Freehold company disposal of shares

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    I don’t think that you can forget about those who do not want to participate at the present time. It may be simpler now but it will only complicate matters in the future.
    You need some flexibility for those who change their minds and new leaseholders who wish to own a share of the freehold in future. You could also start a monthly payment plan for those who wish to spread the cost over a period of time. Ideally, you should aim to have 80+ shareholders with one share each at some stage in the future.
    The problem is that the initial participants are being asked to contribute for 3 or 4 properties. They may reasonably ask a purchaser to pay for one share in the freehold but it may deter purchasers if they are asked to purchase 3 or 4 shares, not to mention the possible financing issues,
    The initial participants should have the opportunity to recover part of their investments when they choose and not be limited to waiting until they sell their property.


      Thanks Lawcrucher I think you are correct that any purchaser will just look at the overall price, and the usual determinates of location, decorative order etc. will weigh far more than any freehold issue.


        As I suggested in my last post, I do not think that those participating should be treating their share primarily as an investment. Allowing outsiders in would defeat one of the objects of the exercise. Whilst flexibility is ideal, it creates complications if you are to avoid a share being devalued each time a new one is issued. One way round it would be to form two companies. There are 80 flats. Let's say 20 leaseholders buy the freehold. You form two companies. One, "A Co", issues 80 shares and the other, "B Co" issues 20 shares. A Co allots one share to each participator and 60 shares to B Co. B Co issues one share to each participator. Whenever a leaseholder who does not have a share wants one he can buy it from B Co. The proceeds are then available to the 20 original participators. All that would though take some setting up and involve administration and expense and the tax position needs to be considered. On the whole I am inclined to think that the chance to buy a share should be presented as a one off opportunity.


          I agree that there should be a condition that only leaseholders may purchase shares in the freehold company but it should be recognised that the restriction limits the value of the shares. That also answers your question, who the purchaser might be.
          I also agree that a prospective purchaser is unlikely to attach much value to the part share of the freehold, not least because it will affect the mortgage which he/she will be able to obtain. That in turn questions why any leaseholders should invest in the freehold now. You have highlighted protecting yourselves from development and insurance costs but all leaseholders would benefit regardless of whether or not they contribute.
          So you are quite right to question how a seller can obtain a fair price and to offer an incentive with some form of a yield.
          There is no need to create 2 freehold companies if there are 2 classes of shares as suggested by sgclacy or if the investment is split into a combination of shares and loans.
          The suggestions that the income of the freehold company should be retained and future sales of shares should be added to reserves for the benefit of all leaseholders compound the problem of why anyone should invest now. There is also the difficulty that the income will arise within the freehold company whilst the expenditure is likely to fall within the RMC, subject to the terms of the lease.
          Opening a bank account should not create a problem, some of the company formation agents include a bank account within the package.


            Those who participate will go into it with their eyes open. They will no doubt see personal advantages in owning the freehold which they will think are worth paying for. The fact that others will benefit they will regard as merely incidental.

            In something like this you really need to keep it all simple as the situation does not warrant anything fancy. Avoiding unnecessary complications is always a good idea as there is less to go wrong. Apart from that, the set-up costs are going to increase significantly if you wander too far from something basic. An off-the-shelf company with a little tinkering to cover any special requirements should do. Once you start talking about A and B shares, shareholder agreements, loan agreements and more than one company you are going to need the input of a company lawyer who will not come cheap.

            The idea that the rent should be accumulated as some sort of reserve fund should be knocked on the head.


              Unless there is a clear benefit established at the outset for those who participate, I would recommend that leaseholders do not part with their monies because it could well become a one off loss. I cannot think of any personal advantage that is worth paying for which would not be available to others who do not pay. If I were one of those leaseholders, I would suggest that the freehold company obtain a bank loan for the whole of the purchase price and repay it from the income which is generated.

              How difficult is it for the terms of a loan to be written on a piece of paper? As you are accountants, you should be able to draw up a simple agreement without the need for an expensive company lawyer. Your solicitor should only charge a nominal sum for approving it.

              I agree that creating different classes of shares and converting or redeeming them becomes slightly more complicated but again you should be able to prepare a draft for approval by your solicitor.

              I agree that building up sufficient funds to cover expenditure is an issue for the RMC to consider and does not need to concern the freehold company,


                I think it unlikely that new purchasers will pay to join the freehold - the lease term is 999 years and the fact it is owned by some of the residents will put their mind at rest and will always think “tomorrow is another day “ and have no passion to buy in

                therefore those founder members need to have a clear reward for the monies they put up to cover the non participators - having either a share class that continues to pay a dividend to them even if they sell up - or loan notes is going to be essential to encourage them to invest


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