The removal of a residence requirement and the relaxation of other restrictions on qualifying lessees have assisted lessees enormously. Likewise certainty on the valuation date and an equal division of marriage value has limited the scope for argument. Restrictions on appeal have limited the ability of landlords to use the right oppressively. The amendments to the impenetrable Leasehold Reform Act 1967 bringing it further into line with the 1993 Act are to be welcomed.

It remains inexplicable, however, that an individual can grant another power of attorney to undertake virtually any act however important or affecting assets of whatever value except the power to sign a notice under the 1993 Act.

These reforms and a growing awareness on the part of lessees of its advantages have meant an ever increasing number of blocks enfranchising, but even now poor management rather than value is the biggest driver of enfranchisement and this is the lesson for managing agents.

Freeholders have become increasingly canny with lease extensions, offering lease extensions back up to 99 years at an increased ground rent at just about the price which the LVT would settle on for an extension under the Act but of course with reduced professional fees. This has meant freeholders have been able to increase the value of their own reversionary interest and get a premium at the same time as making enfranchisement less likely

RTM

We understand that fewer than 400 RTM companies have been formed. This is unfortunate because RTM is a useful tool for groups of lessees. When we have used it we have found that there has been little scope for freeholders to contest its use nor has it proved expensive in practice.

Where possible we have tried to get 100% of lessees to sign an application for membership in the format set out in the standard memorandum and articles. Then it is necessary to ensure the directors pass a resolution accepting their applications and enter them on the register of members. That way there can be no challenge on the basis that an invitation to participate has not been served.

We have used RTM in these situations -

• Where there is a large block with a mix of extended leases and shorter leases with elderly residents and enfranchisement is seen as too expensive.
• Where the landlord owns a number of flats or commercial premises and it is feared would not require a lease-back.
• Where enfranchisement is proceeding but complicated or subject to appeal to the Lands Tribunal and the lessees had concerns as to the competence or probity of the managing agents or feared that expensive major works would be initiated with a view to squeezing available lessee funds.
• Where the freehold was owned by all 4 lessees who were unable to obtain unanimity on management decisions and RTM imposed a majority decision-making structure.

It is also a powerful tool when combined with simultaneous lease extensions, if the freeholder would be likely to seek substantial hope value for development. It is one thing to demonstrate “hope value” at a LVT hearing, but altogether another to drive through a rooftop development without the co-operation and against the opposition of a determined group of lessees intent on preventing it and controlling the management of the building.

There is no doubt that many groups of lessees rightly and sometimes wrongly feel oppressed by their freeholders and/or managing agents. RTM gives them the right to be in control of their own destiny. It also takes away the alibi that it is someone else’s fault and makes lessees face up to their own responsibilities.

Commonhold

Ultimately Commonhold should be the answer to the failure of English Law to give a satisfactory remedy to those who seek to enforce positive covenants where there is no direct contractual relationship. It is, however, difficult to see how Commonhold is going to take off until major developers embrace it and show that it works in the market-place. Certainly it is difficult to advise lessees of existing schemes, otherwise entirely suited to Commonhold, to take a leap in the dark and even attempt to persuade 100% of the lessees and their mortgagees of its benefits.

Other changes

The requirements for consultation for major works are perhaps excessively bureaucratic. They seem to involve one stage too many. This is especially so where the freehold is owned by a residents management company (RMC). It should be possible for RMCs to contract out of the consultation requirements or be subject to a lighter regime.

Restrictions on forfeiture have also been effective.

Financing an Enfranchisement

There are a host of practical issues for groups of lessees. Most important is an early consideration of how to finance the cost in relation to the flats of non-participants. Ideally the cost should be born by the participants or some of them. Bank finance can be difficult and expensive and reliant on guarantees from individuals who may wish to sell their flat long before the loan is repaid.

If the finance comes from within the participants how do they recover their investment? A number of devices can be used but we prefer a carefully worded declaration of trust. There is then no distribution by the Company. Instead the Company holds the reversionary interest of the non-participating flats in trust for the group of investors which may be some or all of the participators. Each investor will have to declare the acquisition of the asset and any capital gain on a subsequent disposal made on subsequent lease extensions to non-participating lessees on their individual tax-return.

> Post enfranchisement issues

One might argue that once the lessees have acquired the freehold if the lease satisfies the requirements of the CML Handbook there really is no need to extend the leases or at least not immediately. In practice it has been known for residents management companies to be struck off for failure to send in annual returns and a lease extension or new lease provides valuable insurance.

The enfranchisement is an opportunity for lessees to establish the character of their block democratically. If the lessees consist of largely elderly residents then they may wish to impose restrictions on sub-letting and even assignment. If it is owned by absent “buy-to-lets” then they may wish to remove restrictions. Regulations can be established about quality of life issues including those wooden floors which look so clean and modern in TV make-over programmes but make life hell for the occupiers below.

It is fascinating to see how keen on the collection of service charge arrears lessees become once they have collectively acquired their freehold.

Marriage Value - Arbib

Where other elements of the valuation exercise in enfranchisement are mathematically precise, even mechanical, to lawyers the calculation of marriage value always appears to involve a great deal of smoke and mirrors.

Abbathure (1999 06 EG 177) set out the various advantages to lessees who collectively enfranchise which give rise to marriage value. Why therefore is marriage value not less for lease extension than for collective enfranchisement? Why has the amount of marriage value not decreased now that many of those advantages can be acquired by the exercise of RTM?

20 years ago (when freeholds were changing hands at yields of 15-20%) purchasers of flats with 70 years unexpired would not have dreamed of paying less than for the same flat with 98 years unexpired. In fact they would not do so now either. All that has changed is an increased awareness in mortgagees and purchasers’ solicitors brought about by the 1993 Act itself. So much for a “No Act world” valuation. Less than 5 years ago in the Edward House Hove decision (357) - in which we were involved - the Tribunal awarded no marriage value in a block where there was 76 years unexpired. Such a decision now would be very surprising. Marriage value appears to be on an upwards only ratchet.

The current hot valuation topic is the decision in Arbib (LRA/23/2004). Unfortunately some have grasped at the “headline” deferment rate of 4.5% and assumed this applies not only to the deferment rate but also to the yield for the return on ground rents and that it also applies equally to a backstreet terrace house converted into 2 small 1 bed-roomed flats as to “trophy” houses in Chelsea. It is clear from the decision itself that this is not the case. In practice one suspects that the usefulness of the Arbib decision will largely be confined to those “trophy” houses. It is inconceivable that every straightforward LVT decision will require the evidence of a valuer and a specialist in money market rates for reasons of expense if no other. Let’s hope so anyway!

Conclusion

I have heard it suggested that if lessees take over their block, it will fall into decay. This is not my experience. In all the hundreds of enfranchisements and RTMs we have dealt with I can think of only 1 or 2 where the end result was not better than what preceded it. Lessees have the rights, whether to acquire the freehold or to manage it. They should use them.

Mick Barry is the senior partner of Farrington Webb, (12a Marlborough Place, Brighton BN1 1WN

(01273 600331) Mick.Barry@farringtonwebb.co.uk) leading a team of 4 solicitors who specialise in enfranchisement and related matters principally for lessees and RMCs.