Buying & Owning the Freehold-What the Books and Some Pros Don’t Tell You P1

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    Buying & Owning the Freehold-What the Books and Some Pros Don’t Tell You P1

    1 The LEASE advisory service guide is a good primer so I won’t your waste time going over that

    2 Too often valuers, surveyors and lawyers assume that you know roughly what you are doing, and often the latter in particular, simply do the paperwork*
    * some say that is to make them more fees to fix it in the future…..

    3 Too often “You” think you know what you are doing and with confidence and blinkers, deter 2 from, as some say, “complicating matters”

    What I am therefore going to do is deal with
    -the common issues that arise or get missed, and, to be frank, that many buying the freehold have completely the wrong idea about what it is about
    - this primes you and your advisors to think about you, your situation and options

    A Where Do We Start?

    Rather than, as some expect, the leases vanish and you all become share freeholders (no such thing) cooperating over common interests, the freeholder and the freehold is a separate legal entity
    - with considerable contractual responsibilities of its own, and
    - under the leases which are your primary asset and your contract whether you participate or not
    - and both are still subject to landlord and tenant and related law

    Rather than thinking “we are one and the same” which you are not, it is a question of hats.

    My Hat: I own my flat& I have a lease and that is what I own borrow on and sell, and is my contract and sets out the rules
    Team Hat: We, our group or our company, owns the freehold.

    Repeat it a 100 times….and never say share freehold again.

    Who will own the freehold is explained in C below, but “wait for it!” work through the rest first.

    When deciding to buy the freehold, it is important to understand the building, its condition, it’s services, the freehold and the various tenancies (that includes leases) rights and obligations, as well as considerable legal responsibilities from financial, administrative, insuring and health and safety, even employment law, to comply with.
    Tip: Many see this as part of the valuation exercise and conveyancing process, both “for later”, but as they are vital to how you organise yourself and may affect your decision and expectations, it is the first step.

    A1 Tenures: This includes establishing the lease lengths and ground rents, any rental tenancies or other leases for say parking spaces or storage, rights over the land for any adjoining users and vice versa, development rights and any premises that you might want to include in the purchase (referred to in the guide as appurtenant premises). This can get complicated when freeholders want to retain garage spaces, parking is provided off site, HVAC plant e.g. boiler houses, are shared with others, or it is one of several blocks with shared roads drains pumps lighting etc
    Tip: Exercising rights to get a statement of account and inspecting the invoices, or a management audit or surveyor appointment in more complicated schemes, is recommended before proceeding.
    Tip: This will also explain how service charges are currently structured, and especially in complicated schemes, reveal that you may not be free to make the changes you want, how much work this will be, and to prepare for the record keeping that you will need in place beforehand.
    Tip: It will also help predict possible objections to the freehold purchase, or right to manage

    A2 Building Services: Some schemes can be complicated and need careful consideration especially if you share plant facilities and staff. Even in simple schemes ensuring that you identify all the utility meters and ensure that they are being billed, are on actual readings, and can take them over quickly, or who the existing contractors are, is essential. The tips in A1 will also prepare you to find out if some contracts are long term and to which you may be bound, especially rental contracts for entryphones or staff contracts that often fall under TUPE.

    A3 Building Condition: It is vital to understand what needs doing and assess the likely cost and therefore your ability to fund it over time, bearing in mind that not all residents can pay or will without a grumble or fight. Its easy to agree that the freeholder was a rip off merchant, but they may say the same of you when the bills go out.
    Tip: Where the landlord has failed to repair and that has increased the likely scope and cost, there is a legal argument, in extreme cases, that your bill should be reduced at Tribunal. It might be best to force the landlord to do the works and fight the case, before buying the freehold.
    Tip: Rather than the 1993 Act in cases of breaches of the landlord’s covenants or disrepair, the 1987 Act provides an easier and cheaper route to buying the freehold

    A4 Participation: When all the leases and rents are the same and all or most of the owners will participate, it is a relatively simple process, and a simple participation agreement is needed.

    Where there is less than 100% participation, where participation is uneven in the amount that they contribute, leases are of different lengths and have significant values, development values, land likely to be retained by the freeholder, etc, this can be quite complicated and may deter some.

    The participation agreement therefore needs to be in two parts in agreeing to do the initial assessment in A 1 -3 before proceeding to stage two, where the remaining participants go forward knowing “what they are in for”. With that clarity, some who were deterred may sign on.

