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    • Ogriv
    • By Ogriv 26th Apr 18, 7:53 AM
    • 86Posts
    • 39Thanks
    Ogriv
    No sinking fund
    • #1
    • 26th Apr 18, 7:53 AM
    No sinking fund 26th Apr 18 at 7:53 AM
    Hello there

    I'm an FTB on a small budget.
    I'm close to exchange on a leasehold flat.
    It's one of five in a Victorian conversion.
    I'm just reading the contract pack now to check for any problems, and attempting some due diligence.

    The purchase process started in November.
    Since November the freehold actually changed hands - an older couple sold it to a management company and this freehold sale completed in March. The freehold was auctioned in January by the looks of things, and interestingly my vendor offered to buy it (the freehold of the entire building) but the old freeholders turned him down (not sure on what basis - perhaps because he is a tenant? He was offering at the lower end of their price range.)
    The contract pack reports that with the old freeholders, while service charge of 300 per year was collected, there are no records of what it was spent on; and extra costs were paid for on an ad-hoc basis. There is no sinking fund.
    The new freeholder is likely to manage things more formally, and they have indicated that a Section 20 consultation will occur (that's for major works, right?) but they don't say what the works will be for as they are apparently still assessing the building.
    My conveyancer has obtained a retainer from the vendor of 300 to cover any shortfall in the service charge.

    So basically it seems to me that with no sinking fund I am definitely at risk of receiving 20% (my share) of a large bill for major works within weeks of moving in. But then again if I pull out I will definitely lose lots of money (and this wouldn't be the first purchase of mine which has fallen through).

    If I complete there will probably be a large bill soon - if it was much more than a grand I'd have to get a loan to pay it. If I pull out there will be a smaller bill, not the first I've incurred in the last 12 months. I'm tempted to just go ahead and complete, because ultimately perhaps I should just swap the problems of a renter for the problems of a leaseholder and get on the ladder.

    Any thoughts?
Page 2
    • Ogriv
    • By Ogriv 26th Apr 18, 1:32 PM
    • 86 Posts
    • 39 Thanks
    Ogriv
    You can either wait and see what comes up (who knows how long that'll take, and the seller might not be able to hang around for you to decide)
    Spend 1000 on a survey which may be incomplete if they cannot access all areas of the building
    Go ahead and risk a big expense. (Divided between the 5 flats)
    Originally posted by Hoploz
    Cheers!
    I have emailed my conveyancer asking her to find out the nature of the works and the likely costs. Without this info I definitely won't exchange. And if I don't get the info fairly quickly, I'll pull out.
    In theory I'd pay for a structural survey but a) will the surveyor actually access the necessary areas? b) will the freeholder's desired works bear any resemblance to a surveyor's recommendations?
    Risking a big expense: as I say, I can do 1K without a loan; and up to 10K with a loan. Just saving the deposit has almost wiped out my savings, though achieving it has been a testament to the power of frugality. If they want a larger amount of money, I can't do it.

    As for Googling the management company, absolutely! There is no dirt on them online, which is good. I always google everyone involved in a property transaction. Once I found that a potential freeholder had been up in court for connecting his tenants illegally to a public water supply; and their sewerage system consisted of a noncompliant pumping station. Google everyone!
    • InterestedParty2018
    • By InterestedParty2018 26th Apr 18, 5:42 PM
    • 119 Posts
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    InterestedParty2018
    It seems like you have all the necessary bases covered/answered.

    In summary, obtain a likely cost to bring the property to a decent/reasonable standard.(Necessary repairs AND routine preventative maintenance stated in the lease.) Please remember to add likely professional and administration fees and then VAT to get an even more realistic figure.

    Broadly speaking this is what the lesees will be expected to pay. If you cant negotiate this into the sale price and/or pay for it from your own savings, then it may be an option to not proceed as it is unlikely you will be able to fulfil your lease obligations.
    • Ogriv
    • By Ogriv 26th Apr 18, 6:02 PM
    • 86 Posts
    • 39 Thanks
    Ogriv
    It seems like you have all the necessary bases covered/answered.

    In summary, obtain a likely cost to bring the property to a decent/reasonable standard.(Necessary repairs AND routine preventative maintenance stated in the lease.) Please remember to add likely professional and administration fees and then VAT to get an even more realistic figure.

