Freeholders vs Leaseholders (when they're the same people!!)

Retro82

Hello wonderful experienced people who always seem to be able to help me!

We are in a block of 7 flats and three years ago we all purchased a share of the freehold. Because there were more than 6 flats we actually own a share in the limited company that was set up to own the freehold.

Not much happened until a year and a half ago when I took on a more proactive role and set up regular monthly payments to cover cyclical works and organised a survey to establish what major works were needed.

I began to get quotes and the major works came to around £100,000 (which was more or less as expected) and we had a meeting and voted to go ahead in principal with these sums in mind(though we hadn't chosen a contractor at this point) so I began to get things moving.

A particular resident who always refers to the company as though they don't make up 1/6 of it has now somewhat backtracked, saying the company (us) should not ask the leaseholders (also us!) for the money as it (us) had a responsibility to make sure these funds were in place! He is saying the company should take out a business loan to pay for it. I'm sensitive to the fact that his circumstances may have changed and that's the real motive here. But I think he's wrong?

I've looked at the Section 20 notice that would be sent to leaseholders (this is particularly important because one resident is still just a leaseholder) and it seems that so long as you give proper notice, there isn't any specific limit to the sum.

Freeholders obviously would usually have a responsibility to maintain the building and it'd be sensible to build up a sinking fund (which I've started to do) but I don't think we could have been expected to build this up in the space of <three years.

I'm not even sure if we'd get a company loan as we're obviously not a for-profit business, the company exists solely to own and manage the freehold. Plus the problems really predate our owning the freehold.

Anyway, it's really frustrating as it felt like we'd all agreed and now someone
is causing more delays. Would REALLY appreciate some advice!

THANKS

Hoploz

I hope you didn't pay much to buy the freehold. It sounds as if the previous freeholder could see what was gong to happen and scarpered in time.

What was the state of the accounts when you took over? Presumably you'd all been paying service charges, so do you have the accounts which show the income, outgoings and any surplus or deficits?

I am wondering whether when you began taking an active role, you knew what was going to happen - you took the time to get your head round it - but perhaps not everyone did and just nodded in agreement at the time, thinking it'd never happen.

This is a lot of money for anyone to have to find. Would it be possible to carry out some of the repairs but not all in the same year? So the costs could be spread out?

eddddy

Presumably your leases say that the freeholder is responsible for whatever maintenance/repairs you are planning - and that the leaseholders must each pay their share to the freeholder.

(But bear in mind that Leases don't usually allow freeholders to charge leaseholders for improvements - only maintenance/repairs.)

So you have to start off with a section 20 consultation - unless everyone voluntarily agrees to pay their share.

As long as the s20 consultation is done correctly, every leaseholder is legally required to pay their share. So there's no need for the freeholder to take out a loan.

Hoploz

What happens if people don't have the money to pay it though? Does it mean the work cannot go ahead, as surely the full amount cannot then be paid to the contractors

G_M

You need to think of the leaseholders, and the freeholders/company shareholders as seperate legal entities.

Yes, by the sound of it 6 of you are both. That is you each have two hats. One leaseholder hat and one shareholder hat. But you cannot wear both hats simultaneously!

So when the 6 of you hold a shareholders meeting, and reach an agreement (which should be formally minuted), you are wearing your shareholder hats. (I've excluded the 7th flat owner who I gather did not buy into the freehold company).

The Company (or rather the appointed company secretary) then writes to each of the 7 flat owners, 6 of whom take off their shareholder hats and join the 7th to all put on their leaseholder hats to read the letter.

Taking out a loan is a bad idea. You, as the active company representative, will spend years trying to reclaim the money from the leaseholders. It's inevitable. One or more will find excuses, want to pay in annual installments, or whatever. Nightmare.

Meanwhile the loan will be wracking up interest payments.

Get the money in before work starts. It's a lot of money (which you seem relatively blase about!). Is there no sinking fund held by the company?