    Tip: What is overlooked is that your group or company must be structured to reflect this, both to complete the exercise and, irrespective of the complexity or simplicity, to function as a group or company, later on. Too often a “sort it out later “we are only focusing on buying the freehold” approach is taken, and, by then, it is too late and leads to disputes litigation, and, as always, the only people who truly win are those being paid fees (mwah ha ha).

    A5 Frightened Off? Buying the freehold has with it certain cache, however it is often misplaced as share freehold, which doesn’t exist, and you will all still be leaseholders. In fully participating blocks the freehold’s only real advantage is control of your affairs. Where therefore leases are long ground rents modest, and residents stay for few years, it might be sensible to think instead about exercising the right to manage, so that rather than lining the freeholder’s pocket, you gain control and use that cash for the building itself, a holiday, or the winter gas bill…

    B What Are These Complicating Issues?


    Ground Rents; These are often binned for peppercorn rents however the freehold is a substantial asset, and it might be advisable to retain these to keep value in the freehold interest to use it to
    -raise capital or pay for major works
    -a future sale to pay for an unforeseen or extraordinary cost or a loss
    -where the lease does not allow for all expenditure to be recovered especially group or company expenses (see later) as they rarely were drafted with this in mind, the income to pay for them
    -a useful reserve having exiled the deep pocketed freeholder

    Leases and Extensions. It is often believed that that the leases are no longer important, or if not, it is common to hear that their length is irrelevant and if an extension is needed, it will be free.
    Tip: Always extend the leases as part of buying the freehold (unless of they are already 999 years)

    The lease is what you own borrow on and will sell, and any interest in the freehold, see later, is often a small or token amount. Once the freehold is owned by a group or company, it is their, not your or a share of it, your asset.

    Should you wish an extension, they would sell it to you, at full price, even though as a participant you get some of the proceeds, in a bizarre form of cashback. It is argued that you are all in the same boat however some might be happy to have a short lease to leave to their ungrateful relatives, and use your cash for a holiday, or the winter gas bill.

    If there is less than 100% participation, there may be a value to selling lease extensions to non participants in the future. As the landlord’s price will reflect this, the value and therefore contribution might be broken down as follows, as your share of the price
    a Purchase of Freehold
    b Individual Lease Extension
    c Value of Lease Extensions for non participants

    Lets say 7 of 10 participate and 7 make up for the other 3. At some point they will want to be paid back for c out of proceeds and therefore the most common way of doing that is making c a loan repayable from extension sales to the other 3 (more on this in D).

    “I want to buy in”: No 8 may want an extension and/or to buy into the freehold and a procedure needs to be pre agreed as to how they do so, how much they pay and what they will benefit from.

    Where leases need extending, it is best, as above, to separate the price for that from buying in, so that they pay a and b separately. As above they may also buy into c, the right to future income. Income from b, and if applicable, c, is used to repay the loans made by 1 to 7. A typical price would reflect b, a- the share of ground rent income or other asset sales- and c, if they are the 8th person, the proceeds, after loan repayment, for the sale of lease extensions and buy ins from 9 and 10.

    Other Assets. Your company structure may have to manage other income, development rights/potential and or uneven contributions where only a few are prepared or able to do fund these as explained in D. This value m bymeay be reflected as above in a or separate entry d to the example.
    Tip: It is therefore clear that the documentation, as explained below, has to be drafted before proceeding to properly reflect not only how you plan to complete the purchase but manage affairs afterward, as they are, it is now clear, one and the same.
    Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

    #2
    Buying & Owning the Freehold-What the Books and Some Pros Don’t Tell You 2

    C. Who is Going To Own The Freehold?

    As readers may know, mention of share of freehold results in furniture being thrown at you by me, for there is no such thing. But you are smart and will remember the lesson about hats.

    C1. People. The freeholder, lets say, will be Miss A Mrs B Mr C and Dr Doom* in 1 of 2 forms

    -Beneficial joint tenancy - where the four people are a single owner i.e. the freeholder is “Miss A, Mrs B, Mr C and Dr Doom“ and act as one entity. No one has a specific share in the property and therefore you cannot use it ,individually, as security for loan, or transfer it to someone else and when you die, your interest passes to the remaining (three) people.
    n.b. even if the deceased’s interest passes to the other 3, their estate may still be a beneficiary.
    *(he’s really quite a nice chap, once you get to know him, its just the armour hanging out on the washing line every Sunday….)

    -Tenants in common- means the property is as above where the 3 people and supervillian are a single owner, however a specific share of the value is allocated to them, and that can be sold, used as security, and left to someone in a will or otherwise inherited

    So that’s pretty straightforward, or is it? You will all just get along with the same interests in mind, right? The problem comes in decision making and disputes; 24 people have to sign the paperwork when a flat is sold and no one can agree to fix the lift as half live on the ground floor, or don’t mind the stairs. Imagine 600 flats on a modern estate and needing 600 signatures!

