Bought building's Freehold, incidentally becoming flat below's landlord.

NorthernSt4r

2 converted flats in a Victorian building owned by the Council. Hoping to avoid future overpriced major works, I asked to buy the freehold. I thought it would be 50%, then the other leaseholder chose not to participate, yet encouraged me to buy 100% (also wishing to avoid the dreaded council's overpriced major works). Somehow I've become someone's landlord, and I don't even know where to start regarding billing service charge to the other flat. It appears I don't need to involve the taxman, as one doesn't make a profit from this as such. I found building insurance matching our previous cover (quite an odyssey, as "block of flats" insurance is very non-standard, I find). I don't favour setting up a company because it doesn't seem compulsory, plus I can't initially see the benefits in exchange of moneys towards this (I also feel I should be able to manage a 2nd flat, already managing one). Overall I'm on good terms with my neighbour. I aim to bill following a similar trajectory (inflation increase) to previous years. During my research, I discovered the concept of "sinking fund". As the building insurance I found for the same cover is cheaper than what the council charged us, instead of lowering monthly D/D, I'm contemplating the idea of using the surplus to create this sinking fund (it's a Victorian building from the late 1800s, so repairs are never too far). The council even charged us a random fee for "account's management". Fire checks are easier, I guess, as I ask a professional every year, pay them, then share the bill. Again, the council did charge for communal areas maintenance, but we have separate entrances, so there's only the small green space front of the building where the bins are, so unsure how much money should be devoted to maintaining this modest area.
With this in mind, I wonder how to do all this while operating within the relevant legal frameworks. How to charge fairly but wisely. In an ideal world, I'm hoping to produce a Word document at home once a year, showing their share of the building insurance, fire checks, maintenance, repairs (if any), and possibly the sinking fund contribution.
Thanks in advance!

* Do I renew my own lease (fairly new)? What do I do when they come for their own lease renewal (88 years left, I understand)?

eddddy

If you're on good terms with your neighbour, the easiest approach is probably asking your neighbour to make ad-hoc payments voluntarily (ideally in advance), as and when costs arise.

For example, you might send emails to your neighbour saying things like…

• "I've got a quote of £850 for next year's insurance. If you're happy with that, please reply confirming your agreement, and transfer £425 to my account, and I'll arrange the policy."

• "The electricity bill for the communal areas is £60. Please reply confirming your agreement to pay £30, and transfer £30 to my account, so I can pay the bill."

• "As dicussed with you, I've got a quote for £800 for repainting the outside of the window frames, please reply confirming your agreement, and transfer £400 to my account, and I'll instruct the painter"

(For legal reasons, it's important that your neighbour tells you that they agree to each payment.)

If not…

If I was your neighbour, I might be very uncomfortable about paying you, say, £100 a month, and/or letting you hold a few hundred pounds of my money in a sinking fund operated by you. I might wonder:

• Would you use my money for frivolous projects, like a water feature in the garden?
• Would you use my money to pay off your gambling debts?
• Have you ever been convicted of fraud?

But if you really do want to do stuff like charge an estimated monthly service charge, or build up a sinking fund - or if your neighbour refuses to pay their share of the bills…

… then you have to do everything 100% properly. So you'd need to read and understand every detail of the leases, and read and understand a whole pile of leasehold legislation.

If you don't do everything 100% properly, your neighbour could take you to tribunal, and you could be instructed to refund big chunks of service charges. Which might leave you hundreds, or maybe thousands, of pounds out of pocket.

elsien

i’m the opposite. I don’t think the sinking fund is such a bad idea. And if the neighbour was so worried about what the money would be spent on they might have gone for the 50-50 option themselves.

if the neighbour gets into difficult financial circumstances, it’s better to have a bit of a buffer than suddenly land them with a bill for a few 100 quid. Or more.

YBR

Definitely have a sinking fund, separate account, IMO.

You might set a ceiling amount at which you stop adding to it, and base that on big ticket item(s) that would not be covered by insurance (e.g. a new roof owing to age, rather than because a storm took it away).

Start reflecting on what categories of work you'll need each year (e.g. bills, insurance), every few years (gutter clearance or Quinquennial survey perhaps), and maybe on longer cycles (windows, roof?).

eddddy

elsien said

i’m the opposite. I don’t think the sinking fund is such a bad idea. And if the neighbour was so worried about what the money would be spent on they might have gone for the 50-50 option themselves.

if the neighbour gets into difficult financial circumstances, it’s better to have a bit of a buffer than suddenly land them with a bill for a few 100 quid. Or more.

In which case, the OP would have many more legal hoops to jump through. As you can imagine, the law is strict about freeholders 'looking after' other people's money ( a bit like a bank does).

Things the OP would have to deal with include:

• Reading the lease to see if it allows contributions to a sinking fund

• Keeping the sinking fund in trust an a separate bank account (e.g. to make sure it is protected if the OP goes bankrupt)

• The OP should make it clear to the leaseholder what the reserve fund will be used for

• The OP should also be prepared to justify the sinking fund payments at a tribunal…

• … for example, the OP might say to a tribunal "I have a survey report saying that the roof will need refurbishing within the next 5 years. The estimated cost is £10,000 (i.e. £5,000 per leaseholder). So I am collecting £1000 per year from the leaseholder for the reserve fund, for the next 5 years"

• If the OP can't provide reasonable reasons for the leaseholder to pay into the reserve fund, the tribunal might order the OP to pay it back to the leaseholder

But having said that, the leaseholder can voluntarily agree to pay money into a reserve fund, and therefore avoid all the above. But maybe it should still be made 'crystal clear' in writing what the reserve money will be used for, to avoid arguments later.

