Inherited Freehold situation

by Readers Question

13:12 PM, 26th January 2016
About 3 years ago

Inherited Freehold situation

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Inherited Freehold situation

I have inherited a situation I don’t fully understand and wonder if anyone can clarify how things should work please. I am not familiar with running a company and all that entails.novice

I own 3 leasehold flats in a block of 4. There is a Ltd management company that owns the Freehold and I own all 4 shares in this company. There is a bank account in this companies name into which the maintenance charge is paid. The leases don’t allow for a sinking fund. The owner of flat 4 wants to renew his lease. The lease has been valued and we are about to agree a price for a 90 yr extension. If lease no. 4 is extended and updated and I extend and update my 3 leases (and get a better LTV) what becomes of the freehold?

If I need to sell a/the flat(s) and the residual value is consolidated by some unscrupulous mortgage company, maybe it would be better not to extend my 3 leases so that the value would sit outside the value of my flats?

Is this the best structure to manage the flats or can it be done another way without having to run a company and dedicated bank account? Can I charge a service charge for the work I put in?

Any advice/comments/possible pitfalls would be greatly appreciated.

Sam



Comments

Puzzler

7:57 AM, 27th January 2016
About 3 years ago

Hi Sam, this is very interesting as I have a very similar situation. I assume your benefactor (parent or whoever) converted the building, sold one flat and left the remainder to you?

Extending the leases has no effect on the freehold. It will save costs to do them all at once.

I'm not sure what you mean by "the value be consolidated"? It is owned by a separate legal entity, the management company. Why would extending the lease change that? Unless there is a change in the legislation which is always possible. Once the lease is extended its residual value is negligible anyway.

I don't have a management company but it will make things easier should you wish to sell one, or even buy the outstanding one. There are rules to follow and since you're new to this, I suggest you try a block management agent. Whereabouts are you? Not sure if private details are allowed on here but assuming they are, my email is rannd@hotmail.co.uk

If you're serious about doing it yourself there are some free or reasonably priced courses which I plan to do, the free one is run by IRPM, see their website. I also inherited an agent but it doesn't hurt to understand what they're doing. They charge about £200 pa per flat (although might be more in London, and with a small block - economies of scale and all that).

@ Section42

10:35 AM, 28th January 2016
About 3 years ago

IF you own the freehold but are selling a lease extension one flat (who does not own a share in the freehold) then this does affect value as you are transferring value out of the freehold to the flat owner on the sale of the lease extension.
Once you have done that the freehold still has value but (if all the other leases are extended - and presumably you are not going to charge yourself to do this) then once they are 'long' 999 or similar then there is little residual value left in the freehold *(unless there is other development potential)
The other thing to think about is tax - as if you have left it a long time before extending the leases then there is a risk that there could be a charge to CGT on the disposal when you extend your own leases - even though you own the shares in the company. This does depend on the values etc

Puzzler

9:31 AM, 31st January 2016
About 3 years ago

Interesting point about CGT.

Renovate To let

15:32 PM, 31st January 2016
About 3 years ago

Given you now own 3 of the 4 "beers" in the 4-pack and also the company that owns the "wrapper" I would take a long hard look at the whole building and work out how best to maximise value.

For example, can you get more bedrooms, or more flats out of the roof space or by adding a storey to the building? Is there room to extend sideways or backwards to do the same?

sam bond

0:02 AM, 6th February 2016
About 3 years ago

Reply to the comment left by "Puzzler " at "27/01/2016 - 07:57":

Thank you all for your comments. The property was converted by someone else in the eighties and I purchased the 3 flats and freehold one at a time. The management company that owns the freehold was already set up with 4 shares when I bought it about 10 years ago. My ex partner managed it for the last 10 years ... but now I have to do it and I am a novice at this side of things.

I have agreed to extend the lease (on the flat I don't own) for 90 years with peppercorn ground rent. Presumably his share of the freehold still has some value - though there's not really any reason for this leaseholder to purchase a share of the freehold (unless he's really unhappy with how I manage it). So I'll be left holding the Freehold and have all the responsibility of maintaining the block. This would be OK if it's just for the flats I own, but having another leaseholder to answer to seems to come with lots of codes of practice for serving notices, budgeting and accounting for everything etc.

