Implications of buying a freehold
Discussion
I'm posting this here as I'm hoping that I can get some initial advice about the rules and regs around freeholds.
I own a flat in a purpose-built block with a total of 8 flats. The current freeholder is the company that built the block a decade ago. Currently I pay ground rent of £75pa (this increased last year by 50% from £50 in line with the lease agreement). One of the other flats extended their lease to 120 years a few years back at a cost of £1,600 with a ground rent of £0 presently. I do not think any of the others have done so.
I received notice tonight that the existing freeholder plans to sell. As such they've given notice and we have the right to buy if more than 50% of the lessees agree. The notice seems to be a little unclear and I'm seeking clarification. Here's what it says:
"This notice constitutes an offer by the landlord to dispose of an interest in the property known as <building number & address> being the land comprised within freehold number 'xyz' for £9.250 on the terms set out in this notice. The estate or interest which the landlord intends to dispose of is 'Freehold'."
The notice does not make it implicitly clear whether this is £9,250 for my flat alone, or for the freehold for all eight flats. Looking at freehold calculators online, it seems to suggest that the freehold should be worth in the region of £30-35k based on the remaining leases (89 years for 7 of the properties as far as I'm aware) and the ground rents (again, assuming 7 x £75).
The flats are worth between £160k and £250k and the block is insured for c. £1.6-1.8m from memory.
If the sale price is for £9,250, this works out at £1,150ish per flat which would be a complete no-brainer. As long as four of the flats choose to buy it, we can do so. Where things become a little unclear in my mind is how things would pan out should only four or five want to buy? It's logical that the cost would be split 4/5 ways and the remaining 3 or 4 flats would continue to be charged ground rent and, when they get to it, lease extensions. It also seems logical that when I come to sell my flat, the ownership of my portion of the lease would remain with the flat (and be built into its valuation for sale?). If the freehold is £9,250 for my flat alone, there's no way I could afford to buy it (nor would it seem to be in my interests to do so at that value?).
The current freeholder has no input in the running of the block presently. We have a ltd company set up which handles our accounts and the day-to-day running is done by a managing agent. They currently save us more than they cost, so it's a good thing presently. They also make sure we're legal and complying with the terms of our leases. I understand that this is 'Right To Manage' or 'RTM' from the current freeholder - they've decided to let us do it.
Here are a number of questions rattling around my brain:
1) If four of us buy the freehold, how would we manage this between us?
2) If four of us buy it, what new obligations would we have as owners of the freehold? (I think point 3, below, is relevant to this re. RTM and such?)
3) If the freehold is successfully purchased by another third party company (as per the notice), can they decide to remove the RTM from the limited company? (The company is in good shape with a reasonable reserve fund (£10k) which is growing at around £2k per annum. The largest costs have been interior and exterior redecorations which are to be done every 5 years and are covered by the reserve).
4) If the freehold is successfully purchased by the third party, can the terms of the existing leases be altered by them, vis-à-vis increasing ground rent etc?
5) Could the freehold be purchased by the existing residents' ltd company? Is it possible, and if so, what would the implications be for any owners who did not wish to participate? It would be logical to assume that as the new owner of the freehold, the residents' ltd company could decide not to charge ground rent etc. I think it could become very messy as you might have directors of the company who did not wish to participate but benefit from it - also it would probably require a cash injection from each flat as whilst the reserve fund could afford to purchase the freehold if its value IS £9,250, it would mean that there would be nothing in the reserve fund. Alternatively, service charges would need to rise sharply to rebuild the reserve as quikly as possible in time for the next round of expenditures on things like redecorating etc.
6) The notice seems to only refer to "20 XXXX Road....." (20 being the number of the whole building) rather than "Flat X. 20 XXXXXXX Road...". This, to my mind, seems to state that the cost of £9,250 for the freehold is for the whole building and not a cost per flat?
I've not dealt with this sort of thing before and I'd like to try and understand as much as I can. I'm certain that I/we will need to take legal advice either way but right now I'm trying to work out what the best course of action is. Things are potentially complicated a little by the fact that the owner of two of the properties is the MD of the company that built the block (as far as I'm aware, he sold them to himself - he is listed as one of the co-directors of the residents' ltd company presently although he has never taken an active role in the running of the place. His properties are rented out and it's entirely possible he may not wish to pay to purchase his portion of the freehold from his own company?
