Share of Freehold - Beginners guide?

KTF

Hello all, I was just wondering if there was a beginners guide to dealing with a share of freehold property that could be recommended?

The reason that I ask is that the block of flats that I am in is share of freehold but all the management side of things have been passed down on a historical basis from whoever wanted to do it to the next person when the original moved out, etc.

There are 4 flats in the block and the current situation is that noone pays any ground rent on the basis that any bills - painting the outside, communal areas, etc - will be split 4 ways.

Each owner of the flat is a director in the 'management company' and very year the insurance for the communal areas is split 4 ways. In addition a small fee is paid to Companies House every year to cover the company registration and the annual accounts (which never change) are sent to them.

As it has always been this way I was wondering if this was actually the right way to go about it as I didnt live here when it was all set up. Or if there is a better way it should be done?

I have thought about outsourcing the lot to a management company to make things easier but I imagine that will increase the costs for everyone involved so any suggestions would be welcome...

G_M

There are many small blocks that are run in this way. What it comes down to is whether it works or not! Which generally means, is there someone prepared to put in the time involved
* to arrange the insurance and collect everyone's share
* to get quotes for building/maintenanc work etc

If there is, clearly it is cheaper (and often more effective!) than employing a professional management company that will have considerable overheads, and profits, to add to the annual bill.

The problems arise when no one is willing to take on the job, or when there are arguemnts over costs, or one or more flat owner refuses to pay their share.

As an aside, don't confuse 'ground rent' (an annual payment by leaseholders to the freeholder for the privilidge of using the ground!) with 'service charge'( a fee for services like cleaning communal areas, repairing the roof etc).

The only other factor to consider is whether it is a good idea to build up a contingency fund. This would be an additional annual payment (small, large, whatever) that could be set aside and saved for the future. If a major repair is needed (new roof? Re-painting the entire exterior?), you would not then need to persuade each of the 4 flat owners to suddenly find the cash - it would be sitting there waiting.

A relevant factor might be the age/condition of the building. If it is a few years old there may be no need for such a fund. If it is a Victorian conversion in poor state of repair......

KTF

At the moment it is working OK as the current 'chairman' is happy to get the insurance quote each year, send out the paperwork, collect the money, etc. whilst I send the acounts to Companies House online as its cheaper and quicker than via post.

Its a mid-80s built so other than a repaint the building is OK. The issues that bother me at the moment are:

* The current Chairman is elderly and spends more time at his second property than he does here these days.
* The other owner is also elderly and the 2 remaining (myself being one of them) are looking to move in the next 12-18 months so passing it on might be difficult.

I agree that a slush fund is a good idea as there is a tree next to the property that could be an issue. One of the flat owners commissioned a tree surgeon to have a look (unbeknown to the other owners) and paid for the cost themselves mainly because they couldn't get hold of the chairman.

It turns out the recommendation is to have the tree cut down at a cost but the owners who paid for the survey are saying that they don't want to contribute to this as they paid for the survey up front.

I dont mind paying for the work to be done but it would have been nice to know what was going on so I see the best solution as being the consultation cost/4 + the cutting it down cost/4 so it is all 'equal'.

Then after this open a business account in the companies name and have everyone pay into it each month to cover situations like this.

Then I guess if someone sells they get the contents of this/4 as a 'refund' and the new owner contributes instead?

G_M

No. A contingency fund should only be used for work on the building.

If someone sells they do not get their contribution to the contingency fund back.

It is something many buyers look at when assessing a building - has the building got an adequate contingency fund? No? I'll buy a different flat in a better run building!

KTF

OK, noted. The property has been 'ticking over' for many years with no work being needed to be done which is why this has not been an issue so far.

If a contingency fund was set up, would each person be able to access it or would it be in the chairmans name only - i.e. each person pays into it but only 1 person can access it and the rights to access it pass to the next chair person?

G_M

Up to the 4 of you to agree! You're all Directors!

Why not put all 4 names on the account and require 2 signatures for any withdrawal?

Or the Chairman + one other? Or whatever will work best for the 4 of you.

KTF

Good idea on the 2 signatures for a withdrawal. Thanks.

propertyman

KTF wrote: »

Hello all, I was just wondering if there was a beginners guide to dealing with a share of freehold property that could be recommended?

