Participation agreements

Collective enfranchisement is the process whereby all the leaseholders participate together in the purchase of the freehold of their property.

Participation agreements- what are they?

Essentially it is a contract between a group of leaseholders who have decided to proceed with buying their freehold, and it gives them a solid legal basis with which to proceed with that purchase.

Do we really need a Participation Agreement ?

Freehold purchase is quite a complex process involving strict timescales. The leaseholders need to come together as a group – and every person involved within that group is dependent on the others involved meeting their obligations, such as providing money when required. If just one person fails to meet their obligations within the group, then this has implications for everyone else – for example they could find themselves having to introduce more money unexpectedly to make up any shortfall if one person fails to provide their share of the purchase price and associated costs.

A participation agreement seeks to bind everyone within the group of leaseholders to the procedures required to complete the process, to avoid such potential pitfalls. It gives them a contractual basis for ensuring the required payments are made on time, and controls other aspects of the process. The agreement gives a clear basis for the group, identifying all obligations and responsibilities, and gives welcome (and vital) assurance that all the leaseholders involved in the company will make the necessary contributions when required. It means everyone involved knows exactly what their role is in the process and what is required of them. It leaves no room for misunderstandings which may otherwise arise within the group.

So what are the principle reasons for having a participation agreement?

Certainty – good teamwork is essential for the leaseholders. The agreement gives certainty both as to the steps to be taken, and the position of each leaseholder within the group. It gives a platform from which the leaseholders can instruct the freehold purchase company to serve the Initial Notice – a step which triggers liability for the freeholder’s costs. If the Initial Notice is withdrawn after service, the company will remain liable for the freeholder’s costs up to the date of withdrawal, and the group will also be unable to begin the process again until a twelve month period has expired.

The existence of the agreement, which all leaseholders “buy in” to, should discourage any leaseholder from withdrawing from the group application.

Funding – wherever a group are collectively responsible for payments, it is prudent to have a formal agreement recording the overall sum due from each member of that group, and the amounts and dates of payments. With freehold purchase, as soon as the purchase price has been agreed a timescale within which all procedures must be completed kicks in, and it is essential that there is no delay in making payment to the freeholder – this could endanger the purchase. The agreement should address funding with clarity – it should determine exactly how much is to be paid by each leaseholder, not only for their share of the purchase of the freehold itself, but also their share of legal and valuation costs of both the freeholder and the enfranchisement company. The financial contribution of each leaseholder should be agreed at an early stage, as wrangling over finance later in the process when completion of the purchase is on the horizon could be potentially disastrous.

Control – every group should have an appointed leader to ensure that the group works effectively, and enfranchisement is no exception. The agreement should name the person who has been appointed by the group to be in overall control of the enfranchisement process – more than one person giving instructions to the valuer and solicitor involved will simply cause muddle and confusion, which in turn will result in additional cost for the whole group and an unsatisfactory outcome.

What tasks are the leaseholders faced with which the agreement can help cover?

Once the decision has been made by the leaseholders to acquire the freehold, the time period until the issue of the initial notice is of the utmost importance and will be an extremely busy time. The leaseholders will have to deal with a range of issues. They must assess eligibility, make a preliminary assessment of costs, establish a cost fund and arrange finance, create the enfranchising company itself, put together all the information which is required and prepare the initial notice.

When exercising their freehold right to buy, the leaseholders must ensure that they can cover the costs and that they can meet the various timescales imposed by the legislation. In other words, they have to be extremely organised and to ensure a successful outcome, they must be able to give clear instructions to the enfranchising company.

Is there a set form of agreement?

No. The legislation which enables collective enfranchisement to take place gives no guidance as to how the group of leaseholders should govern themselves.

When should the agreement be entered into?

It’s up to the leaseholders to decide when they want to become contractually bound in their venture – but it’s common sense that the earlier in the enfranchisement process the agreement is entered into, the better, bearing in mind that the agreement needs to address funding issues and the appointment of a valuer and solicitor – matters that need to be agreed at the very outset. It’s absolutely essential that it is in place before the Initial Notice is served on the freeholder.

Obviously, the larger the property and the more flats involved, the greater the number of leaseholders and this means that it is likely to take longer to obtain commitment from everyone. Many people will be reluctant to commit themselves until they have clear information about the amount of money involved. There are ways of addressing this situation; for example, those who feel able to commit can instruct a professional valuer to give an indication of costs, and a solicitor to manage the process, and can enter into an agreement between themselves at this point as to how they will meet the costs of hiring these professionals.This will enable financial information to be obtained, and presented to other leaseholders so progress can be made – and as additional leaseholders decide to commit, they can enter into the agreement thereby not only becoming committed to the process but also to accepting a share of the costs of the professionals already instructed.

What should go in it?

  • The agreement must have a commencement date.
  • It must set out the obligations of the enfranchising company, and matters concerning the initial notice.
  • It should give representations and warranties, covenants and a default indemnity, and name qualifying tenants who are not to be party to the Initial Notice.
  • It should also appoint valuers and specialist enfranchisement solicitors.

Should a specialist valuer and solicitor be appointed?

Yes – a  specialisl valuer will be able to give an accurate initial assessment of costs which will be invaluable to the leaseholders, and as the procedure is quite complex and its success hinges on meeting set timescales, a solicitor to help guide the group through the process is really essential.

Both the valuer and the solicitor must be specialists in enfranchisement as it is a complicated area. A clause should be included within the participation agreement covering the contribution required by each member of the group to these professional costs.

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