Freehold company - Right of first refusal

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    Freehold company - Right of first refusal

    We received a Section 5B notice (required by law) from our freeholder, who intends to sell the freehold of our property with 5 residential leasehold flats in auction.

    All 5 leaseholders have collectively served an acceptance notice, expressing interest in acquiring the freehold. We are now in process of setting up a freehold company limited by shares.

    However, our circumstances are such that 4 leases have had statutory lease extensions, hence no longer pay ground rent, and one lease had a non-standard lease extension and still pays a rising ground rent. This is the flat holding most of the freehold value, and in the long term there is a lease extension due.

    The freehold price will be determined in the auction, and I assume it could be less than calculated in a valuation. Also, in this scenaro, the lease for the one flat paying ground rent would not have to be extended, and whilst the leaseholder is happy to pay a share to participate, it would be less than the amount that would be required to also extend the lease.

    Effectively, shareholders of the freehold would receive ground rent and in due course a lease extension premium, when the lease gets actually extended.

    Under the circumstances, should we issue two classes of shares, or does this overcomplicate matters?

    The leaseholder who would seek an extension of his lease could just be excluded from voting on the future premium acceptance, applying a conflict of interest clause, that typically forms part of the Articles of Association (#14 in Model Articles).

    Any advice would be appreciated.

    Thanks


    #2
    Originally posted by ULAK View Post
    Also, in this scenaro, the lease for the one flat paying ground rent would not have to be extended, and whilst the leaseholder is happy to pay a share to participate, it would be less than the amount that would be required to also extend the lease.
    That's the flaw in your thinking. They will have to pay for the extension -- to the other co-freeholders, to get equally distributed to all (including themselves)

    Comment


      #3
      They will ultimately extend their lease, but don’t need to extend at this point and don’t have an incentive to do so (over 100 years left). Other participants are still better off, if this party pays an equal share now, and then a premium for an extension at a later date (eg statutory extension in 20 years). The valuation for this extension might be above the price achieved for the freehold in the auction. This is the value a successful bidder would obviously be looking to capture. Right of first refusal is different from collective enfranchisement, where obviously everyone has to pay for their flat as well as flats of any leaseholders that do not participate.

      Comment


        #4
        I guess I'm not understanding what your question is. The ownership (via shares) of the entity that owns the freehold has nothing to do with what relationship each lessee has with that entity.

        Comment


          #5
          We need more info on number of years remaining on all leases & ground rent payable but I would be looking to even all the shares shares now by adjusting each person's contribution. The auction price will be lowered by the fact you have reserved your rights and in the future legislation might change so the odd lessee was unfairly advantaged.

          Comment


            #6
            Originally posted by Section20z View Post
            The auction price will be lowered by the fact you have reserved your rights
            Isn't that the wrong way around? The auction price will be higher by virtue of the fact of the un-extended lease (which is worth money) as well as the incoming ground rent.

            Comment


              #7
              Section20z Four units have equally long leases over 165 @ peppercorn, after statutory extensions, whilst one has around 100Y with significant ground rent. They don’t have to extend now, but in about 20Y. We want everyone to participate, for governance reasons, but how can we make it fair? Would a different share class help or complicate matters? Obviously, the diverging party shouldn’t vote on their own premium in the future.

              Section20z - i am not sure if the freeholder would need to disclose that we have notified acceptance.

              Comment


                #8
                Originally posted by AndrewDod View Post

                Isn't that the wrong way around? The auction price will be higher by virtue of the fact of the un-extended lease (which is worth money) as well as the incoming ground rent.
                No sorry I meant that bidders will be deterred (me for one) as you can win at the auction, pay deposit and expenses and then find lessees exercise the purchase right and you get nothing.
                OP thinks that all leases have already been extended so there may be little value over the ground rent.

                Comment


                  #9
                  Section20z You are abolutely right, that was my thinking, too.

                  Comment


                    #10
                    Originally posted by ULAK View Post
                    Section20z - i am not sure if the freeholder would need to disclose that we have notified acceptance.
                    It will be in auction details. My suggestion would be you wait to find out sale price then calculate a fair split and increase the last lease to £165 years at nil ground rent, that way you all move forward on a level footing with equal interest in maintaining the building.

                    Comment


                      #11
                      Section20z - thanks, good to know that it will be disclosed. It would be best to align leases, but that would essentially mean that the one party pays the bulk of the fee, or that we share it either evenly or proportionately to unit size, and the party who also needs to extend their lease pays extra, but that is not in their immediate interest.
                      We may need a lease valuation for that unit and then compare to the auction price.

                      Would you see any benefit in creating a separate share class for this unit?

                      Comment


                        #12
                        I'm sorry I have no knowledge of share classes or how it would work but my concern would be overcomplicating matters and in ten years you have five new lessees, none of whom know what went on or what was intended.
                        why not go on one of the lease extension calculators and get an idea of the cost to extend for the 5th flat, it strikes me this is the only real value to the freehold and it is right that that party should contribute more (and then level leases).
                        He gets an immediate benefit of saving the ground rent which to my mind is 100x compared to having money in the bank, eg saving ground rent of £200 is worth £20,000 yet auction price will likely be 20 X ground rent.
                        And you all benefit from cheaper insurance and maintenance costs.

                        For the sums we are talking about I would think you can just work it out between you as you will all gain something. Good luck

                        Comment


                          #13
                          Herein lies the problem, assuming an auction price of 20x ground rent, and below a theoretical lease extension value assumed to be 100x ground rent, the rebate cannot just benefit the unit which hadn’t extended the lease, when the others have already paid 100x ground rent to extend theirs.

                          Comment


                            #14
                            True, it's not easy but don't forget he also paid to extend his lease in the past.

                            Comment


                              #15
                              Where lessees reserve their rights at auction there is little interest in the room (I suppose its now the end of a mouse) and you should pick it up for well below market value and enfranchisement price.

                              Your logic of having two classes of share capital is very much the best way forward.

                              Class A - everybody takes part and votes on service charge expenditure
                              Class B - everybody shares the ground rent and lease extension premium , except as you say the lessee with the short lease does not vote on the premium

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