Imagine that you and your fellow leaseholders have spent the last ten years trying to buy yourbuilding freehold and, finally, you have reached your goal. You and other apartment owners are now collectively the owners of the building. Time to relax and rejoice, right? Wrong! If you and your neighbours want truly to enjoy this new ownership status, there is some crucialtransitional work to get done.
A rapidly-growing number of leaseholders are exercising their right to “Collectively Enfranchise” their building by compelling their landlord to sell to them their freehold — only to find after the process has concluded that they are a worse landlord than the previous freeholder. Here are ten important steps to put in place systems and policies that help ensure your building is well-run and that relations amongst neighbours remain harmonious.
1. RESIDENT MANAGEMENT COMPANY Leaseholders should always set up a company limited by shares for the purpose of buying the freehold and then appoint directors that have integrity and “can-do” ability. It is useful to have directors with corporate, legal, accountancy, engineering or architectural experience, but honesty, responsibility and accountability are the truly “must-have” elements. Leaseholders in some large buildings make the mistake of appointing all shareholders as directors. This creates organisational paralysis, since the board is too large and unwieldy to take and implement decisions.
2. COMPANY SECRETARY AND ACCOUNTING WORK
Leaseholders should outsource non-strategic functions to create an efficient and sustainable resident management company structure. The role of company secretary should be outsourced to a professional service provider where possible. An outside accountant or accountancy firm should be hired to prepare the resident management company’s annual profit and loss account, and balance sheet, rather than hiring a resident in the building, in order toavoid conflict of interest.
3. MANAGING THE BUILDING
Were you planning to manage your own building? Don’t do it! Some residents boast that they will save money by running the building themselves, but this often represents a false economy, particularly in large buildings. It is preferable to outsource the running of the building to a managing agent that has the experience, skill sets and organisational scope to handle the job. This includes the expertise required to collect service charges and to serve Section 20 Notices on leaseholders, as part of legally-required consultation by the freeholder, when major works in the building are planned.
4. ROLES AND RESPONSIBILITIES
Be clear once the freehold has been bought about who is who in the building. A residents’ association will often initiate a freehold purchase project, but it is the resident management company that buys the freehold. The responsibilities of the new freeholder are defined in each lease. All leaseholders in the building remain leaseholders after the Enfranchisement has been concluded. Those that participated in the freehold purchase will also be shareholders (or owners) of the resident management company, while non-participants will not. Leaseholders can decide to shut down the residents’ association or keep it going. While either option is acceptable, the latter requires more work.
5. LEASE ENFORCEMENT
Remember that all leases remain in force in the building after the freehold has been bought. The lease continues to serve as the binding contract between the freeholder and each leaseholder. Some blocks of flats descend into chaos when residents conclude incorrectly that leases are no
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longer relevant after an Enfranchisement and that major decisions can now be taken by a simple show of hands. You can avoid unpleasant conflict amongst your neighbours by ensuring that your resident management company, as the new landlord, enforces the lease and creates a culture of compliance and good governance.
6. SERVICE CHARGE COLLECTION
I see some resident management companies inherit messy problems from a previous landlord if collection of service charges has not been pursued efficiently and fairly. The financial health of your newly-acquired block of flats can quickly be crippled if service charge arrears are not cleared up in the first year. One of the most important tasks, therefore, of the resident management company is to make clear to all leaseholders, through the managing agent, that nonpayment of service charges will not be allowed, and to take firm action at the Leasehold Valuation Tribunal and/or County Court, if necessary.
7. 999-YEAR LEASES
Enfranchisers normally grant themselves new 999-year leases, with zero ground rent, after buying the freehold. But sometimes they are so exhausted by the process they wait years to create the new leases. It is best to get modern-form leases drafted within the12 months following the Enfranchisement and, in so doing, to eliminate any defects in the old leases.The 999-year leases should include the “Prescribed
Clauses” cover sheets now required by Land Registry and a clause on “mutual enforceability”. A growing number of Enfranchisers insert a clause allowing for a sinking fund and also a requirement for adequate sound proofing when installing wooden floors. Some leaseholders save on the legal cost of creating an entirely new lease by getting a simple “Supplemental Lease” or “Deed of Variation” created that extends the term of the old lease to 999 years.
8. AGM AND BOARD MEETINGS
Volunteer directors of the resident management company should try to limit the number of board meetings to four a year. These meetings should be properly minuted immediately afterwards, with all actions, action owners and deadline dates for delivery identified. The annual general meeting represents an important opportunity for all shareholders to meet with the directors and to express their views on company issues. The Memorandum and Articles of Association of the company should identify the minimum number of days by which documentation for the AGM must be sent to all shareholders. Proxy forms that enable shareholders to vote in absentee should always be included, along with the company profit and loss account, balance sheet and directors’ report on important issues.
9. DIRECTORS’ INSURANCE
It is best practice for directors of a limited company to secure directors’ insurance and for the company to pay for this. This insurance protects against the possibility of the director being sued in connection with his or her role as director. Directors of resident management companies should always insist on getting directors’ insurance and for the company to pay.
10. NON-SHAREHOLDERS
It is an exasperating truth that one or two leaseholders who choose not to participate in a large Enfranchisement will often approach the resident management company years later and ask to join - at the opening price! The company may decide voluntarily to sell to the non-participant a 999-year lease and a share of the freehold, but there is no legal obligation to do so. The freeholder can be compelled, however, to sell a 90-year lease extension to a leaseholder in most blocks of flats, as long as the leaseholder has owned his or her flat for a minimum of two years.
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