I have other flats that use managing agents but they charge a minimum rate which is not economic for just 4 flats (and you end up chasing maintenance up all the time anyway!) Their main advantage seems to be to deal with all the legal responsibilities.

My comments about consolidation refers to some mortgage companies who keep any capital left from a sale (after the mortgage has been paid) to reduce other mortgages in your portfolio. This is what was making me think twice about extending my 3 leases. If I needed to re-mortgage then I would need to extend. If I did, I presume I wouldn't charge myself to do it as this would make a taxable capital gain? Is this right? Should I do them one per year? I am not sure what '@section42' meant by 'on the disposal' .

There is a nice loft space which falls under one of my leases so I did have an eye on that but this would be new territory for me and I am not sure if the rental increase would make it worthwhile.

This freehold was purchased for £5,000 (10 years ago) and the lease extension is being purchased for £6,000. Further advice on CGT would be very greatly appreciated.

Also, what would happen to the freehold if 999year leases were granted? Do you just 'give' a share of the freehold company to each leaseholder? Maybe I should have offered a 999year lease?

I have another freehold with 8 leaseholds of which I own one. Only one leaseholder can afford to extend. I presume it is better to extend than offer a share of freehold? I suppose its possible to end up with some having a share of freehold and others having a lease extension! What are the pros and cons please? Your comments are much appreciated.

S.E. Landlord

15:10 PM, 6th February 2016
About 3 years ago

A premium of £6,000 sounds cheap for a 90 year lease extension but this obviously depends on the current ground rent and years to run on the lease.

The lease extension only needs to be at a peppercorn if being extended under statutory terms. If by mutual agreement it could still include a ground rent, perhaps different amount to the existing ground rent with provision for it to increase.

If renting the properties it is worth owning the freehold as some freeholders charge every time there is a change of tenant - worth checking what the lease says on this.

As to tax treatment of the lease extension premium it depends if held individually or via a limited company, if the latter, I think it would be subject to corporation tax. Suggest you talk to your accountant.

You should be able to find an agent that would manage small blocks for a reasonable fee - probably £150 - £200 per flat which could form part of the service charges.

I think it would be worth trying to buy the lease of the fourth flat and then you could look at revising all the leases to provide for a ground rent. It would also mean you would be able to extend the property without the fourth leaseholder objecting.

S.E. Landlord

15:36 PM, 6th February 2016
About 3 years ago

In addition to above, if you took the opportunity to revise the wording of the leases you could include provision for all leases to contribute to the running cost of a company which owned the freehold. Perhaps update all leases to reflect what would be included in a new lease today.

The wording of the leases can be amended if the lease extensions are by mutual agreement rather than statutory terms.

Puzzler

16:20 PM, 6th February 2016
About 3 years ago

Leases generally do provide for the costs to be borne equally. If there are 4 shares (one per flat), how come you ended up with all 4? Why does the fourth leaseholder not have that share?

sam bond

17:00 PM, 6th February 2016
About 3 years ago

Reply to the comment left by "Puzzler " at "06/02/2016 - 16:20":

Thank you Puzzler, Renovate to Let, @section42 and SE Landlord for your comments. I am beginning to get a grasp on this!

When I purchased the freehold 10 years ago, the 4th leaseholder did not want to buy their share so I bought the whole thing. The company that owns the freehold (4 shares) is a limited company.

We have agreed the lease extension without a section 42 statutory notice. My solicitor will be updating the lease to bring it in line with modern leases. We have yet to discuss what to do with my 3 leases.

If I wanted to convert the loft or extend, can one leaseholder prevent it (assuming I have planning permission)? ie 25% of the leaseholders. This question affects another property I have. Does anyone know how many leaseholders, who all have a share of the freehold in this case, need to agree in order for an extension or loft conversion to proceed? .... or disagree in order to prevent it?

S.E. Landlord

8:36 AM, 7th February 2016
About 3 years ago

Reply to the comment left by "Puzzler " at "06/02/2016 - 16:20":

The lease would provide to share the cost of managing the block but not necessarily the freehold company. If there is to be no ground rent to cover the freehold company's cost then provision should be included in the lease to cover this. Different shares could be issued for the three flats and for the fourth flat.

As I said above cost of lease extension looks cheap and may be worth obtaining a formal valuation, at leaseholder's cost, and including ground rent in new lease.

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