Sorry for the very wordy post but I'd like to understand so I can start to work out a plan of action straight away. We have only 2 months to respond, otherwise the purchase of the freehold will automatically go to the third party company by default.
I own a flat in a purpose-built block with a total of 8 flats. The current freeholder is the company that built the block a decade ago. Currently I pay ground rent of £75pa (this increased last year by 50% from £50 in line with the lease agreement). One of the other flats extended their lease to 120 years a few years back at a cost of £1,600 with a ground rent of £0 presently. I do not think any of the others have done so.
I received notice tonight that the existing freeholder plans to sell. As such they've given notice and we have the right to buy if more than 50% of the lessees agree. The notice seems to be a little unclear and I'm seeking clarification. Here's what it says:
"This notice constitutes an offer by the landlord to dispose of an interest in the property known as <building number & address> being the land comprised within freehold number 'xyz' for £9.250 on the terms set out in this notice. The estate or interest which the landlord intends to dispose of is 'Freehold'."
The notice does not make it implicitly clear whether this is £9,250 for my flat alone, or for the freehold for all eight flats. Looking at freehold calculators online, it seems to suggest that the freehold should be worth in the region of £30-35k based on the remaining leases (89 years for 7 of the properties as far as I'm aware) and the ground rents (again, assuming 7 x £75).
The flats are worth between £160k and £250k and the block is insured for c. £1.6-1.8m from memory.
If the sale price is for £9,250, this works out at £1,150ish per flat which would be a complete no-brainer. As long as four of the flats choose to buy it, we can do so. Where things become a little unclear in my mind is how things would pan out should only four or five want to buy? It's logical that the cost would be split 4/5 ways and the remaining 3 or 4 flats would continue to be charged ground rent and, when they get to it, lease extensions. It also seems logical that when I come to sell my flat, the ownership of my portion of the lease would remain with the flat (and be built into its valuation for sale?). If the freehold is £9,250 for my flat alone, there's no way I could afford to buy it (nor would it seem to be in my interests to do so at that value?).
The current freeholder has no input in the running of the block presently. We have a ltd company set up which handles our accounts and the day-to-day running is done by a managing agent. They currently save us more than they cost, so it's a good thing presently. They also make sure we're legal and complying with the terms of our leases. I understand that this is 'Right To Manage' or 'RTM' from the current freeholder - they've decided to let us do it.
Here are a number of questions rattling around my brain:
1) If four of us buy the freehold, how would we manage this between us?
2) If four of us buy it, what new obligations would we have as owners of the freehold? (I think point 3, below, is relevant to this re. RTM and such?)
3) If the freehold is successfully purchased by another third party company (as per the notice), can they decide to remove the RTM from the limited company? (The company is in good shape with a reasonable reserve fund (£10k) which is growing at around £2k per annum. The largest costs have been interior and exterior redecorations which are to be done every 5 years and are covered by the reserve).
4) If the freehold is successfully purchased by the third party, can the terms of the existing leases be altered by them, vis-à-vis increasing ground rent etc?
5) Could the freehold be purchased by the existing residents' ltd company? Is it possible, and if so, what would the implications be for any owners who did not wish to participate? It would be logical to assume that as the new owner of the freehold, the residents' ltd company could decide not to charge ground rent etc. I think it could become very messy as you might have directors of the company who did not wish to participate but benefit from it - also it would probably require a cash injection from each flat as whilst the reserve fund could afford to purchase the freehold if its value IS £9,250, it would mean that there would be nothing in the reserve fund. Alternatively, service charges would need to rise sharply to rebuild the reserve as quikly as possible in time for the next round of expenditures on things like redecorating etc.
6) The notice seems to only refer to "20 XXXX Road....." (20 being the number of the whole building) rather than "Flat X. 20 XXXXXXX Road...". This, to my mind, seems to state that the cost of £9,250 for the freehold is for the whole building and not a cost per flat?
