Freehold company disposal of shares

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    Freehold company disposal of shares

    I am a leaseholder [999 years] with a management company looking after all 80+ flats. We are intending to acquire the freehold at a reasonable price, but know that not everyone will wish to participate. That is Ok as those who do will get an attractive yield and peace of mind from further development. However I am not clear on structuring rules when a shareholder in the freeholder disposes of their interest, which I think they should be obliged to do on sale of their leasehold flat. Does anyone have experience of a similar situation of how this can be done to provide the seller a fair price and who the purchaser[s] might be in this case? Thanks John

    #2
    It would be better to grant an overriding lease over the non participators and then sell that lease - buyers would pay a better price , also selling shares is difficult as the broker has to be regulated under a completely different set of rules

    the generic term for the buyers of such investments are white knights and buying individual overriding leases over each flats is the preferred method of acquisition for them

    Comment


      #3
      Thank-you for this. I expect 20-30 leaseholders would participate and stump up 1/20 - 1-30 of the total without external investors. I am looking at the medium term when an initial investor sells or dies etc. Would this still be appropriate?

      Comment


        #4
        A share in an unquoted company would be of very little interest other than to other shareholders

        alternatively why not borrow against the security of the freehold to raise the money from the non participators - there are various institutions that would lend at around 3.75% to 4.5% interest only over a number of years .the ground rent income from the non participators covering the loan interest

        Comment


          #5
          Shares in leasehold are usually sold for £ 1, as you have no customers, no sales, and no profit, and any service charges that come in do NOT belong to the freeholder, but the leaseholders, and is just "kept safe" by the freeholder, to pay for things the building wants WITH THE LEASEHOLDERS PRIVATE MONEY,

          So if you are thinking of a huge potential personal profit, then i am suspect of you motives.

          ~The share price will be as you say, split between 20 / 30 leaseholders. Where's the profit ? = none, it's a one time loss.

          Comment


            #6
            Originally posted by jdg View Post
            Thank-you for this. I expect 20-30 leaseholders would participate and stump up 1/20 - 1-30 of the total without external investors. I am looking at the medium term when an initial investor sells or dies etc. Would this still be appropriate?
            You could issue two classes of shares, Let suppose the purchase price is £120k and there are 80 flats and 30 decide to participate putting up £4k each

            The 30 who put up £4,000 each get an A share worth £1,500 and a B share worth £2,500. The "A" share will enable the holder to have the ground rent income waivered and has to be sold to a new lessee. The B share will have a 1/30 share of the ground rent from the non participators and can continue to be kept when the owner of the share moves on. There will be admin expenses involving this exercise and the non participators' income will be subject to corporation tax in the companies hands and income will be payable by the holder of the B shares on their income

            All of this admin will either have to be done externally or by a competent individual - however it is a burden with responsibility and if one of the lessees undertakes to do all the returns and make the dividend payments they really should be remunerated for it

            As there will never be any lease extensions as the leases are 999 years it may be better as I have suggested earlier to grant an overriding lease over the non participators and repay the surplus they have had to put up initially to cover the non participators

            Comment


              #7
              My development did this - the price was divided amongst those who could and would pay. Then on each sale of the ones that hadn't the purchaser paid in the same sum and this money went in to reserves. Simples.

              Comment


                #8
                Originally posted by Sarah B View Post
                My development did this - the price was divided amongst those who could and would pay. Then on each sale of the ones that hadn't the purchaser paid in the same sum and this money went in to reserves. Simples.
                In this case we are told that those who are participating is relatively low - so a participator may well be in this case be paying 2 to 2.5 times what they would pay if all took part

                the idea when other decide later to join up that their funds go into a reserve I doubt very much would be acceptable

                Comment


                  #9
                  ram There is already a management company, but the freehold ground rents would yield just under 7%, so not too bad. I and most other investors are not really looking for profit but more to protect ourselves from development and expensive insurance

                  sgclacy Actually this looks to have some potential. I and another here are accountants so I don't think the admin would be too taxing; opening a bank account might be... perhaps later participants could invest and the funds used as a dividend to those already in. I will think on that one.

                  Thanks to all for your comments.

                  Comment


                    #10
                    Dear jdg.
                    Sounds like a scam, whatever way you put forward.

                    So a flat gets sold - after new management. Don't expect the incoming owner to fork out £ 4000 for shares. i would tell you to bog off.
                    The easiest way to lose a sale.

                    If the shares are kept by the outgoing leaseholder, then you will eventually end up with no one that lives there is a member of the company.
                    + could possibly have a revolution on your hands if that happens.

                    Ground rent is for the freeholder to accumulate, to possibly pay for urgent works that if 15 leaseholders are refusing to pay the service charges, the freeholder MUST carry out works, especialy if its an emergency, then you sue the none paying leaseholders for none payment of the service charge, but you must find that initial shortfall and possibly from the ground rents ( accumulated, as you wont have enough for many years.)

