Collective enfranchisement-L to serve 1987 Act Notice?

[windlassie]

I own a flat in a block and I am a director of a flat management co. All flat owners are members of the mgt co. The mgt co has a lease of the common parts. The landlord has offered the freehold to the mgt co at a fair price. The mgt co has the money in reserves from the service charge to enable it to purchase straight away without even involving the members. The directors would rather proceed quickly without telling the members at this stage and rely on the fact that most flat owners would want the mgt co to buy and the fact that the purchase is patently in everyones best interests. However, does the freeholder need to serve S5 Notices on all of the flat owners in order to comply with the Act, even though if they were served, the flat owners would naturally be the vehicle that the flat owners would nominate?

[LHNM]

Be very careful.... service charge reserves are just that - service charge reserves. They cannot generally be used for anything other than those items mentioned in the lease, which would normally be restricted to maintenance and repair. Purchase of the freehold is a whole other issue and no matter whether you feel that it would be in the interests of the leaseholders for the management company to purchase it, it isn't that simple. Please please get proper legal advice, this is a very complex subject.

[Tax Accountant]

Be very careful.... service charge reserves are just that - service charge reserves. They cannot generally be used for anything other than those items mentioned in the lease, which would normally be restricted to maintenance and repair. Purchase of the freehold is a whole other issue and no matter whether you feel that it would be in the interests of the leaseholders for the management company to purchase it, it isn't that simple. Please please get proper legal advice, this is a very complex subject.

I have a similar query. We are trying to get more than 50% leaseowners to agree to force the freeholder to sell. The reason to do this is due to the onerous restrictive clauses in the lease, one being restriction on sub-letting, although 2/3rds already do this. Because of the existing 999 year leases, the freehold price is thought to be less than £1,000 per flat.

If all agree, it would make sense to buy through the existing management company of which all leaseholders are shareholders.

However, it is thought that about 18 out of 24 leaseowners will wish to participate in this. Can the freehold still be bought through the existing management company to save setting up and running yet another company? There is no fund at present and therefore it is thought that purchase price could be bought through a loan which could be repaid by special charge of say £200 per year to all leaseholders over a number of years.

Can any one with experience of this make any useful suggestions?

[LHNM]

Again, this is a huge subject with an almost infinate number of variables so you must take proper legal advice.

Why is it so tempting to use the existing management company? It only costs a couple of hundred quid to set up a new company, less if you know how to do it yourself.

If you use the existing company the 6 leaseholders who are not interested will have shares in the freehold owning company regardless of whether they pay. You could get around this by creating different classes of shares and only issuing them in accordance with contributions but that seems awfully complicated (not to mention the fact that it's probably in contravention of the company's articles of association).

Additionally, think of the consequences of the management company folding. It can and does happen with frightening frequency. If the management company owns the freehold it will be considered an asset which could be used to pay off creditors, or if the company is struck off it will be returned to the Crown. Why risk it?

[Tax Accountant]

LHNM, Thank you for your reply.

I am fully conversant with accounting and company issues.

Our management company is used only for the purpose of maintaining the common parts by charging service charges.

I am not aware that service charge management companies are folding up with 'frightening frequency' as you put it. However, I take the point that it would normally be safer to keep the assets separate from the normal management or business functions.

I was intending for the management company to buy the freehold for the benefot of all the leaseholders who would all be charged the additional contribution to service the loan for the freehold purchase. As such the whole ownership and running of the flats is confined together in one vehicle rather than two companies with differing interests.

I wonder if anyone else has any views on this, especially someone with practical or professional experience of this matter.

[LHNM]

These days many leaseholders are more aware of their rights and with the expanding jurisdiction of the LVTs, more and more residents management companies are finding themselves on the wrong end of LVT decisions. Because of the way that these companies are funded they can find themselves insolvent unless they can lay the claim on someone else, such as their agent. I would guess in the last three years I have come across three that have been struck off and another six that got away with it by the skin of their teeth.

