Leasehold Flats - Self Management

foju2019

Hi all - looking to see if anyone has experience of the following scenario.

Block of 8 leasehold flats. A management “company” was created, I believe between the original owners. Each of the 8 owners have a £1 share in the company. 

The management / admin of this has been handed down between various owners through the years and none of the current owners really understand the responsibilities or function of the company? Communal bills, insurances and repairs are handled jointly and costs shared between the owners so the “company” doesn’t handle any funds. 

Some of the owners are currently progressing a lease extension, and the output of one has resulted in a cheque for a portion of the lease extension fees being sent to the management company.

What should happen with these funds and why were they due? 

Any light anyone can shed on this scenario would be most helpful. 

Thank you.  

eddddy

foju2019 said:

Some of the owners are currently progressing a lease extension, and the output of one has resulted in a cheque for a portion of the lease extension fees being sent to the management company.

What should happen with these funds...  

The lease extension money would be income for the freeholder (i.e. the management company)

The company (i.e. the directors) can decide what to do with the money,  but the usual approach would be to distribute it to the shareholders, as dividend payments.

But the management company might have to pay tax on the income, and the shareholders might have to pay tax on their dividends.

foju2019 said:

... and why were they due? 

From what angle are you asking the question?

A lease extension has value.

foju2019

eddddy said:

foju2019 said:

... and why were they due? 

From what angle are you asking the question?

A lease extension has value.

Thanks for your reply. So the freeholder received their (large) chunk of the leasehold extension fees and a small portion has been issued to the management company. 

The owner if this flat in particular has paid this amount as part of their overall fee so it feels unfair for this to be distributed among the 8 owners. 

The management company has no bank account etc and has never previously handled funds.
i assume the same may happen with the other extensions as they complete. 

I just don’t understand why this company would be entitled to any portion of those fees. 

gm0

Misunderstanding of who owns what with a typical SoF

The company owns the freehold.  And the 8 leaseholders own the company (collectively).  No individual owns a freehold - whole or fractional.

So when the freeholder (the company) extends a lease and is paid the formal consideration for the extension.  This money needs to go from the lessee (extending) to the freehold interest.  The company

What happens after that is up to the shareholders (or delegated to the directors).  It could be held as funds for long term maintenance (sinking fund).  It could be distributed to shareholders (who happen also to be the 8 leaseholders. 

The distribution has to be equal to the shareolders based on them having the same level of ownership.  Who paid it in is of no account.  If freeholder shares are unequal (for some how they got to here reason) then that too would apply.

The fact that 8 (or less) quite often don't bother with formalities - AGMs. Section 20 notices etc. etc.  And just do it (whatever it is this year).  Doesn't make the legals go away.

foju2019

gm0 said:

Misunderstanding of who owns what with a typical SoF

The company owns the freehold.  And the 8 leaseholders own the company (collectively).  No individual owns a freehold - whole or fractional.

So when the freeholder (the company) extends a lease and is paid the formal consideration for the extension.  This money needs to go from the lessee (extending) to the freehold interest.  The company

What happens after that is up to the shareholders (or delegated to the directors).  It could be held as funds for long term maintenance (sinking fund).  It could be distributed to shareholders (who happen also to be the 8 leaseholders. 

The distribution has to be equal to the shareolders based on them having the same level of ownership.  Who paid it in is of no account.  If freeholder shares are unequal (for some how they got to here reason) then that too would apply.

The fact that 8 (or less) quite often don't bother with formalities - AGMs. Section 20 notices etc. etc.  And just do it (whatever it is this year).  Doesn't make the legals go away.

The company I’m referring to do not own the freehold? The freeholder is a separate company to whom we pay ground rent and who have been paid for extension of the lease. 

I don’t have the exact figures but in this example the flat owner has paid ~ 21k to extend lease including about 6k of solicitors fees, ~ 14k to freeholder, and a cheque for -1k has been sent to the management company which is the company with the 8 equal shares. 

I perhaps need to seek advice from someone who can explain it from the start in simple speak as I genuinely don’t understand the purpose of the 8 person share company or what it should do and the responsibilities. 

gm0

If the company doesn't own the freehold. And the money has (correctly) gone to the external freeholder.  Then what you have is a Ltd which was setup at some point.  With a view to doing RTM (right to manage).  And possibly - if all agreed - to purchase the freehold into it using the relevant rules.

In this instance if the 8 are doing the management themselves - having invoked "right to manage" some time ago.  The freeholder would no longer appoint an agent.  And the RTM company directors would need to either "do the work" (meeting all legal obligations of a freeholder as exist, buildings insurance, fire safety, lift contracts - whatever applies here.  Or (larger sites only) appoint an agent themselves.  Still better as can direct priorities

It is possible therefore that the freeholder is "silent" in terms of managing the place because of RTM.  So the legal works were done by a lawyer for the RTM company (acting as managing agent) and this money needs to be repaid hence the 1000.  That's a guess.  But - somebody did the extension paperwork (for both ends of the lease)

eddddy

foju2019 said:

Thanks for your reply. So the freeholder received their (large) chunk of the leasehold extension fees and a small portion has been issued to the management company. 

So you're saying...

• A leaseholder paid the freeholder for a lease extension

• The freeholder paid a chunk of the lease extension money to the management company

If that's correct, the most obvious explanation would be that the leaseholder did a 'Statutory Lease Extension' and management company own a head lease (aka an intermediate lease).

i.e. the ownership structure has 3 'levels', like this:

• 1) Freeholder
• 2) Head leaseholder (the management company)
• 3) Leaseholder - aka sub leaseholder or under leaseholder

Could that be possible?

foju2019 said:

The owner if this flat in particular has paid this amount as part of their overall fee so it feels unfair for this to be distributed among the 8 owners. 

I don't understand the logic here. Why do you believe it's unfair?