                    You also need ground rent accumulation to pay solicitors before they take on a case, as they KNOW that freeholders in leasehold, have no money.
                    If someone sues the company for damages - you need cash in the bank. Company bank, and not the leaseholders service charge money.
                    Don't expect to go to your shareholders begging for £ 8000 to pay an expected bill ( if you win / lose - solicitors fees must be paid )
                    Shareholders will say, I gave you £ 4000, and you want more ?

                    And you are thinking of giving the shareholders a dividend on ground rents ? ! ? !. - Yes, that is a good idea, give them back the ground rent..

                    I'm a shareholder, and ground rents are for the freeholder to operate, -- Legal advice - court case attendances ( An agent cannot represent the company, but can be present to advise the company, and then a company representative advises the court.)

                    If I lived there now, I would sell


                    Comment


                      #11
                      ram,

                      In all fairness I don’t think that JDG is trying any form of scam.

                      The problem they face is that there is a low take up rate because the leases are so very long and to raise the funds the participators need to put up more than a 1/80 or so share and in so doing quite understandably want to know what reward there will be. Hence my idea of A shares and B shares.

                      Your point of course about needing funds to deal with expenditure which may not be recoverable through the service charges is very relevant indeed. But encouraging those who have put up far more than their share but offering no reward on that extra capital they put up will be a very difficult conversation to have with those participators

                      A possible idea might be to issue the A ordinary as partly paid shares which gives the company the right to call in the unpaid share capital at a later date if the problems you envisage come to pass


                      Comment


                        #12
                        It is not a scam and it is not a one off loss, some leaseholders wish to acquire an asset which has a value and it is right that those who participate should benefit and those who do not participate are choosing not to benefit at the outset but they should be able to join at a later stage if they wish.
                        The freeholder should be a separate company to the RMC as not all members wish to participate. Those who participate should acquire shares in the freehold company representing their share of the freehold. The most flexible way of dealing with additional contributions is to treat them as loans from the members to the freeholder and those loans would be repaid as and when other leaseholders wish to join as members.
                        The freehold company will make a profit representing the ground rents and administration charges paid by the non members. It is reasonable that the profit should be shared by the members who have contributed and not by those who have not participated.
                        When a member sells his/her property, the freehold company will need to obtain another leaseholder to participate and purchase the member’s share. The freehold can be revalued if necessary to obtain the price to be paid at the time of purchase but as these are very long leases, I doubt that it will be necessary. Any loan will need to be repaid at that time and the freehold company can either borrow from a bank or request loans from other leaseholders for that purpose.
                        Any annual profit can either be paid as interest on the loans or a dividend or a mixture of both to those members who participated. Those who do not participate cannot expect to benefit from that income.

                        Comment


                          #13
                          ram No it is not a scam but I appreciate your thoughts on the need to build up and maintain some capital within the freehold company. And the ground rent would be collected from the maintenance company not individual lessees so less risk of litigation.

                          eagle2

                          Comment


                            #14
                            eagle2 The loan idea is interesting as it sounds like it would have tax advantages to repay a loan before dividends are declared, but I strongly suspect more complicated in practice.

                            sgclacy The partly paid shares idea seems a good one. I'd hope it would never be necessary but probably good to have in reserve.

                            Again thanks all. I think I have enough for now to canvas potential participants before getting our solicitor to look at it. Thank-you! JDG

                            Comment


                              #15
                              Some of the suggestions here involve over-complication in a situation which needs to be kept as simple as possible. Just concentrate on buying the freehold and the arrangements between the shareholders in the company which will buy it. Leave the structure in place. Forget those who do not want in.

                              The company's constitution needs to have a provision that only leaseholder's can be shareholders and that on a disposal of a flat the share must be transferred to the new leaseholder.

                              What the shareholders do with the rent is a matter for their collective decision.

                              Your question here is: How can a shareholder ensure he gets a fair price for his share when he sells? The answer to that is that when it comes to a sale, whilst the share and the flat are two distinct things, what is sold is a package not least because the flat cannot be sold without the share. In theory, a flat sold with a share is worth more than an identical flat sold without a share. However, in practice it may not work like that. Whilst not quite on a par, it is not too different from the not uncommon situation where two identical properties in the same street fetch the same price even though one is in better decorative order than the other. So, when you sell you may decide that the flat is worth, say, £250,000 and the share £5,000 and set an asking price of £255,000. If someone makes an offer of £245,000 you have to decide whether to accept it and then the apportionment you have made ceases to have any special relevance. The best you can say is that having a share which produces an income may make the flat more attractive to some buyers - just as having a recently decorated property may make it more attractive than one needing a lick of paint.

                              You suggest that the prospect of a good return on investment is not necessarily the main objective in securing the freehold. So, it is a question of looking at the overall picture and each potential shareholder asking whether the advantages he feels he will secure are worth the price he has to pay.

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