I've not dealt with this sort of thing before and I'd like to try and understand as much as I can. I'm certain that I/we will need to take legal advice either way but right now I'm trying to work out what the best course of action is. Things are potentially complicated a little by the fact that the owner of two of the properties is the MD of the company that built the block (as far as I'm aware, he sold them to himself - he is listed as one of the co-directors of the residents' ltd company presently although he has never taken an active role in the running of the place. His properties are rented out and it's entirely possible he may not wish to pay to purchase his portion of the freehold from his own company?
Sorry for the very wordy post but I'd like to understand so I can start to work out a plan of action straight away. We have only 2 months to respond, otherwise the purchase of the freehold will automatically go to the third party company by default.
Edited by Funk on Tuesday 25th February 22:09
http://www.pistonheads.com/gassing/topic.asp?t=838...
Then have a look at these
http://www.lease-advice.org/publications/documents...
http://www.lease-advice.org/information/faqs/#Righ...
The offer of £9,250 is definitely not for the whole block. The slice for each of the 8 flats wouldn't even cover the ground rent for the remainder of the term never mind the reversionary interest in the lease! If there really is another interested party it's a guessing game what they are willing to pay. The figure you have been presented with looks high to me and could well be an opening gambit by the freeholder hoping to squeeze a better return from you and the other leaseholders.
One thing you haven't mentioned is whether it includes anything for the freeholder's legal costs/valuation fee. Even if it does, bear in mind that you will also need to budget for yours. Get together with the other 5 leaseholders (not the MD at this stage - potential conflict of interest) as there must be a qualifying majority to accept whatever figure is finally agreed upon. You need to find out where they stand as you will all need to sing from the same hymn sheet.
Then have a look at these
http://www.lease-advice.org/publications/documents...
http://www.lease-advice.org/information/faqs/#Righ...
The offer of £9,250 is definitely not for the whole block. The slice for each of the 8 flats wouldn't even cover the ground rent for the remainder of the term never mind the reversionary interest in the lease! If there really is another interested party it's a guessing game what they are willing to pay. The figure you have been presented with looks high to me and could well be an opening gambit by the freeholder hoping to squeeze a better return from you and the other leaseholders.
One thing you haven't mentioned is whether it includes anything for the freeholder's legal costs/valuation fee. Even if it does, bear in mind that you will also need to budget for yours. Get together with the other 5 leaseholders (not the MD at this stage - potential conflict of interest) as there must be a qualifying majority to accept whatever figure is finally agreed upon. You need to find out where they stand as you will all need to sing from the same hymn sheet.
Thanks Red Devil, I'll have a good read up on all the links later on today. The letter from the solicitor handling the sale was incredibly unclear to someone who's never been involved in this sort of thing.
I'm really concerned that I won't be able to afford to buy my part of the freehold should things go ahead and the uncertainty of what powers the new freeholder would have should they be successful in purchasing worries me. After nearly a decade of successful self-management of the building by the owners, we could be about to be folded and taken dry.
I'm really concerned that I won't be able to afford to buy my part of the freehold should things go ahead and the uncertainty of what powers the new freeholder would have should they be successful in purchasing worries me. After nearly a decade of successful self-management of the building by the owners, we could be about to be folded and taken dry.
We lived in a house leasehold by Manchester City Council. £12 ground rent a year, 70 years of lease remaining. When we came to sell, the potential purchaser could not get a mortgage on such a 'short' leasehold, so we had to buy the freehold before we could sell.
Something to consider if you live there for another 10 years you might have to buy the freehold at less favourable terms if you want to sell.
Something to consider if you live there for another 10 years you might have to buy the freehold at less favourable terms if you want to sell.
Sorry don't have time to answer all the points, but I bough the freehold with the other two separate flat owners. I'm currently doing everything admin wise for past 8 years as the other two are useless. I just filed the companies house annual return etc (or we all get fined etc), I just sorted the insurance and as one of them is selling I'm getting bombarded with questions I cant and wont answer from purchasers solicitors. Its a bit of a mare as the other 2 dont pull their weight...but I have more control...and if one of them doesnt stump up cash for a repair etc I can threaten to remove them from the freehold holding company etc.
