The Right To Enfranchise

What is an RTE?

An RTE is a private company limited by guarantee and not by shares; its Constitution (Memorandum and Articles of Association) are prescribed by statutory instrument.; and
its Memorandum of Association should state that its objects, or at least some of them, are: to exercise the right of collective enfranchisement; to acquire, hold, manage and administer the freehold and any other interests acquired; to maintain, repair and improve the premises and with the consent of the company, to let or licence part of the premises; to exercise the functions of the landlord under the leases including services, repairs, maintenance, improvements, insurance and general management.

In order to guard against competing bids in the same premises, legislation provides that a company cannot be an RTE in relation to premises if there is already another RTE company in existence.

Furthermore, a company cannot be an RTE if it is a Commonhold Association under Part 1 of the Act.

The role of the RTE

As set out previously, the RTE’s prescribed memorandum must envisage it acting as landlord once enfranchisement has been completed.
The RTE Company therefore serves a dual purpose:

•  to act as a nominee purchase through which participating leaseholders can pursue the enfranchisement claim; and
•  to act as the new landlord after the freehold has been acquired.

The right to participate

Any qualifying leaseholder of a flat in the premises is entitled to become a member. Usually the only members of the RTE will be those leaseholders who have chosen to become members.

One of the first jobs of the RTE, therefore, is to serve a ‘Notice of Invitation to Participation’ on any leaseholders who are not already members of the company. This notice must be given at least 14 days before the Initial Notice of Claim is served on the Landlord.

The Invitation Notice must state that the RTE:
• intends to exercise the right to enfranchise;
• gives the names of the
• participating tenants;
• explains the rights and
• obligations of the company;
• includes an estimate of the price and costs; and
• invites the recipients of the notice to become participating members of the company.

A copy of the RTE’s memorandum and articles of association must also accompany the notice.

The Act also makes provision for new assignees and personal representatives of leaseholders to become members of the RTE upon service of a ‘Participation Notice’ i.e. a notice given by a leaseholder stating they wish to be a participating member. Such notice may be given after service of the Initial Notice of Claim but within the ‘participation period’. In other words, within the period between the date on which the Initial Notice of Claim is given and either a period of six months or date on which a binding contract is entered into, whichever is earlier.
The Act also envisages Right to Manage Companies (RTMs) mutating into RTE Companies and makes it very easy to do so, although for obvious reasons, a landlord who is a member of the RTM cannot be a member of the RTE as it is acquiring the freehold estate from the landlord.

The Impact on Four or Fewer Participating Leaseholders

Setting up a company to purchase the freehold is nothing new. In practice, participating leaseholders have preferred setting up a company before pursuing the enfranchisement claim. However, this has not always been the case where there are four or fewer leaseholders participating in the claim, as forming a company is not strictly necessary.
On commencement of the RTE provisions in the Act, the enfranchisement notice will have to be given by the RTE Company. This obviously has an immediate impact where four or fewer leaseholders are participating in an enfranchisement claim. RTEs will, in future, have to feature in all enfranchisement claims regardless of the number of participating leaseholders involved.

Service Provisions

The Act fails to deal adequately with service provisions and in particular there are no provisions in relation to deemed service. This is likely to cause major complications in practical terms especially when it comes to service of the Notice Inviting Participation. For example, if it proves difficult to serve one leaseholder in a block of say, 50 flats, is the initial notice of claim null and void?

Conclusion

The regulations required for RTE companies to be constituted are not yet in place and it is apparent that the drafting of these regulations has encountered some difficulties; whether all of the provisions come into effect is at this time uncertain.

Consequently, any acquisition of the freehold will continue, for the time being at least, to be by a ‘nominee purchaser’ (either an individual or a corporate body, but in most cases the latter option will be taken due to the liability aspect involved). However, it is hoped that at some point in the future, the enfranchisement process will be operated through the Right to Enfranchise Company.

For further information regarding this article, contact Roger Hardwick, Head of Leasehold Enfranchisement, Brethertons Solicitors.