If not, and if the work is not urgent (what are the works?), could you postpone it for several years and build up a sinking fund?

eddddy

Hoploz wrote: »

What happens if people don't have the money to pay it though? Does it mean the work cannot go ahead, as surely the full amount cannot then be paid to the contractors

Most freeholders would collect the money before the work started.

If some leaseholders have the money, but are refusing to pay - the freeholder can take legal action to get the money.

If the leaseholders genuinely don't have the money - I guess it becomes a moral question about how you proceed. In theory, the freeholder can start a process to repossess the flat and sell it, to raise the funds.

If selling the flat, and paying off any mortgage, does not leave enough funds - the leaseholder is effectively bankrupt.

AdrianC

Retro82 wrote: »

A particular resident who always refers to the company as though they don't make up 1/6 of it has now somewhat backtracked, saying the company (us) should not ask the leaseholders (also us!) for the money as it (us) had a responsibility to make sure these funds were in place! He is saying the company should take out a business loan to pay for it. I'm sensitive to the fact that his circumstances may have changed and that's the real motive here. But I think he's wrong?

Where on earth does he think the money to repay this loan will come from?

Retro82

Hoploz wrote: »

I hope you didn't pay much to buy the freehold. It sounds as if the previous freeholder could see what was gong to happen and scarpered in time.

What was the state of the accounts when you took over? Presumably you'd all been paying service charges, so do you have the accounts which show the income, outgoings and any surplus or deficits?

I am wondering whether when you began taking an active role, you knew what was going to happen - you took the time to get your head round it - but perhaps not everyone did and just nodded in agreement at the time, thinking it'd never happen.

This is a lot of money for anyone to have to find. Would it be possible to carry out some of the repairs but not all in the same year? So the costs could be spread out?

Thank you for replying!

We had a survey carried out before buying the freehold and the maintenance required was taken into account (the previous freeholder was an individual who never set up proper monthly service charges. We are now (and this does include a sinking fund) but this is only in the past 18 months that I started running things.

I'm looking to spread out the work as much as possible but the cost of scaffolding makes it a false economy to pay for that more than once.

Retro82

G_M wrote: »

Taking out a loan is a bad idea. You, as the active company representative, will spend years trying to reclaim the money from the leaseholders. It's inevitable. One or more will find excuses, want to pay in annual installments, or whatever. Nightmare.

Meanwhile the loan will be wracking up interest payments.

Get the money in before work starts. It's a lot of money (which you seem relatively blase about!). Is there no sinking fund held by the company?

If not, and if the work is not urgent (what are the works?), could you postpone it for several years and build up a sinking fund?

Thank you for replying! No I'm not blase, I'd just done my research knew what the amount would be and was prepared for it (we may well be taking out a personal loan to cover it but that's our own business as leaseholders).

The works are mostly what ought to have been cosmetic maintenance but have tipped over into more major works because the previous freeholder did very little - he also never built up a sinking fund. As mentioned elsewhere, the price of scaffolding alone makes it a big cost.

Retro82

adrianc wrote: »

where on earth does he think the money to repay this loan will come from?

thank you!

Retro82

eddddy wrote: »

Most freeholders would collect the money before the work started.

If some leaseholders have the money, but are refusing to pay - the freeholder can take legal action to get the money.

If the leaseholders genuinely don't have the money - I guess it becomes a moral question about how you proceed. In theory, the freeholder can start a process to repossess the flat and sell it, to raise the funds.

If selling the flat, and paying off any mortgage, does not leave enough funds - the leaseholder is effectively bankrupt.

Yes, as much as I am able to 'change hats' between being the freeholder and the leaseholder, the fact that we are both in this case does mean we can take personal circumstances into account before proceeding.

What he seemed to be implying was the freeholder was obligated to take out a company loan to pay for the works for failing to make sure there was £100,000 sitting in the bank ready!

I understood that the directors (us) propose the works and the shareholders (us) vote, and then ask the leaseholders (us) to pay for it.