Its been a learning curve - but I guess you could employ and pay someone (although I failed to find anyone). I gave us all 999 year leases...free too! Top tip is fit in a £150 per quarter from everyone payment for costs/repairs - but if you open a Ltd freehold holding Co bank account you will need accountant and to submit to hmrc and companies house annually. I just do it in a savings account and they trust me. All a bit messy but better than a rip off management company etc
Its been a learning curve - but I guess you could employ and pay someone (although I failed to find anyone). I gave us all 999 year leases...free too! Top tip is fit in a £150 per quarter from everyone payment for costs/repairs - but if you open a Ltd freehold holding Co bank account you will need accountant and to submit to hmrc and companies house annually. I just do it in a savings account and they trust me. All a bit messy but better than a rip off management company etc
Well I and another owner spoke to the solicitors handling the transfer of the freehold; the price is the £9k figure for all the flats together. That makes it a total no-brainer, we'll be buying the freehold without a doubt.
Thanks for the input, actually quite nice to have things resolved in my head so quickly - my concerns about a new freeholder will be null and void.
In response to your comments Brian, we're already running the block ourselves. We have a ltd company set up with each owner as a director. We review our annual service charges which we split roughly 70/30 between current account and reserve account. Any unspent funds in the current account at the end of the year are shunted into the reserve. The managing agent we've appointed have saved us more money than they've cost us so far as well as removing all the hassle around complying with the lease, safety inspections, maintenance and accounts etc. We get a copy of the annual return before it's submitted to sign off. No problems so far in the 9 or so years for which I'm very grateful.
Thanks for the input, actually quite nice to have things resolved in my head so quickly - my concerns about a new freeholder will be null and void.
In response to your comments Brian, we're already running the block ourselves. We have a ltd company set up with each owner as a director. We review our annual service charges which we split roughly 70/30 between current account and reserve account. Any unspent funds in the current account at the end of the year are shunted into the reserve. The managing agent we've appointed have saved us more money than they've cost us so far as well as removing all the hassle around complying with the lease, safety inspections, maintenance and accounts etc. We get a copy of the annual return before it's submitted to sign off. No problems so far in the 9 or so years for which I'm very grateful.
Funk said:
Well I and another owner spoke to the solicitors handling the transfer of the freehold; the price is the £9k figure for all the flats together. That makes it a total no-brainer, we'll be buying the freehold without a doubt.
I'm smacked in the gob. You jammy 
Great result. Have a virtual
on me. In fact to truly mark the occasion, have another. I'm a cautious s-o-b where legal stuff is concerned. Don't take a phone call as gospel. Get the freeholder's solicitor to confirm it in writing. Then they can't claim the paralegal trainee/work experience bod gave you duff info.
Edited by Red Devil on Wednesday 26th February 22:47
Red Devil said:
Funk said:
Well I and another owner spoke to the solicitors handling the transfer of the freehold; the price is the £9k figure for all the flats together. That makes it a total no-brainer, we'll be buying the freehold without a doubt.
I'm smacked in the gob. You jammy Great result. Have a virtual
on me. In fact to truly mark the occasion, have another. I'm a cautious s-o-b where legal stuff is concerned. Don't take a phone call as gospel. Get the freeholder's solicitor to confirm it in writing. Then they can't claim the paralegal trainee/work experience bod gave you duff info.
Edited by Red Devil on Wednesday 26th February 22:47
I couldn't see it was ever going to be £9.250 per flat.
I suspect the £75 per year per flat will be constant for a long time. Was the initial £50 covering the first few years after build to help the company sell the flats?
£75 per flat multiplied by 7 flats (the 8th flat is on a 120 year free period) gives a yield of around 5.5% per year. Less any costs of which there seem to be a few by the sound of things every now and again.
Sometimes you might buy this sort of lease in the hope that people want to extend their lease or buy the freehold in the case of multiple properties. In this case 1 flat has bought a 120 year virtual freehold in the sense that no ground rent will be paid for £1,600. If the remaining 7 flats did the same it would come to £11,200 so you can see where the £9,250 came from.
The maintenance is separate from the ground rent / lease but owning the lease removes the possibility of the lease holder insisting you use a particular management company.
