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Lease Extensions and Collective Enfranchisement
The areas of lease extensions and collective enfranchisement can be confusing and stressful for all parties involved as there are numerous procedures and deadlines that must be met.
The keys to a stress free and smooth transaction are experience, knowledge and organisation.
At CWJ we have a highly experienced specialist team who can guide you through the procedures, deadlines and negotiations involved in this complex area, providing advice and support for both landlords and tenants.
At the outset we will provide you with an outline of the procedure and the costs involved, and as the matter progresses we will keep you updated.
Our areas of expertise include acting on behalf of landlords and tenants in relation to:
- agreed lease extensions
- statutory lease extensions
- collective enfranchisement
- agreed purchase of freehold
- Right of First Refusal
- Right to Manage
- Section 20 Consultation
- drafting new residential leases and amending current residential leases
Enfranchise or extend
In the current economic climate more and more leaseholders are considering extending their lease or purchasing the freehold as a means to make their property more attractive to prospective buyers. This can be good news for commercial property owners looking to divest of their portfolio. It is not only sellers that are looking to these methods; leaseholders in general are becoming more aware of the need to protect the financial investments they have made in their properties, even where they have no intention of selling within the foreseeable future. So, the main question on most leaseholders lips is “do I enfranchise or extend?”
To answer this question, the leaseholder must first weigh up the pros and cons of each method and decide which achieves the best result.
Collective Enfranchisement allows the leaseholders in a building to join together to purchase the freehold where certain requirements set out in the Leasehold Reform Housing and Urban Development Act 1993 (“the Act”) are met.
There are three main pros to following the collective enfranchisement route:
- Control - Once the leaseholders own the freehold they will have full control over the use and management of the building. This is an especially strong incentive for leaseholders in a building where the landlord or management company is not managing the building in a satisfactory way (although they could make use of the Right To Manage provisions).
- Security - Once the leaseholders own the freehold they can modernise the terms of their current leases, extend the term to 999 years and reduce the rent to a peppercorn. Increasing the term of a lease adds value to the property, and in the current market all leaseholders want to add as much value as possible to their property.
- Costs - All costs incurred in relation to the purchase are split between all of the participating leaseholders. This can often mean that it is more affordable for a leaseholder to enfranchise than to extend.
The pros make enfranchisement seem like the logical means for all leaseholders; however there are three main cons that should be carefully considered before setting out along this path:
- Disputes - The path of collective enfranchisement does not always run smoothly and it is not only during the process itself where arguments can arise over matters such as division of costs. After the freehold has been purchased there are often disputes regarding the management - chasing late paying neighbours is never going to be a pleasant experience!
- Organisation - For this procedure to work the leaseholders have to work together; everyone is relying on everyone else to do their bit and meet the deadlines, which can of course be very stressful.
- Duration – If people don’t send in their money or sign required documents promptly then the whole process can be delayed. This is particularly a problem where there are lots of non-resident owners.
In addition to the right to enfranchise, the Act also states that a leaseholder can obtain a Lease Extension of 90 years on top of their unexpired term, provided that they have owned their property for at least two years. There are other requirements, but the two-year rule is the main obstacle to most leaseholders.
There are certain pros to a leaseholder that may encourage them to take this route rather than follow the enfranchisement path:
- Speed – The process is carried out individually and thus the leaseholder can push the process through much faster.
- Security – At the end of the process the leaseholder will have a lease that is 90 years longer than when they started.
There are however cons to this route which may end up guiding the leaseholder into the arms of enfranchisement:
- Control – Unlike in enfranchisement, at the end of the process the freeholder still owns the freehold and can manage the building how they like. If the management of the building is awful at the beginning of the process, it will more than likely remain that way at the end.
- Costs – The costs involved are borne by the leaseholder alone, and are therefore usually higher than those in enfranchisement.
Before making a decision the leaseholder should be sure that they have carefully considered their own requirements against what each method has to offer them, and it is without doubt advisable for them to take legal advice on how best to proceed.
Finally, it is said that a lease is a “wasting asset”, so in the present difficult financial market leaseholders should certainly consider making their wasting asset a little less “wasted” and try to add as much value as possible to their investments by enfranchising or extending.