    It is crucial to have a partnership deed, or set it out in the transfer of the freehold/ in the leases, or ideally, as the easiest option, a trust deed. This sets out the agreement between you on the purchase of the freehold, the appointment, and accountability, of managing partners or trustees ( so 2, not 24, sign the transfer and do the day to day stuff), the share of the value (no, not the freehold, stop it) as above, and the who and how and when of decisions. It may also name beneficiaries of the trust and distribution of proceeds or liability. In large schemes it is common that trustees are few in number and not as above 600 people. Where disputes arise, it is important to have a form of dispute resolution mechanism if a simple majority is felt to be insufficient.

    Tip: Odd as it may seem, this is essential in blocks with a few flats, especially only two, as, as eggs are eggs, they will someday fall out.

    C2. A Company. The participants have a company and it owns the freehold, while they either own a share in a company limited by shares, or are a member of a company limited by guarantee.

    The issues in C1 apply here as well. While a Companies’ Articles do put in place a good deal of the workings required for decision making, with a few or just two shareholder/members, a dispute mechanism is vital to avoid stalemate and litigation if a vote is tied.

    It is worth looking at the off the shelf articles closely to ensure that they fit your situation, e.g.
    -accountability ensuring that general meetings are called once a year and directors are automatically removed and have to be reappointed
    -that as the majority of income comes from service charge, where the lease may not allow recovery of some expenses, such as the companies own reporting and auditing, insurance for liability or company secretarial services or legal costs, or a loss where an owner disputes service charge and wins, that there is a method to raise income for these purposes and avoid insolvency
    -duties of directors/officers is often overlooked and while standing orders on scope authority and accountability can be put in place, it is worth looking at the standard articles and allowing for either the creation of the “who and when and what” of standing orders or a detailed “ job description”, or a detailed list of duties.

    C 3 Owner Documentation: It is not uncommon that C1 or C2 involve less than 100% participation and for those that do, doing so on an uneven basis. The “owner documentation” (trust deed or articles etc) must therefore reflect that and ensure that it deals with matters such as distribution of income from ground rents, lease extensions sales, loans or share premiums, and cashing out/buying in to the freehold group or company as outlined above. Those who made loans may have loan notes or additional shares in the company or share of the value of the freehold.

    Tip: In almost all instances the use of company is preferred as it is an easily understood vehicle for freehold ownership and for dealing with these complicated issues.


    D Ownership Documents

    Where all participate, particularly in purpose build blocks, the articles or trust deed will normally provide
    -ownership membership or a shareholding, dependant on ownership of a property
    -the automatic transfer of the above when a property is sold (but paperwork still needs done, sorry)
    -it is common for the lease to require that the new owner must join the group or company

    This is the default and most common position, and where it is not, it is advisable to change that. This is to make sure that the
    -owner shareholder or members are the owners, and
    -to avoid a problem where one of the above left some time ago and is not available, or not to be found, to sign paperwork
    -that people who do not own a flat still have as say in your block’s running
    In 100 % cases the overriding purpose of ownership is the management of the building.

    Going back to the complicating issues, it is common to place restrictions on ownership and put in place special provisions.

    Where it is owned by people, a restriction is often placed, and in some cases the default position, on the title to prevent it being transferred by one person. Here the trust deed is essential in dealing with the appointment of new trustees and changing the owners.

    Whether it is owned by people or their company an issue arises where there is significant value and different types of participation. Lets say the participants are faced with a purchase price reflecting compensating the freeholder for lease extensions, the house managers flat, the development potential of the roof or back garden, garage or parking rents etc. All of the participants are happy to buy into the right to receive, or not pay, ground rents and get a lease extension ( a and b as above) but these other items ( c and d as above) are too expensive or long term for them.

    One solution is to grant a head lease of these areas and sell them to others e.g. flat 2 and 3, who can afford their winter gas bill, get together and buy from you, the freeholder to be, a head lease for the house managers flat and charge you rent for it. If your leases don’t include rent to be paid, don’t forget your articles or trust deed must allow for a collection to do so. If it is say parking, then you may find that as the head lessee, flats 2 & 3, are raking it in, the lease should ensure that they pay you a nice little rent as well as a share of service charge.

    What is more common is that some or all of the participants fund this by giving the company or group the money to buy the freehold in return for loans, a larger share of the value or in rare cases, additional shares or different share capital e.g. where everyone gets an A share, and those who put in additional money to fund the lease extensions of non participants are issued B shares and those who put in money for right to develop the roof get C shares. Where a group owns the freehold A B & C contributions would be identified as different beneficiaries, and the trustees directed or structured to manage those accordingly.