"I was intending for the management company to buy the freehold for the benefit of all the leaseholders who would all be charged the additional contribution to service the loan for the freehold purchase."

You simply can't do this. You can't charge those leaseholders that don't want to participate in enfranchisement anything at all, no matter how beneficial you think it may be to them.

[Tax Accountant]

LHNM, Thank you once again for your input.

[tenant29]

I own a flat in a block and I am a director of a flat management co. All flat owners are members of the mgt co. The mgt co has a lease of the common parts. The landlord has offered the freehold to the mgt co at a fair price. The mgt co has the money in reserves from the service charge to enable it to purchase straight away without even involving the members. The directors would rather proceed quickly without telling the members at this stage and rely on the fact that most flat owners would want the mgt co to buy and the fact that the purchase is patently in everyones best interests. However, does the freeholder need to serve S5 Notices on all of the flat owners in order to comply with the Act, even though if they were served, the flat owners would naturally be the vehicle that the flat owners would nominate?

It is a requirement of the Act to serve notices on all flat owners before the sale of freehold and since 1996 , failure to do so may bring a penalty of time in jail for the vendor. To reduce the waiting time, the directors of flat management company could call a special meeting to consider and pass a resolution to make the purchase. If you get 50% or more support from members , then you could go ahead with the purchase.

[tenant29]

I have a similar query. We are trying to get more than 50% leaseowners to agree to force the freeholder to sell. The reason to do this is due to the onerous restrictive clauses in the lease, one being restriction on sub-letting, although 2/3rds already do this. Because of the existing 999 year leases, the freehold price is thought to be less than £1,000 per flat.

If all agree, it would make sense to buy through the existing management company of which all leaseholders are shareholders.

However, it is thought that about 18 out of 24 leaseowners will wish to participate in this. Can the freehold still be bought through the existing management company to save setting up and running yet another company? There is no fund at present and therefore it is thought that purchase price could be bought through a loan which could be repaid by special charge of say £200 per year to all leaseholders over a number of years.

Can any one with experience of this make any useful suggestions?

Karongo,

Under the recent Commonhold & Leasehold Reform Act, a compulsory purchase of freehold must be made through a new company with a name ending RTE denoting "right -to enfranchise" . Likewise to take control of the building management from the landlord, it is necessary to form a new company with name ending RTM denoting "right -to manage". You can get more information on the web using "google" as some solicitors and agents advertise their services to deliver RTE or RTM.

It would be wonderful if all flat owners can finance their share of the cost by adding to their existing mortage, but often some owners are unwilling to participate so a loan must be found to cover the shortfall. Sometimes one flat owner in the block may be willing to provide a loan to cover those flats unwilling to participate in return for their ground rent. I haven' t seen any banks or building societies advertising loans to leaseholders to buy their freehold yet but if anyone knows where to find these loans, please identify.

What is the annual ground rent of your flat ?

[Tax Accountant]

The Ground Rent of my flat is only £40 pa and the lease is for 999 years. Therefore, normally there would not be any reason to buy the freehold.

However, the lease contains restrictive covenants, eg not to sublet, and the freeholder is insisting on onerous terms to allow subletting. It is thought that it would be cheaper to buy the freehold than to comply with the onerous terms.

Also, 75% of leaseholsers already sublet their flats, with or without the freeholder's consent.

[tenant29]

The Ground Rent of my flat is only £40 pa and the lease is for 999 years. Therefore, normally there would not be any reason to buy the freehold.

However, the lease contains restrictive covenants, eg not to sublet, and the freeholder is insisting on onerous terms to allow subletting. It is thought that it would be cheaper to buy the freehold than to comply with the onerous terms.

Also, 75% of leaseholsers already sublet their flats, with or without the freeholder's consent.

How does the "onerous terms" for giving subletting approval compares to 12 x annual ground rent ?

I suggest that you consider putting an offer to buy the freehold at 12 x annual ground rent using the Managment Company as nominee buyer. You should ask the other flat owners to declare their willingness to support you.
Also ask bank what overdraft you can get for this purchase .