    Broadly speaking this is what the lesees will be expected to pay. If you cant negotiate this into the sale price and/or pay for it from your own savings, then it may be an option to not proceed as it is unlikely you will be able to fulfil your lease obligations.
    Originally posted by InterestedParty2018
    Thanks - I am so grateful to you and others on this board. I don't personally have anyone in real life I can get such advice from, although my conveyancers are great and have won several awards. I'm actually going to use some of the text here to instruct my conveyancer regarding what to find out.
    • Semple
    • By Semple 27th Apr 18, 1:51 PM
    • 133 Posts
    • 90 Thanks
    Semple
    The building needs whatever work the building needs, and that's got to be paid for by the leaseholders.
    Originally posted by AdrianC
    Is this not a prime example of everything that's wrong with leasehold and why they should be made illegal?

    I fully appreciate that in a building of flats that everyone has to contribute to the repairs - no arguments there. But when the freeholder is allowed to collect ground rent/service charges etc etc, and yet escapes a massive bill by dumping it on the leaseholders is quite obviously unfair.

    In a logical world, i would say these costs should fall to the freeholder and then they have to adjust their annual service charges accordingly to build up a "sinking fund".

    Playing devils advocate here, what would happen to the leasehold flats if none of the owners could pool together enough to pay for a major repair? - does ownership then fall to the freeholder?

    Obviously none of the above really applies when the owners also have a share of the freehold. But it seems as in the OP's case that a 3rd party owns the freehold.
    • AdrianC
    • By AdrianC 27th Apr 18, 2:24 PM
    • 18,388 Posts
    • 16,606 Thanks
    AdrianC
    Is this not a prime example of everything that's wrong with leasehold and why they should be made illegal?
    Originally posted by Semple
    Umm, what on earth do you think happens with freehold...?


    The toothfairy fixes your roof for free?
    • Ogriv
    • By Ogriv 27th Apr 18, 8:41 PM
    • 86 Posts
    • 39 Thanks
    Ogriv

    In a logical world, i would say these costs should fall to the freeholder and then they have to adjust their annual service charges accordingly to build up a "sinking fund".
    Originally posted by Semple
    Well in my (the OP's) case the freeholder has just recently changed - an older couple auctioned it off to a company. The lack of sinking fund appears to be because there is not provision for one in the lease - so presumably they are not statutory. And apparently with the service charge, the old freeholder had absolutely no record of how it had been spent. The fact that that can happen is yet another reason to reform/abolish leasehold, I think.
    • eddddy
    • By eddddy 27th Apr 18, 8:59 PM
    • 6,899 Posts
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    eddddy
    The lack of sinking fund appears to be because there is not provision for one in the lease - so presumably they are not statutory.
    Originally posted by Ogriv
    A sinking fund is only really a savings account that all the leaseholders pay into. You can have open own personal savings account, if you want - and call it your personal sinking fund.

    Where sinking funds exist, some people are equally unhappy that their cash is tied up in a sinking fund - and they 'lose it' when they sell their flat.


    And apparently with the service charge, the old freeholder had absolutely no record of how it had been spent. The fact that that can happen is yet another reason to reform/abolish leasehold, I think.
    Originally posted by Ogriv
    If it happened that way, then every single leaseholder and the freeholder must have agreed that they wanted it to happen that way.

    If even just one leaseholder had objected to things being done that way, then the freeholder would have had to keep proper accounts.

    Leaseholders have a huge amount of legislation to protect their rights over stuff like this.
    • Ogriv
    • By Ogriv 27th Apr 18, 9:10 PM
    • 86 Posts
    • 39 Thanks
    Ogriv
    A sinking fund is only really a savings account that all the leaseholders pay into. You can have open own personal savings account, if you want - and call it your personal sinking fund.

    Where sinking funds exist, some people are equally unhappy that their cash is tied up in a sinking fund - and they 'lose it' when they sell their flat.




    If it happened that way, then every single leaseholder and the freeholder must have agreed that they wanted it to happen that way.

    If even just one leaseholder had objected to things being done that way, then the freeholder would have had to keep proper accounts.

    Leaseholders have a huge amount of legislation to protect their rights over stuff like this.
    Originally posted by eddddy
    I'd be happy to set up a personal sinking fund - but I'm not prepared to pay an enormous bill the moment I move in. I just know I'm potentially walking into a financially unsavoury situation - so although I'm checking out the likely Section 20 costs, I'll probably walk away. And all the most vital information has only been revealed to me just before exchange. Sounds like the leaseholders in the property have been very passive.
    • eddddy
    • By eddddy 27th Apr 18, 9:17 PM
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    eddddy
    I'd be happy to set up a personal sinking fund - but I'm not prepared to pay an enormous bill the moment I move in.
    Originally posted by Ogriv
    Yep - so you're right not to buy this flat because it's in a building that needs urgent major repairs.

