What is the difference between collective enfranchisement and right to manage?
25 August 2020
Leaseholders often declare that they would like to “take control” of their building, to get rid of inert managing agents, difficult building owners or sometimes both, but what this actually means for a particular group of leaseholders can vary depending on the ultimate aim.
We set out below a brief comparison of the two most frequently used processes; the right to manage (RTM) and collective enfranchisement.
Right to Manage: key points
The key qualifying criteria for the RTM is that it requires the participation of half of the ‘qualifying tenants’ in the building: broadly speaking, residential leaseholders who own a long leasehold flat. The process of making a claim is outside of the scope of this article, save that a building owner has no ability to object to a valid claim.
The result of a successful claim is that the RTM acquires responsibility for:
- performing the landlord’s maintenance covenants under the leases. Ordinarily the RTM will appoint new managing agents to assist with this
- administering the service charge budget and collecting service charge funds from leaseholders
- liaising with the freeholder over requests from leaseholders to carry out alterations to their flats.
Crucially, the RTM does not confer any power on the leaseholders to extend individual leases, in contrast to collective enfranchisement. It is simply a means of taking control of the management of the building on behalf of the owner, rather than a capital investment in the building.
With this in mind, it is important that leaseholders understand that running an RTM requires ongoing engagement, even where managing agents are appointed to assist. If required maintenance works are not carried out, it is the RTM that leaseholders will look to for solutions.
Collective enfranchisement: key points
The key qualifying criteria for collective enfranchisement is similar to the RTM, in that at least half of the qualifying tenants in the building must participate.
The difference here is that the result of a successful claim means that the leaseholders, who will normally form a company for the purpose of making a claim, will become the owners of the freehold of the building in which their flats are situated. This does, however, come at a price, and the participating leaseholders must pay the freehold owner a premium which reflects market value.
Ownership of the building comes with the same maintenance responsibilities as with the RTM, so it is similarly important that leaseholders understand that owning the freehold also requires ongoing management. As a perk of owning the freehold, however, the enfranchisement company will also acquire the ability to extend individual leases, and most collective enfranchisements will include an agreement between the participating leaseholders to do so at a nominal cost. This can be extremely valuable to leaseholders whose building owner is known for taking an obstructive approach towards lease extensions. Leaseholders who did not participate in the collective enfranchisement can be charged a premium by the enfranchisement company if they want to extend, thus allowing leaseholders to recoup at least part of their investment.
Which is best for you?
The crucial question for leaseholders who are considering either process is: are you looking to take control of maintenance, or are you looking to take ownership? In turn, this will mean thinking about whether or not the building owner or agent are causing issues, if control over the lease extension process would be beneficial and if it will be possible to fund the enfranchisement premium.
Whatever the circumstances, Birketts are well placed to advise and guide leaseholders through each of the processes.
This article was first published in News on the Block on 24 August 2020.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at August 2020.