A participation agreement is a binding arrangement that sets out how the freehold purchase costs will be allocated. It also helps protect your interests during the process.
This legally binding agreement formally recognises the commitment to purchasing the freehold of your block. The rules state that at least 50% of qualifying tenants must take part, but sometimes people drop out because it’s a long process and their circumstances change – meaning that the 50% requirement may not be fulfilled. Similarly, some people sell their flats before the freehold has been purchased. In either case, the entire enterprise could be derailed. You therefore need a watertight participation agreement from the outset to ensure everyone’s commitment and to protect you against adverse eventualities.
The participation agreement should answer the following questions:
How are the purchase costs to be divided? Some flats will increase more in value as a result of the enfranchisement due to their size or position in the block. It’s therefore important to decide on the proportion of costs payable by each flat to reflect this situation.
Who will manage the process? Certain individuals may be nominated for this purpose.
What happens if a flat is sold during the transaction? You can ensure the new owners join in with the freehold purchase.
Once the freehold has been purchased, will the flat owners be entitled to a lease extension at zero premium?
How will legal and purchase costs be collected?
What happens if everyone decides not to proceed? If the valuation is too high, for example, the costs which have already been incurred will need to be paid.
After the purchase, how will the block be managed?
How will requests for alterations be treated? For example, some flat owners will wish to make changes to their properties such as converting a loft.