    You would have the same issue if you bought a freehold house that needed urgent major repairs. You would have to pay an enormous bill shortly after you move in.

    (None of that is really the fault of the leasehold system.)
    • Ogriv
    • By Ogriv 28th Apr 18, 6:36 AM
    • 86 Posts
    • 39 Thanks
    Ogriv
    Yep - so you're right not to buy this flat because it's in a building that needs urgent major repairs.

    You would have the same issue if you bought a freehold house that needed urgent major repairs. You would have to pay an enormous bill shortly after you move in.

    (None of that is really the fault of the leasehold system.)
    Originally posted by eddddy
    I find it frustrating that my surveyor wouldn't give me a full structural survey because I was buying a flat. How is any flat purchaser in that situation able to make a good decision about the building overall?
    And yes, finding out about the Section 20 just before exchange is the fault of the conveyancing system. It's to the benefit of conveyancers, as most people would back out about a week after their offer if such information was available immediately. But instead you go through the whole process, racking up costs. It feels like a scam all round.
    • Ogriv
    • By Ogriv 2nd May 18, 7:00 PM
    • 86 Posts
    • 39 Thanks
    Ogriv
    Hi guys

    I'm the OP and today I heard from the estate agent, who is of course working for the seller.

    This is what she wrote in her email (with key details anonymised):

    "I have had quite a long chat with XXXXXXXX management company about XXXXXXX Road.

    They have confirmed that the annual management charge will be put into a sinking fund moving forward and that a surveyor has been in to see the property but has not filed their report yet and there is no timescale for this. The lady I spoke to explained that they will request the annual interim charge yearly. As well as this, after the 25th December (year end) an invoice would be sent out to each resident with a bill for works taking place. If this figure is in excess of 250 per lessee per annum, they will have to resurvey and look to amend the interim annual charge.

    They are implementing new software over the next few months in order to create the sinking fund and allow for this moving forward as they have no information from the previous freeholder as they purchased the freehold at auction.

    Mr XXXXXX is concerned as he knows that you want to be in sooner rather than later and is doing everything he can to try and secure a timescale but to no avail.

    Please can you confirm how you would like to proceed?"

    To me it looks like she's saying that the new freeholder is about to create a sinking fund.
    There's no info on the scope or estimates of the work, and no timescale for that information.
    An interim charge (does she mean the sinking fund?) will be requested annually.
    At year end an invoice will come for works, but if it were more than 250 per lessee per annum they would re-survey and get the money from the interim charge.

    So I have some questions for you clever people:
    * does she mean that a huge lump sum bill won't turn up?
    * what is an interim charge?

    My solicitor is still waiting to get more info on all this from the buyer's solicitor, so I hope to make decisions based on more than the word of an EA.
    But I am wondering how to interpret what I have heard so far.
    (I am viewing some new properties on Saturday, but have not yet decided what to do about the current one.)

    Many thanks!
    • eddddy
    • By eddddy 2nd May 18, 8:31 PM
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    eddddy
    * does she mean that a huge lump sum bill won't turn up?
    Originally posted by Ogriv
    Nope - it doesn't mean that. If major works (repairs or maintenance) need doing, there would be a section 20 consultation, and you might end up with a big bill.


    This following stuff sounds like the EA doesn't really understand what she is talking about:

    They have confirmed that the annual management charge will be put into a sinking fund moving forward and that a surveyor has been in to see the property but has not filed their report yet and there is no timescale for this. The lady I spoke to explained that they will request the annual interim charge yearly.
    I suspect they mean that they will collect a contribution to the sinking fund annually (at the same time that they collect the service charge).

    * what is an interim charge?
    Originally posted by Ogriv
    I'd guess she means 'provisional charge' (or 'estimated charge'). i.e. They will collect an estimated service charge at the beginning of the year. If it turns out to be an underestimate or overestimate of what is actually spent, they will make an adjustment at the end of the year.