Henry
I suspect the £75 per year per flat will be constant for a long time. Was the initial £50 covering the first few years after build to help the company sell the flats?
£75 per flat multiplied by 7 flats (the 8th flat is on a 120 year free period) gives a yield of around 5.5% per year. Less any costs of which there seem to be a few by the sound of things every now and again.
Sometimes you might buy this sort of lease in the hope that people want to extend their lease or buy the freehold in the case of multiple properties. In this case 1 flat has bought a 120 year virtual freehold in the sense that no ground rent will be paid for £1,600. If the remaining 7 flats did the same it would come to £11,200 so you can see where the £9,250 came from.
The maintenance is separate from the ground rent / lease but owning the lease removes the possibility of the lease holder insisting you use a particular management company.
Henry
Hi Brian, sorry I completely missed your question... One of the other owners in the building used them at another property he owns and recommended them. They seem to do a reasonable job on most things although I have my reservations about a couple of things recently. I recently needed to replace my boiler which required a new flue. I gave the management company notice that there might be minor disruption on that day and they tried to tell me I needed to pay them £85+VAT for 'permission from the freeholder' - permission that the freeholder granted for free directly to me...
Anyhow, it looks like we're going ahead. 6 of the owners of the flats are in agreement which surpasses the 50% threshold and I'm sure the owner of the other two flats will come in once he knows it's going ahead (his company, who built the block, own the freehold. He is looking to sell the freehold to another of his companies so couldn't be 'one of the 50%' until that was a definite).
We'll need to instruct a solicitor to handle things. If we're going in collectively I'm guessing this might make things simpler/more straightforward? Would we be able to use the existing ltd company to purchase, giving each of the flats its slice of the freehold (and apportioning it evenly to each owner/director)? This would probably work best as when a director sells their property, they resign from the company which would mean leaving their portion of the freehold with the property they've just sold.
Basically lots of questions I need to try and understand! WRT to legal fees, would something in the region of £1k be about right for this sort of thing?
Anyhow, it looks like we're going ahead. 6 of the owners of the flats are in agreement which surpasses the 50% threshold and I'm sure the owner of the other two flats will come in once he knows it's going ahead (his company, who built the block, own the freehold. He is looking to sell the freehold to another of his companies so couldn't be 'one of the 50%' until that was a definite).
We'll need to instruct a solicitor to handle things. If we're going in collectively I'm guessing this might make things simpler/more straightforward? Would we be able to use the existing ltd company to purchase, giving each of the flats its slice of the freehold (and apportioning it evenly to each owner/director)? This would probably work best as when a director sells their property, they resign from the company which would mean leaving their portion of the freehold with the property they've just sold.
Basically lots of questions I need to try and understand! WRT to legal fees, would something in the region of £1k be about right for this sort of thing?
Thought I'd pop back and update this thread. New ltd company was set with 4 of the other flat owners and the freehold was successfully purchased late last year. Total cost including setting up ltd co, new bank account, legal fees and the purchase itself came in at ~£2300 each.
Turns out two of the three properties who didn't join the purchase haven't yet extended their leases so we'll likely recoup a chunk of our investment when they come to do so. The third property extended to 125 years about 5 years ago and paid around £4k to the then-freeholder for the privilege...
Next steps for me (and the other four) is to grant ourselves extended leaseholds to 999 years and a peppercorn ground rent. Initial conversations with the solicitors who handled the freehold for us suggests it'll be about £300 so for about £2,600 I think it was a pretty shrewd move.
Thanks to all who offered advice and input - I know far more about freeholds and leaseholds than I ever wanted to now!
Turns out two of the three properties who didn't join the purchase haven't yet extended their leases so we'll likely recoup a chunk of our investment when they come to do so. The third property extended to 125 years about 5 years ago and paid around £4k to the then-freeholder for the privilege...
Next steps for me (and the other four) is to grant ourselves extended leaseholds to 999 years and a peppercorn ground rent. Initial conversations with the solicitors who handled the freehold for us suggests it'll be about £300 so for about £2,600 I think it was a pretty shrewd move.
Thanks to all who offered advice and input - I know far more about freeholds and leaseholds than I ever wanted to now!
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