If I were the leaseholder, I'd prefer to put the £1000 a year into a savings account in my name, which I control - and then withdraw the £5000 in 5 years time to pay for the roof refurbishment.

If the OP really wants to go down the 'reserve fund' route, it might be best to get advice from a solicitor first.

eddddy

.

…. Just another thought . You mentioned:

elsien said

if the neighbour gets into difficult financial circumstances, it’s better to have a bit of a buffer than suddenly land them with a bill for a few 100 quid.

But what if the OP gets into difficult financial circumstances? And is tempted to take money from the reserve fund?

It's easier for a freeholder to take enforcement action against a non-paying leaseholder, than it is for a leaseholder take action against a dishonest freeholder.

Albermarle

If I were the leaseholder, I'd prefer to put the £1000 a year into a savings account in my name, which I control - and then withdraw the £5000 in 5 years time to pay for the roof refurbishment.

That would probably be the ideal scenario, but not everyone is so disciplined.

But having said that, the leaseholder can voluntarily agree to pay money into a reserve fund, and therefore avoid all the above. But maybe it should still be made 'crystal clear' in writing what the reserve money will be used for, to avoid arguments later

So the OP needs to talk to the leaseholder about starting a sinking fund and being open about all the potential issues discussed above. Then if they are happy, a sinking fund would probably be a good idea, although probably best it is not too large - maybe £3,000 max ? The OP could show the leaseholder a bank statement from time to time to show it was not being spent on other things.

eddddy

If I were the leaseholder, I'd prefer to put the £1000 a year into a savings account in my name, which I control - and then withdraw the £5000 in 5 years time to pay for the roof refurbishment.

That would probably be the ideal scenario, but not everyone is so disciplined.

But having said that, the leaseholder can voluntarily agree to pay money into a reserve fund, and therefore avoid all the above. But maybe it should still be made 'crystal clear' in writing what the reserve money will be used for, to avoid arguments later

So the OP needs to talk to the leaseholder about starting a sinking fund and being open about all the potential issues discussed above. Then if they are happy, a sinking fund would probably be a good idea, although probably best it is not too large - maybe £3,000 max ? The OP could show the leaseholder a bank statement from time to time to show it was not being spent on other things.

That sounds a bit strange. That suggests that the leaseholder would be thinking…

"I don't trust myself to be disciplined and put money each month/year into a savings account. So I'll voluntarily ask the person upstairs to look after the £3000 for me instead.

Even though I probably know very little about the person upstairs, I'll trust them to look after up to £3000 of my money"

What if the OP promises to show the leaseholder a bank statement from time to time - but then doesn't? (And the leaseholder suspects that the OP has spent the £3000 on a holiday to Florida.)

Then the OP tells some creative fibs about what the £3000 payment was for.

It could get very difficult for the Leaseholder to get the £3000 back from the OP.

If the leaseholder can't trust themselves not to dip into the savings account, maybe they could ask a trusted relative to look after the money, rather than asking the person who lives upstairs.

poseidon1

A sinking fund has legal complications, first and foremost the necessity for it to be held in a separate and distinct trust account for the benefit of the leaseholders. This is a specific requirement of Section 42 ( a) Landlord and Tenant Act 1987 with criminal sanctions for non compliance.

It certainly cannot be held in a secondary account in the freeholder's sole personal name.

Some explanatory links -

https://www.propertypassport.uk/guides/sinking-fund-leasehold-what-it-is

https://building-trust.uk/bank-accounts.html

However, there is a problem with opening trust accounts of this nature with normal high street banks. By and large they are not interested. The few that would offer the service will likely treat it as a business account with monthly fees chargeable.

Should the OP find an accommodating bank, he will have to ensure either no interest is earned on the account or such interest is kept below £500 annually. If the £500 threshold is breached the entire interest becomes liable to tax at the trust rate of 20% ( rising to 22%) and an annual trust tax return must be submitted. The return must either be in paper form or using third party software. Following article explains -

https://barnesroffe.com/insights/april-2024-changes-to-rules-for-interest-earnt-on-service-charge-funds-held-in-a-trust/

All in all, a sinking fund in the OP's circumstance might prove far more trouble than it's worth.

ExEstateAgent

Regarding a lease extension, I don't think you can grant yourself a lease extension! You can grant your neighbour one (for appropriate charges).

Setting up a Freehold company should be easier as the company would grant the extension. Speak to a suitably qualified solicitor for advice.

NorthernSt4r

https://forums.moneysavingexpert.com/discussion/comment/82122550#Comment_82122550

Thanks, very helpful.
The lease does permit the freeholder to build a sinking fund managed on trust. It won't be to fund a frivolous ballroom. It's an old building, high maintenance, so it's fair that all leaseholders pay for future major works, not just whoever buys the flat today, then shortly later a structural something comes up.