Practitioners will be aware that for a collective freehold claim under the 1993 Act, getting the participation agreement (PA) right is the key to success. An inadequate PA, or worse, no PA at all, can and does lead to arguments between the participators which can take away much of the benefit of getting the freehold. This is a non-exhaustive look at the aspects which should be covered in any PA to get the project off on the right foot.
Before you even get to the PA, make sure that the participants have met (if you can be at that meeting at the building that is ideal), or (if they do not live there) have spoken and agreed the channel of communication with the professional advisers (one or two lessees only) They should have had a valuation done before they incur legal costs (which is useful as it requires contributions to a fighting fund for the fee to prove serious intent), and they should have agreed in principle how they will fund any non-participating flats and non-residential premises (if the freeholder does not take a leaseback), either themselves or through an external “White Knight” investor. If there is a porter’s flat, what are their intentions for that flat going forward (as this affects who will fund that element of the price)?
The PA will need to cover all these points, and the proposed nominee purchaser, usually a company owned by the participants, should be a party to it. You will need to deal at this stage with who will be the members and, if limited by shares, how many shares the White Knight will have, and who will be the directors; in small blocks each participant should be able (or obliged) to appoint a director in my view – directors’ liability insurance should allay concerns here.
The White Knight should not be a party to the PA, to avoid marriage value on the non-participating flats under section 18 of the Act.
The PA should of course deal with the agreement to make the collective claim, provision of funds by the participators when required, and the grant of the 999 year leases after completion (in satisfaction of the participants’ beneficial interests). The proportions in which the participants provide the premium and SDLT (usually the same) and the costs (which can be different) should be shown, even if those are to be determined by the valuer when the price is agreed.
If there are to be any changes in the leases from the current form other than the term and ground rent, this should be agreed and recorded in the PA. Any agreed management objectives such as the refurbishment of common parts should also be stated. To avoid tax complications, don’t delay in issuing the new leases after completion.
Above all, the participators need to realise that the PA is a binding legal agreement, not a non-binding statement of intent, and essential for a successful collective claim.
John Stephenson, Senior Partner and Head of Enfranchisement at Bircham Dyson Bell LLP