When some leaseholders buy freehold, but not all

outtatune

The freeholder of my relative's apartment block has offered the long leaseholders the chance to buy the freehold. There are about 40 flats. Leases have around 215 years left to run.

It seems like a good deal, so there's a good chance that 50%+ will accept, but not everyone.

If everyone were to take part they would presumably extend all the leases and reduce the ground rent to a peppercorn for everyone, but how does it work when some people own a share of the freehold company and some don't?

So for example, would they still collect ground rent from everybody but then immediately credit back participants ground rent against their service charge? Or run two different sets of leases, one for participants without ground rent, one for non-participants with ground rent? Or something else entirely?

It's really hard to get me head round how it work in practice

gm0

It's an undesirable situation vs all buying into share of freehold.  But it happens.  The existing leases continue as is.  And cannot be unilaterally altered by the SoF.  All the existing restrictions and rights and obligations remain.

Clearly those lessess don't get a SoF vote.  And this complicates "residents association" discussion. As they still need to be handled by the SoF/MA as though the situation was as before.  Keeping this "inclusive" yet professional - makes an already torturous process (running an SOF) harder depending on numbers and the split.

Many SoF don't touch leases as this costs money - per lease - to execute it. And it opens the what else shall we alter pandora's box.   SoF owners are also lessees and will be paying in to pay for things anyway according to shares anyway. So the line item on which the payment is made matters relatively little.   There are situations - escalating ground rents etc. where change in perspective / mortgageability etc. make lease modification more desirable.

outtatune

Thank you @gm0 that makes sense. So I guess then that unless there's a compelling reason otherwise, keep leases as they are until they need to be extended anyway, by which time presumably there'll be a completely new way of managing this kind of thing!

eddddy

outtatune said:

So for example, would they still collect ground rent from everybody but then immediately credit back participants ground rent against their service charge? Or run two different sets of leases, one for participants without ground rent, one for non-participants with ground rent? Or something else entirely?

I think that many people would suggest something like this as being the cleanest, fairest and most tax efficient...

• A company is created to own the freehold

• The people taking part in the freehold purchase each lend a chunk of money to the freehold company, to cover the purchase price. They become shareholders in the company.

• The people taking part in the purchase have their leases changed/regranted to extend them to 999 years, and their ground rent reduced to zero

• The people who don't take part don't have their leases changed, and continue to pay ground rent, and pay for lease extensions (at the market rate)

• The money collected from ground rent and lease extensions is used to repay the loans made by the people who took part in the purchase (i.e. the shareholders)

• (Once the loans are repaid, any further ground rent or lease extension money is paid to the participants/shareholders, and is taxable as income.)

Is this an 'informal' offer being made by the freeholder, or is it a formal 'section 5' notice?

If it's an informal offer, have you checked that it's for a fair price?

outtatune

Thank you @eddddy that's very helpful.

I think it's been offered to the leaseholders as the current freeholder has agreed to sell to another party, but I will check.

eddddy

outtatune said:

I think it's been offered to the leaseholders as the current freeholder has agreed to sell to another party, but I will check.

That sounds like a formal 'section 5' notice.


In simple terms, it should mean that

• Somebody (an investor?) has offered the freeholder £x for the freehold.

• The law says that the freeholder must give the leaseholders "The Right of First Refusal" to buy the freehold for £x.

• The thinking is that if an investor has freely offered to pay £x for the freehold, that's probably a fair price.

(But there's a possibility that the freeholder is tricking you - the offer of £x from an investor isn't legitimate. It's just a ploy to get the leaseholders to pay £x, but the freehold is really worth much less than that.)

It might be worth getting a valuation for the freehold, to make sure the price is sensible.


See: https://www.lease-advice.org/advice-guide/right-first-refusal/

gm0

I largely agree with what @edddy is suggesting. 

However I would still add that "complexity" generally and  "different treatment" (even if entirely just and legal for the flow of events - paying into purchase and not) has to practically and operationally survive changes of SoF directors, leases being reassigned, new residents arriving having deliberately failed to understand or accidentally misunderstood or even having been misled at purchase (caveat emptor) - about the nature or details of the arrangement by EA/prior leaseholder. A poor management pack etc. Legally the situation may be fine.  But the SoF has to operate it and sustain the ability to do so.

Even with unmodified leases and the simplest possible setup with 100% participation - this can be painful in terms of what residents "believe" vs "what actually is".  And once you get into legal consultations and formalities then you may have already fallen off the horse in terms of unwanted hassle and expense

When first acquring the SoF and appointing your first agent - you are reliant on any prior freeholder MA meanwhile.  Which may not be contractually scoped, willing or able to do things which you want - or take direction and do them as you would wish.

outtatune

Thank you all. It is a section 5 and it seems that they were previously offered the freehold at more than 3x the price and ignored it.

Current offer is equal to about 7 years of ground rent and less than the cost of a single lease extension (as things currently stand, and not counting legal costs etc) so they're very tempted. 

They will of course get a proper valuation/legal advice before committing.

eddddy

outtatune said:

Current offer is equal to about 7 years of ground rent...

That does sound cheap. But they'll be a bunch of legal fees on top.


One very fundamental thing to investigate is the freeholder's responsibilities within the lease, because the new freehold company will take those over.

Perhaps the first thing to check is whether the lease is between 2 parties or 3 parties.

2 party lease:

• 1) Freeholder (who is typically responsible for managing the building, but might hire a managing agent to do that)
• 2) Leaseholder

3 party lease:

• 1) Freeholder (who typically has little or no responsibilities for anything) 
• 2) Management company  (who is responsible for managing the building)
• 2) Leaseholder
  

As you can probably imagine, if it's a 2 party lease, and the freeholder is responsible for insuring, maintaining, and repairing the building, plus collecting service charges, plus following legal requirements - that might be a major task for leaseholders with no relevant experience.

I guess you'd probably want to hire a managing agent to do all that for you.

outtatune

Thank you. I think it's a 3 party lease; I'd expect them to continue to use a managing agent if they do go ahead.

eddddy

outtatune said:

Thank you. I think it's a 3 party lease; I'd expect them to continue to use a managing agent if they do go ahead.

Just to clarify - if it's a 3 party lease, the management of the building will (typically) be nothing to do with them.

They don't get to choose whether or not to use a management company.

The current management company will (probably) just carry on doing what they do at the moment. The leaseholders/joint freeholders will have no new powers to tell the management company what to do, or to change the management company.