Right to manage v collective enfranchisement?
7th December 2022 by Mark Preece
If you own a leasehold flat, you may want to end your landlord’s involvement in running the property. There are two main ways in which this can be done.
Owning a leasehold property means that you have to pay service charges to cover expenses such as buildings insurance and upkeep of the building. It is sometimes the case that flat owners feel they could make a better job of the property management themselves or they may feel that the landlord is charging an excessive amount.
It is possible for you and your fellow leaseholders to take over the property management from the landlord, either by enforcing your legal right to manage or by purchasing the freehold, which is known as collective enfranchisement.
Right to manage
As tenants of a leasehold block, you can form a residents’ management company and take over running the property from the landlord. Generally, at least half of the leaseholders will need to take part and a formal process will need to be gone through, including serving notice on the landlord.
The management company will take over all of the management tasks, including arranging buildings insurance, carrying out repairs and maintenance and paying money into a sinking fund for future large items of expenditure. It will also need to carry out the company administration, to include the preparation and filing of accounts. It is open to you to employ a managing agent to do everything for you, but their charges can be substantial.
An alternative to enforcing your right to manage is collectively buying the freehold from the landlord. Again, at least half of the flat owners will have to take part in the process. The correct procedure must be followed throughout and you will all be required to pay a premium for the freehold. This is complicated to calculate and unless a price can be agreed informally, you will generally need to employ a surveyor with expertise in this area to prepare a valuation.
You are also strongly advised to seek representation from an experienced property solicitor who will be able to ensure that the right steps are gone through and who will be able to represent you in negotiations over the price to be paid. They will also be able to set up a management company on your behalf and deal with the registration of directors and ensure that the company memorandum and articles of association are appropriate.
Once collective enfranchisement has been completed, the management company will own the freehold and be responsible for managing and maintaining the flats.
Choosing between right to manage and collective enfranchisement
Right to manage is a cheaper option as you will need to pay to buy the freehold from the landlord if you choose collective enfranchisement. However, one of the main advantages of collective enfranchisement is that as a management company, you can choose to extend all of the leases free of charge.
Once a lease drops below 80 years, it can start to impact the value of your property, as some mortgage lenders will not lend against a leasehold property with only 70-80 years or less left. While you do have the right to extend your lease in most circumstances, this can be expensive. You will need to pay a premium to the landlord, which can increase fairly sharply when the remaining term of a lease falls below 80 years. You will also be required to pay a valuation fee and the landlord’s reasonable legal expenses.
Collectively owning the freehold means that you could all decide to grant leases of 999 years, avoiding any potential reduction in the value of your flat.
You can also decide not to collect ground rent anymore. If this is a substantial sum, it can be advantageous not to have to pay, although you will have had to buy out the landlord.
If you choose collective enfranchisement, you may find that your flat is more attractive to buyers.
If you would like to speak to us about either of these options please contact Mark Preece on email@example.com or call Mark on 01202 377862.