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.
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.
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