    In turn when they sell up and move you have to determine if they remain participants, if the new flat owner has to buy their interest, bearing in mind that can be expensive and from your point of view quite complicated administratively, not to mention leaving some with no vested interest in the block, making decisions about the block.

    Tip That is why loans are the most practical as they remain a liability even after owners move on, and shares in the value or share premiums on B and C shares, a distant second option, as if you require sellers to sell up, the others may not want to buy them out, or a flat buyer not buy in!

    Tip Having done your initial assessment in A above, you can now see why your participation agreement, trust deed or articles need to be drafted at the outset “Don’t try it at home grasshopper” leave it to the trained professionals.
    This got “very technical” didn’t it?! I’d read it again. And hire a lawyer.
    Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

    Comment


      #3
      Buying & Owning the Freehold-What the Books and Some Pros Tell You P3

      E We Are A company/the Freeholders- We can do what we Like.

      This is the number one mistake, and leads to looks of bewilderment and frustration. It is true, as long as your articles say so and it is lawful. However, the group or company is bound by its contracts, the leases. These are binding between the individual flat owner even if they are a participant. They operate within housing and landlord and tenant law and the rights that go with it.

      So for instance
      -the company may decide to do works, however you the lease and the law may restrict what you can do i.e. repair vs improvements, pay for it as service charge as the leases set out, and how you go abut it by consulting if they are qualifying works or contracts
      -it decides that the expensive gym has to go or the head porter issued a gold clock, but if the lease says that they must be provided, unless everyone, under their contracts-leases-agree, it stays

      Can we opt out? You have to consider if the proposal runs contrary to the leases such as removing a service or frustrates rights under a lease such as making parking spaces on grass that they have a right to laze or gaze upon. If not, then in theory, as the maxim goes “that a freeholder must consult if he wants to get his money back”, you might decide not to recover it as service charges. Now if all agree, have understood and have waived their rights as leaseholders, you might feel willing to go ahead with written agreements.

      Tip The problem is that as House says “ everybody lies, some too embarrassed, even too lazy to take a stand or disagree or their financial situation may change, which leads, as the law stands, to the risk that they may dispute the costs as still being a service charge and therefore subject to a cap. On the other hand, in order to get the cash, you may need to prove your case.Either way only the lawyers truly win.


      F Its Yours Now

      Now that you are freeholders you need to serve notice on all the flat owners and anyone else with whom rent, even a peppercorn, or service charge is due. In fact its best to do so on everyone for the avoidance of doubt.

      Ask your solicitor to draft the notices.

      Notices under Section 47 and 48 of the Landlord and Tenant Act 1987 which
      -identifies the freeholder either “Your company limited” or the named parties (one reason to use a company rather than 600 names)
      -identifies your location, not a c/o address or third party (typically a site office or the Chair or Secretary’s home address) and as long as you are there can be anywhere, in the world
      -if that address in not in E & W then IN ADDITION, gives an address in E & W for service of notices
      - and, under section 48 an address for service of notices and proceedings in England and Wales
      The latter two can of course be a third party address such as an agent solicitor or accountant.


      Notice should also be given under section 3 Landlord and Tenant Act 1985 under (1) the new landlord shall give notice in writing of the assignment, and of his name and address, to the flat owners or other tenants not later than the next day on which rent is payable under the leases/tenancy or, if that is within two months of the assignment, the end of that period of two months.
      Under (2) where trustees are the new freeholder, a collective description of the trustees as the trustees of the trust in question may be given as the name of the landlord, and, if so, the address of the new landlord may be given as the address from which the affairs of the trust are conducted

      It might be clear that all the names and addresses are the same Our Company, Flat 3, but I suggest that you fill it out as above for the sake of clarity and not missing anything I what as you can see might be complicated.
      Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

      Comment


        #4
        Quick questions to leaseholdanswers

        As quoted from your eg, 7 out of 10 participate and the 7 pay in for the 3 non participants in the way of a loan. Now one of these 7 wants to sell their flat, how do they get repaid their share of the loan if none of the 3 have not yet extended.

        Do they therefore keep their "share" of the freehold and wait until the 3 extend their lease to recuperate their loan? The buyer of their flat would therefore be only a leaseholder and not entitled to buy into the "company"

        As the cost of the extensions would increase, are the 7 entitled to ask for market value for the lease extension?

        Can they grant a market value statuatory 90 year extension even if they granted themselves 999 year leases?

