Leasehold Enfranchisement or Right to Manage? A Lessees' Conundrum

QUALIFYING CRITERIA
For both collective enfranchisement and right to manage, the criteria are similar.  Briefly,  the building must be a self-contained building or part of a self-contained building, not more than 25% may be used for non-residential purposes (excluding the common parts), two or more flats must be held by qualifying tenants and qualifying tenants must own at least two-thirds of the total number of flats in the building.  In addition, 50% of the total number of flat owners must participate in a claim.

PROS AND CONS OF ENFRANCHISEMENT
Pros In most cases the collective enfranchisement of a residential building will be the best option for leaseholders.  This will enable them to gain complete control and ownership of the building and in turn grant themselves (as leaseholders) new 999 year leases for no premium. The value of their interests may therefore be enhanced.  Market perception is that purchasing a flat with a share in the freehold is preferential to buying a leasehold interest so this provides more good news for leaseholders.
Leaseholders with a high ground rent should also be attracted by the enfranchisement option as rent can be reduced to a peppercorn on granting the new leases.  There is also potential investment value for third parties willing to fund the cost of enfranchising non participating flats - so called White Knights.  For lessees constrained by a budget, this option can prove invaluable and enable a collective claim to proceed where it might otherwise fail for lack of funds.

Cons The enfranchisement process can be protracted, the average claim taking approximately two years.  Leaseholders will need to budget carefully, not only for their own costs and the premium but a significant proportion of the landlord’s costs which the Act says they must pay.
If the enfranchisement is to be a success following completion, it is vital there is an efficient and cooperative group of residents willing to oversee the management of the building and its ownership structure for many years to come.  Although a managing agent can be appointed, the necessary involvement from some leaseholders may be onerous with issues such as maintenance, improvements, licences to assign or alter, noise nuisance and company administration in the offing. Leaseholders should consider carefully whether it is better to have a common enemy in a landlord than be embroiled in arguments with their neighbours.
 

PROS AND CONS OFRIGHT TO MANAGE
Pros A right to manage claim will be cheaper than making a collective enfranchisement claim as there will be no valuation fees, nor is there a premium payable.  If finding a resolution to management problems is the leaseholders’ main objective and cost is also an issue, a right to manage claim may be the best option.

Cons It would be a misconceived to suggest that after the tenants have gained control of the management of their building the problem landlord will disappear from sight.  A right to manage claim enables leaseholders to take over the building’s management functions such as services, repairs, maintenance, insurance and improvements.  However, a landlord will not be completely absolved from their management duties.  Landlord and lessee will still need to work together. 
The legislation requires that landlords must be given notice before the Right to Manage Company (set up by the leaseholders following completion of the claim) may grant approval relating to assignments or alterations.  If a landlord objects, the RTM company may not grant consent.  In practice this may delay the decision making process as an additional party has been introduced.  The statutory notice periods will also be likely to jeopardise time sensitive transactions.

CONCLUSION
From the outset leaseholders should be clear on their objectives.  There is little point in completing a right to manage claim if this proves a short term and ineffective solution, the problem landlord remaining in the frame.  Similarly, with collective enfranchisement foresight and planning is key.  Without an honest assessment of whether leaseholders are willing to take on the long term ownership of a building, and its associated challenges, rancour and disagreement may be closer than they anticipated.  
As with so many leasehold matters, there is no right answer or a one size fits all solution. But with some careful planning and proper advice, leaseholders can choose a remedy that is just right for them!

Anna Favre is a Partner and Amy Chance is a Solicitor at Pemberton Greenish LLP