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

GoodbyeFalcon

My advice;

- The Directors of the Company have a fiduciary obligation to act in the best interest of its shareholders.
- In this case the Shareholders; interest in the company is in respect of the freehold of the building (held through shares in the company).
- The Directors running the company therefore have an obligation to ensure the freehold estate is kept in good condition to optimise and maintain value of the asset
- Where this is complicated is that the company's sole source of income (assuming no ground rent) is from levying residents' contributions on leaseholders (which also happen to be shareholders). A conflict of interest exists, so there must be a balance struck between maintenance of the freehold asset and cost to leaseholders.
- In regards to your dear friend, the company has no obligation to raise finance, and in fact (i) a Bank would be unlikely to lend to a residents management company, even with a mortgage over the freehold as if there is peppercorn rent and long leases there is little value in the title and no source of guaranteed cash flow to repay the loan (ii) such a loan may require a special resolution of shareholders given raising finance is likely outside the normal remit of the company (running the freehold)
- I would imagine (you need to check your company articles, and probably take some legal advice) that a majority vote of Directors would allow the freehold company to go ahead with works and then levy this charge pro rata between residents, which would have a legal obligation to make payment.
- However, you of course need to be mindful of the financial position of residents. Imagine if you were having cash flow issues and someone knocked on your door for £10k+! I think a concept of reasonability applies where you should give plenty of notice of such as charge and allow residents a window to write formal written objections to the company and state the basis of doing so.


Source: 10yr+ corproate banker. Director in Residents Management Company.
Disclaimer: I am about to ask a dumb question in the forums!

Retro82

Thanks everyone.

Broadly speaking the deal is:
The freeholder is responsible for maintaining the building, grounds etc.
The leaseholder is required to pay for said maintenance

GoodbyeFalcon

Retro82 wrote: »

Thanks everyone.

Broadly speaking the deal is:
The freeholder is responsible for maintaining the building, grounds etc.
The leaseholder is required to pay for said maintenance

Yes, but if you have the potential for a £10,000+ dispute on your hands I advise that you at least make sure that any decision the company takes to do extensive and costly works is clearly documented in writing and signed/agreed by Directors. You may find that such works could constitute a requirement for a "Unanimous Decision" under your company articles, in which case a dissenting Director could block the works.

The company only has the right to make leaseholders pay for the works insofar as it abides by its own governing documents and that of the leasehold agreement it has granted to the leaseholders.

Retro82

GoodbyeFalcon wrote: »

Yes, but if you have the potential for a £10,000+ dispute on your hands I advise that you at least make sure that any decision the company takes to do extensive and costly works is clearly documented in writing and signed/agreed by Directors. You may find that such works could constitute a requirement for a "Unanimous Decision" under your company articles, in which case a dissenting Director could block the works.

The company only has the right to make leaseholders pay for the works insofar as it abides by its own governing documents and that of the leasehold agreement it has granted to the leaseholders.

I think I'm ticking all the boxes so far. The works are all maintenance and not improvements and these are based on a survey that was conducted (so it's an objective view of what needs doing).
I got quotes from contractors based on the survey and these were the figures I quoted at our meeting. We all voted to go ahead with the works based on these figures (and this was documented). It's only subsequently he has backtracked. Our articles state the decisions can be by majority and there is nothing that excludes this.

Even if he lost the vote he would still have all the usual rights any other leaseholder would have in this situation (although they seem to be few!).

Soundgirlrocks

Hi OP,

Didn't want to read and run. I'm in a similar position, having taken over as director of our company following bad management, we are looking at a similar amount in terms of repairs the building although we are in the fortunate position on having an asset we can potential sell (although that is another can of worms!) Have you go a management company helping you? I've found ours invaluable they deal with the legal aspects, collecting moneys filing accounts and if needed providing the legal clout with difficult leaseholders. Ive done all the section 20 notices myself (there are some templates online that can be adapted)

We also looked at a loan as none of the leaseholders had the money needed for repairs (before deciding to sell off the garden) but as others have said its a can of worm and you will struggle to find anyone who will lend to you.

[Deleted User]

we are 6 equal shares in a freehold jointly held area. We set up a management company, registered at companies house, each household at that time provided one director of this company. Over time one person left, his share was transferred but the new owner chose not to become a director. We have an agm open to all shareholders and any decisions or queries are openly circulated. Decisions will be taken by the directors and each shareholder will be issued with a service charge.

Sounds like the op is not understanding the formation and obligations of a management company. 7 properties, has he asked these 7 owners to become directors? Have they appointed a chairperson, secretary and treasurer. Decisions should be taken jointly by the directors. We have an agenda and minute all meetings. I don`t think that the op is doing this in the correct way, he needs to step back and get the management company up and running first. It will also protect him personally

Retro82

kittie wrote: »

we are 6 equal shares in a freehold jointly held area. We set up a management company, registered at companies house, each household at that time provided one director of this company. Over time one person left, his share was transferred but the new owner chose not to become a director. We have an agm open to all shareholders and any decisions or queries are openly circulated. Decisions will be taken by the directors and each shareholder will be issued with a service charge.

Sounds like the op is not understanding the formation and obligations of a management company. 7 properties, has he asked these 7 owners to become directors? Have they appointed a chairperson, secretary and treasurer. Decisions should be taken jointly by the directors. We have an agenda and minute all meetings. I don`t think that the op is doing this in the correct way, he needs to step back and get the management company up and running first. It will also protect him personally

Sorry if I oversimplified but we do have a management company in which each resident (bar one who remains just a leaseholder) has a share. Each shareholder is also a company director. Of these directors we have a chairperson, a treasurer and a secretary (although these are roles that aid organisation, they are no more or less responsible than any other director). Proposal are discussed and put forward by the directors (us) which are voted for by the shareholders (also us, and our company articles allow for a majority decision to be made) at meetings which follow and agender are minuted and recorded.