        What premium would be on top if they wanted to buy into the Company and can the 7 refuse?

        Thanks

        Comment


          #5
          The lender has to wait until the freeholder has the funds to do so. This is the way that you can move on and sell up but still ensure that monies to be repaid have to be repaid in due course. it means keeping an eye on the company and keeping in contact, though the loan agreement should allow for that

          the problem is that if they retain an interest in the company or as one of the named freeholders they are committed to decision making and/or liability, not too mention having a say over matters which they no longer have an interest in unless the DoC or Articles make specific provision as to their involvement. It can also cause issues with it no longer being a close or mutual company. That is one reason why in some cases an intervening head lease is created however that it itself leaves you with being a landlord to the under lessee, who without some nifty legal wording, is one step removed from the freeholder lessee relationship, and has to deal with their superior landlord the head lessee.

          yes they should ask for full market value for the 3 non participants.

          yes they can grant shorter leases or a statutory one.

          Buying into the company is entirely a matter for the company to decide they have no rights to do so, save that they may make it a requirement, stat extensions excepted of course! The price of a buy in, over and above a lease extension, can be anything that they like. Trick or treat, I say!!!!
          Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

          Comment


            #6
            Thanks leaseholdanswers - very informative.

            You make the point that with long leases and modest ground rents then Right To Manage may be a better option. This is something I've considered, although I admit to succumbing to the lure of dispensing with the landlord, however financially illogical that might be. Anyway, back to the point - I seem to recall reading that with Right To Manage you need to set up a company and that you're obliged to invite the freeholder to be a joint owner of that company. Is this the case and if so, is there any way that the freeholder can exert disproportionate pressure? Or is it simply a case of one man (or woman), one vote?

            Comment


              #7
              The freeholder becomes a member and has the voting rights ascribed to them normally one vote per flat and therefore they get one vote even if they have five flats.
              Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

              Comment


                #8
                Thanks for the answers. Would it be possible to ask the buyer to pay back the loan so they end up with the "share" of the freehold tather than the seller retain it.

                I ask as we have 3 out of 5 interested buyers. Their leases are currently 89 years and mine is 160 years. 1 of the leaseholders has no intention of extending the lease or selling for the foresable future so the repayment of that loan will not be forthcoming for many years, if ever. So it does not make financial sense for me.

                Comment


                  #9
                  Yes the buyer and seller can agree to transfer that loan by a cash payment, or part of it can be realised by a lease extension. it all depends how the loans were set up.
                  Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

                  Comment


                    #10
                    I have copied text below in italics from the leasehold advice centres' page third paragraph down:

                    Once all the appropriate sections of the law are in place, the right to enfranchise may THEN only be exercised through a specific `Right to Enfranchise (RTE) Company' which becomes the owner of the freehold & all qualifying leaseholders *are entitled to be members of the RTE Company & it is those members who run & have control of the RTE Company, i.e. effectively controlling the management, running, repairs, maintenance etc. etc. of the building as a whole. Until the commencement of the relevant section of the Act the purchase must be carried out through a Nominee Purchaser who is the person specified in the Initial Notice to the freeholder who will acquire the freehold and become the new landlord. Due to what is known as 'Transitional Arrangements' this can presently be either a lessee, a group of lessees or indeed a management company owned by the participating flat owners.*We can act on your behalf to obtain the specialist independant Valuer's opinion as to the likely premium together with preparation & service of the Notice of Claim upon your Landlord

                    My neighbour and I bought the freehold of our purpose built block of four maisonettes through the CE process about fifteen years ago. This was on a 50/50 share of the value basis as tenants in common receiving profits and proceeds of sale split the same. We had a deed of trust drawn up at the outset. From my lay persons perspective it appears to accommodate for everything kindly laid out here by leaseholdanswers. Although perhaps not relevant to my query here I need to mention that my neighbour passed away last year leaving his 50% interest in the share of the value of the freehold to his two daughters. They are now bound by the terms of the DOT.

                    In view of the copied text I am concerned that there may be current proposals to force freeholders into RTE companies if the legislation is passed. We have a simple structure and as our freehold has no communal areas and the lessees covenant with us the LLs to repair, maintain, cleanse etc and insure the buildings, forming a Ltd company would appear to be a waist of money. Any advice appreciated, thank you in advance.

                    Comment


                      #11
                      Even if the section gets a commencement date, it will not apply retrospectively. Your arrangements will stand and don't need to be changed.
                      Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.

                      Comment


                        #12
                        Thanks ever so much for the prompt reply leaseholdanswers, your expertise is much appreciated.

                        Comment

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