    That is very normal. Almost all management companies work like that.
    Last edited by eddddy; 02-05-2018 at 8:36 PM.
    • Ogriv
    • By Ogriv 3rd May 18, 12:13 AM
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    Ogriv
    Thanks Eddddy
    So I suppose the only good thing is that they are planning a sinking fund.
    I'll wait to see what my conveyancer can discover about imminent costs.
    Thanks so much
    • Mickygg
    • By Mickygg 3rd May 18, 6:55 AM
    • 1,430 Posts
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    Mickygg
    You have these concerns now, don't buy it. Yes losing money to date is so upsetting but pulling out could save you thousands.
    Why is the top floor flat for sale as well? Is not unusual for 2 out of 5 to be for sale but it would make me stop and think.
    • Ogriv
    • By Ogriv 3rd May 18, 7:49 AM
    • 86 Posts
    • 39 Thanks
    Ogriv
    Thanks Mickeygg
    I think if my solicitor can't get some kind of ballpark figure for imminent costs I'll pull out. I do have lots of new property viewings lined up for Saturday. I think in a week I'll have a better idea what I'm doing.
    Speaking as a previously nave potential leaseholder, while you can always be hit with a large bill, certain types of properties make it more likely.
    • BBH123
    • By BBH123 3rd May 18, 8:31 AM
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    BBH123
    Leasehold is always a risk because you can be hit with large bills at anytime and have no control over them, don't believe the gumpf about Leaseholders having legislation to protect them because in reality its a token gesture as all those deciding / ruling have vested interests in Freeholds themselves. They are not transparent.


    Yes Freehold properties need maintenance but the big thing is you have absolute control over everything, costs, spec, and when works get done ie when you can afford it.


    My advice is pull out, everyone you are speaking to has an interest in you going ahead but you could be jeopardising your whole financial security for life. If you cant afford Freehold then rent until you can.
    Save 12k in 2018 challenge #14
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    • Ogriv
    • By Ogriv 3rd May 18, 8:47 AM
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    Ogriv
    Thanks BBH123
    On Saturday I'm actually seeing a share-of-freehold flat, which is appealing.
    I think I'll wait till I have seen it, then decide.
    As for houses, it'd take me a couple more years to save enough for one, and I'm afraid the market will pull away from me in that time.
    Same old story.
    I have definitely taken on board your story of horrendous bills, though.
    • BBH123
    • By BBH123 3rd May 18, 8:50 AM
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    BBH123
    Share of Freehold or Right to Manage is so much better as you have a bit more control over things.


    I know I am vehemently against Leaseholds and it may seem OTT but I have seem my neighbour have a nervous breakdown over the treatment he had at the hands of our managing agents / Freeholders, We were in the fortunate position of having the funds but he didn't and nearly and still may lose his home.
    Save 12k in 2018 challenge #14
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    • Ogriv
    • By Ogriv 3rd May 18, 9:52 AM
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    Ogriv
    Yeah and there was that recent research saying that leasehold issues were people's number one headache.
    I must also take my personal circumstances into account: I have no family or partner to ask for a bailout. So I don't think I should take undue risks.
    • InterestedParty2018
    • By InterestedParty2018 14th May 18, 11:57 AM
    • 119 Posts
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    InterestedParty2018
    My comments on the EA note:

    All she seems to be saying is that there is no sinking fund, and that one will be set up going forward.

    The point of a sinking/reserve funds is that over a number of years it (reasonably) slowly builds up to a large sum of money, which can then be offset against a specific planned big project or a general large project.

    Whilst starting to collect one is good, it seems a bit late for the work which is required now!

    The surveyor has been around, which means the ball has started rolling for a major works project.
    Surveyor needs to write a specification, agree project with freeholder, send out to tender.
    (Notice of Intention is sent to lessees about the work at the early part of the above, but no figures will be available.)
    Once the tenders are obtained and reviewed, this will be presented to the freeholder with a recommendation. (ie which tender to go for and why).
    Only at this stage will the Freeholder/Managing Agent have a genuine indication of costs. (Project sum, CDM, Professional fees, admin fees + VAT).

    You may be able to get a very crude figure from your own surveyors about what to expect, but this would only be a guide.

    Assuming the issue was a new roof, your surveyor could perhaps broadly tell you: " a new roof for this type and size of property is going to cost circa xxx, plus professional & admin fees & CDM of circa 15%, plus 20% VAT means about xxx... and your proportion of this cost is x%, therefore be prepared for a bill of circa X"
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