Tag Archives: Info for leaseholders

Do we need a participation agreement?

This is a question I often get asked in practice and the answer is, almost invariably, yes.

What is a participation agreement?

A collective freehold purchase involves a commitment from all of the participants to act together in the purchase of the freehold. The participation agreement sets out the legal relationship between those taking part.

Normally there will be a company (called a ‘nominee purchaser’) incorporated by the flat owners to hold the freehold after completion. The agreement sets out the legal relationship between the proposed participants and the company.

What sort of things does it cover?

There are no hard and fast rules and it is possible to customise the agreement to suit the particular features of your transaction. If you are thinking of buying your freehold you should establish the ‘key terms’ agreed between those taking part as soon as possible and then formalise these in a written agreement.

A good agreement will cover the answers to the following questions which are set out under the headings below:-

What are the financial obligations of each flat owner taking part?

How much will each individual flat owner taking part will have to pay towards their own share of the purchase price?

This depends on a number of factors, not least how many flats take part and also whether the price is to be divided equally between all those taking part. Who is going to decide on how this is done? Will there be fixed proportions or will someone (e.g. the valuer) have the power to decide?

Are larger flats (or more valuable ones) going to be asked to pay more? If so, how will this be calculated. By reference to flat size and/or value, or by some other means?

How are the transactional costs of the process (legal and valuation fees for the freeholder and the flat owners) going to be allocated?

Are these to be split equally (the simplest mechanism but not necessarily the fairest), or will some other basis (e.g. flat value) be used?

What happens if people want to pull out?

It may be a good idea to ensure that there is some sort of cut off point in terms of time, price or numbers that might trigger the possibility of the process being abandoned if the capital cost of buying the freehold appears to be too high.

Who is going to pay for the costs of those not taking part?

Are these costs to be split equally or will some other mechanism be applied? – e.g. will one or more of those taking part pay in more money and get something in return. Or will everyone’s contribution be increased and then any future income shared out?

What do I get in return for my money?

The agreement may also cover things that will happen after the freehold has been purchased – e.g. the issue of a share in the company and also the right to extend the lease on your flat to 999 years.

What about outside funding?

Is the company going to obtain funding from outside sources? – for instance an individual investor, or a bank mortgage (which is sometimes possible if the ground rent income is high enough). If there is an outside investor, what will be the basis of their return? Will they obtain head leases over some of the flats, or have the benefit of another area of value in the property?

There may be more than one class of share in the company (one for investors and one for those taking part) with different rights. The funds subscribed may be documented in a loan agreement to make dealing with future income more straightforward.

So, remind me again, why do I need an agreement?

As well as the points above, serving a notice has consequences in cost terms both for the flat owners and for the landlord.

If the flat owners pull out of the process having served a notice they will become liable for the landlord’s legal and valuation costs. Clearly it is better to have all those who commit to the process signed up to a binding agreement so that there is a clear understanding that if they pull out, they will have to pay their way.

I am thinking of buying a flat with a short lease, is there anything I can do?

Yes, there certainly is. Why not see if you can get the seller to serve a Notice claiming an extended lease, so that you can take the process over when the flat is sold to you?

How do I do this?

Provided that the seller has owned the property for more than 2 years (and has not tried to bring a previous lease extension claim and abandoned it in the last year) the current owner will have the right to an extended lease under the 1993 Act.

You can (as part of the purchase process) take steps to arrange for a lease extension Notice to be served by the seller and then transferred to you so that you can take over the lease extension claim.

The notice needs to be not only properly drafted and served but must also be assigned to you correctly. You should check that your legal advisor is experienced in this sort of work. You will also need specialist valuation advice about the premium to put forward in the notice.

Bear in mind that any valuation report prepared for the seller may not be addressed to you (so you will not be able to rely upon it against the surveyor or valuer unless this person specifically confirms this). In addition, you may simply want your own ‘view’ on the likely price for the lease extension. This information could impact on the price to be paid for the flat if this has not been properly taken into account.

If you do take this step as part of the purchase, you will save on having to wait 2 years to qualify for the lease extension.

The valuation date for the claim will be set as the date on which the Notice is served. If you are of the view that in the relevant market for the flat prices are rising, this may also be a good thing.

Finally, if you do wait the lease will be two years shorter when you make the claim. Particularly, if the lease has less than 80 years to run (or is likely to slip into this category shortly after you buy the flat) taking action now will almost certainly save you from paying a lot more for a lease extension in the future.

Lease extension or freehold purchase – which is best ?

The differences between obtaining a lease extension or buying the freehold may seem a little bewildering at first, but the following basic guidelines below may help you choose which is right for you: –

A Lease Extension may be best for you if:

  • Your lease is short – or about to get more expensive to extend (e.g. about to become less than 80 years remaining);
  • You do not know your neighbours, do not get on with them, or would not want to be involved in running the freehold to your block with them;
  • There is a high degree of ‘apathy’ within the block and you feel that you might be the only one doing all the work;
  • There are a large number of flats (perhaps with non-resident owners) – and co-ordination and management of a freehold purchase claim might be difficult;
  • You are generally ‘satisfied’ with the management of your block and do not want to take over the service charge budget.

You will not end up owning the freehold and taking ‘control’, but you will solve the problem of protecting the captial value of your flat.

If you are nearing a relevant valuation point (e.g. the lease length becoming less than 80 years) you will be able to ‘peg’ the valuation date by serving notice before the relevant date is passed, something that may be missed if you are waiting for a ‘collective’ action to take place.

You will need to have owned your property for 2 years before you can exercise this right, or if you are buying you will need to consider getting the outgoing owner to serve the notice (provided they qualify) and ‘selling this on’ to you.

Freehold Purchase (or “collective enfranchisement”) may be best for you if:

  • You have concerns about future development of areas forming part of the block (e.g. the roof or other areas) – although it has to be remembered that the landlord can sometimes retain and develop common areas;
  • You want to take ownership and control of the day-to-day management of the site;
  • You have a well-organised group of residents (or a group of residents who are prepared to be organised);
  • You want to protect the long-term capital value of your asset (which you can do by extending the lease to 999 years after the freehold purchase completes);
  • There are other issues that can perhaps be addressed if the freehold is purchased (e.g. alteration of lease terms or correction of other defects in the title which may be possible with 100% participation);
  • It is a small block and there is an equal choice for those involved as to whether to pursue the purchase of the freehold (with 100% participation) or lease extensions.

The overall results can be very rewarding – taking ownership and control of your building is a satisfying process. You will (collectively) be able to consider changing the management, or possibly to exploit other opportunities (e.g. the sale of lease extensions or shares in the freehold to non-participating owners, or the right to develop areas in a way decided by the residents).

If one of your concerns is the development or sale of other areas forming part of the block then this needs to be considered carefully, as the freeholder has certain rights to retain common areas and to grant the freehold purchasing company equivalent rights over them. Issues may also arise where a lease of an area capable of development or other use has already been granted, as this may well not be acquired as part of the process.

Curiously, with freehold purchase you do not need to have owned your property for any particular length of time to take part or initiate a collective action and therefore if you are in a small block (or looking to buy a flat in one) this may be worth considering.

Whatever you decide to do, ultimately you may require specialist advice as to the pros and cons as outlined above, to help you come to a decision.