently, if more than 25% of a building’s internal floorspace is used for non-residential purposes it cannot be enfranchised. The Act proposes to increase this limit to allow enfranchisement for buildings with non-residential internal floor space of up to 50%. If the Act is implemented as it currently stands, this would make more buildings available to be enfranchised by its leaseholders.
The Act currently proposes to change the methodology used to calculate the premium payable on a freehold acquisition when acquired by collective enfranchisement, namely the abolishment of “marriage value”.
Marriage value is the potential loss incurred by the freeholder if the property is sold to the leaseholders, and if developments were made to the property. The abolishment of marriage value aims to reduce the amount payable to buy a freehold. We now await the secondary legislation which will contain details on the calculation of the premium for buying the freehold.
Alongside this, the Act also seeks to impose greater controls on a landlord’s ability to recover costs from leaseholders who enfranchise their buildings and surrounding areas, although the extent of this is not yet clear.
The Act further proposes to allow leaseholders to impose a restriction on future development of the property instead of paying development value as part of their premium figure. If the freehold has a large amount of development opportunities, this could substantially reduce the premium. Similarly, if the leaseholders did decide that they wanted to develop in the future, they would be able to negotiate a release of the restriction with the original landlord.
Vikki Herbert is a partner and head of real estate, and Alisha Maidment is a conveyancing executive at Thackray Williams