Yes

1: there is no such thing
2 That's right there is no such thing.

Advice can be found here
http://www.arma.org.uk/public/h/dvd_cdrom
http://www.arma.org.uk/public/h/advice
http://www.landlordzone.co.uk/forums/showthread.php?43583-Service-Charge-Residential-Management-Code-of-Practice
http://www.companieshouse.gov.uk/about/pdf/gba9.pdf

All four of you have leases of your flats and it is that the governs what how and when things are done, as well as being the thing that you own borrow on and sell.

The freehold is not shared or owned, expect by a company in which all of you have a share.

Now that company, a distinct legal entity of it's own, can under its Articles do as the company wishes, as long as it is legal and lawful.

But.....

They like any company are constrained by their contracts, in this case, leases, and the surrounding law.

While that you are coincidentally directors and leaseholders it is important to remember that you cannot vary the terms of the lease or waive the various obligations and rights unless everyone agrees.

If say your shares are unequal and fixed under the leases perhaps as a result of floor size, 3 people cannot win in a vote for you to pay more, say 1/4, in this case as, as said, the contract cannot be changed without your agreement.

Otherwise it is a simple majority.

Common sense is the overriding approach but it is easy to comply with the procedures . As House says "everybody lies" and in a recession one must always be aware that an agreement might mask that someone dos not have the finances to to meet that, and can then take advantage of the shortcomings in procedure.

propertyman

KTF wrote: »

At the moment it is working OK as the current 'chairman' is happy to get the insurance quote each year, send out the paperwork, collect the money, etc. whilst I send the acounts to Companies House online as its cheaper and quicker than via post.

Then after this open a business account in the companies name and have everyone pay into it each month to cover situations like this.

Then I guess if someone sells they get the contents of this/4 as a 'refund' and the new owner contributes instead?

Absolutely do not so this.

The timing and calculation of contributions are set by the lease, and set out what can be included. Very few allow for contingency fund and for longer term works such painting they are known as reserve funds or sinking funds, and only collectable if the lease allows.

Any bank account holding those monies must hold them on trust under section 42 and 42 A of the Landlord and Tenant Act 1987 ( see the link to code of practice).

If the Chair is away then I suggest that the initiative is gently taken and decision made by email on a majority vote, subject to my earlier comments..

I assure you that these are simple hurdles easily overcome and often run contrary to any commercial experience you may have, but leaseholders and freehold owning companies have their own distinct legislation that has its own logic.



While you may all agree to

KiKi

We have a three way share of freehold in our property, but haven't even gone as far as setting up a management company. We know each other well, get on well, bought the freehold together. I do all the admin and finances, and the others pay me as and when we need stuff done.

We don't have a contingency fund. But that's not a reflection on a poor set up, as could be implied - it's what works for us. We're all working professionals who have savings to delve into if we needed something big doing.

If one person sold and someone else moved in, we'd have to review this set up. But last time it happened, I met the new 'owners' before the flat was actually sold to them...the old owners wanted to make sure I was happy with them living above me, bless them, and that we'd all get on from a freehold perspective!!

But I would review if new people moved in.

So there are different set ups, and it has to be what works for you, as long as you fulfil your freehold obligations.

KiKi

propertyman

KiKi wrote: »

We have a three way share of freehold in our property, but haven't even gone as far as setting up a management company. We know each other well, get on well, bought the freehold together. I do all the admin and finances, and the others pay me as and when we need stuff done.

I am sorry Kiki but you need to review this before someone moves; we have made considerable fees over the years resolving these problems

You each own a lease which is what you will sell to a buyer. You should ensure that these leases are long enough and ideally a 999year lease would be ideal.

That buyer will want to see that service charge accounts have been produced each year totalling the income for the year, less actual expenses, even if they are not audited.

The three of you are the joint owner of the freehold (not SOF)and you need to put in place a mechanism to transfer that in addition to the lease.

Very often that is forgotten and at the very least the flat vendor should instruct the solicitor to do so as well as transferring the lease to the buyer. No this is not standard practice and will get overlooked if specific instructions are not given.

Given the liaiblity that being a freeholder can bring, we have had cases where a new owner declines to take over the vendors ownership of the freehold, content with a long lease.