Life After You Buy Your Freehold: Major Works

You are lucky if your block of flats is in good physical condition by the time you and your neighbours buy the building freehold.

 

Sadly, many owners of flats that Collectively Enfranchise do not have this experience.

 

In fact, many resident-owned freehold companies inherit a mess from the previous landlord, with a building that has been neglected and now urgently needs major repairs.

 

The older the building and the worse the mismanagement by the old landlord, the more extensive will be the "major works" that need to be carried out by the new freeholder and the more money that leaseholders will have to pay for one-off special service charges that go beyond the annual repair and maintenance of the building.

 

Buying your freehold is almost always a smarter option than not Enfranchising. But receiving one or more whopping big invoices for “extraordinary” service charges reminds residents that Collective Enfranchisement is not Nirvana. With ownership of the freehold comes responsibility, including the task of getting the building in good shape.

 

Depending on how urgently the major works are needed, the board of directors of the new freehold company should address this issue in the first, second or third year after the freehold has been bought. This is a moment for the directors and all leaseholders in the building to take a deep breath and to work together to plan the best way forward, to carry out maintenance and repairs that will make the bock safe and enjoyable.

 

This is a big transitional task for the new freeholder. It usually takes several years after the Collective Enfranchisement to get a programme of major works underway.

 

Be ready to deal with conflict.

 

While leaseholders will often say they want their building to be safe and aesthetically pleasing, it is unusual to achieve unanimity regarding which major works need to be done, which should be carried out first and how quickly the works should be undertaken.

 

I know of many apartment buildings in central London in which leaseholders get unnecessarily bogged down after buying their freehold in the issue of planning major works. For instance, some flat owners will say they want to upgrade the porterage from an existing eights hours a day to 24/7, while others lobby for service charges to be lessening by cutting back on the existing porterage service. When the new resident-owned freehold company is renovating the internal common parts, some flat owners will say they want expensive wood panelling installed to replace tired old wallpaper, while others say they don't want to spend money on any renovation of the common parts .

 

Remember that it is the freeholder’s responsibility to comply with requirements in the lease to keep the building in a state of good repair. So, if the lease says that the freeholder has to, for example, get the outside of the building redecorated every seven years, no leaseholder has the authority to prevent such work being done. Nor do protests from leaseholders that don't want to pay decrease in any way the freeholder's responsibility within the lease.

 

So, where to begin?

 

The roof is leaking, the lift keeps breaking down, the carpet in the lobby is frayed and wallpaper in the common-parts corridors is stained and torn.

 

Start at the beginning.

 

First, ensure that you have a good managing agent in place, since it is the managing agent that will advise your resident-owned freehold company on the major works that need most urgently to be carried out and that will organise and supervise the works.

 

Have the managing agent carry out an initial investigation of works that appear to require the most urgent action. If yours is a large century-old mansion in London, your managing agent will most likely need to call in a surveyor and other building experts to check on structural issues. Get the managing agent to prepare an Excel spreadsheet with estimated costs and expected duration of each major works project.

 

Then organise a meeting for all leaseholders to attend with the managing agent. The managing agent and the board of directors should brief leaseholders on the works that need to be carried out in order to comply with the lease and keep the building safe. Get input from leaseholders on which works they would like to see carried out, say, in the following three-to-five-year period.

 

While this type of residents’ meeting almost never produces 100% support by leaseholders for a proposed plan of action, it is important to consult flat owners and to inform them about significant extraordinary service charge costs that are coming up in the next few years. The freehold company also needs to gauge how quickly or how slowly most leaseholders want to see the building fixed up and to rally support amongst residents for the major works programme ahead.

 

The managing agent and the board of directors of the freehold company should make it clear that proper consultation for each major works project will be pursued, but, that the final decision on which works to get done and in which timeframe will be taken by the freehold company, on advice from the managing agent.

 

Some people think that a block of flats becomes a commune when leaseholders buy their building freehold, with every flat owner having an equal vote in how the building gets run. This represents badly mistaken thinking. The building does not become a commune.

 

All leases remain in effect after you buy your building freehold. The responsibilities of the leaseholder and of the freeholder, as enshrined in the lease, remain unchanged.

 

The big change created by Collective Enfranchisement is that participating leaseholders now wear two hats – one hat as leaseholder of a flat and another hat as shareholder (ie- part owner) of the freehold company.

 

Even if there is strong consensus amongst leaseholders about major works projects that need to get done, the freeholder still has to follow a legally-required consultation process for each project. This includes a requirement for the freeholder to serve a "Section 20 Notice" on all leaseholders, advising them of a planned major work project and inviting their input. It is the managing agent, on behalf of the freeholder, that sends the Section 20 Notice (in letter form) to each flat owner. The Section 20 Notice begins a staged consultation process that usually takes a few months. The proposed work must be put out to tender and the leaseholders must be consulted before a contractor is instructed.

 

Keep in mind, when preparing to fix up your building after years of neglect by the old landlord, that projects often take longer and cost more than anticipated. This is true of a residential block of flats, an office building, an airport, a home renovation or any other building project. Sometimes cost overruns in a major work programme in a block of flats occur because contractors have initially quoted unrealistically low fees in hopes of winning the tender.

 

Because of the known probability of time and cost overruns in many big projects, it is best practice for the managing agent, when estimating the cost of each project, to add a reasonable “contingency fee”. This might be 10% of the total expected cost, or more or less. The freehold company needs to agree with the managing agent on the amount of the contingency fee.

 

When the managing collects extraordinary service charges from leaseholders for a planned major works project, the managing agent needs to ringfence these monies for the specific project. This is to ensure that money collected, for instance, to install a new lift is not spent on something else, like repairing the roof.

 

No major works project should be started until all the money has been collected from leaseholders or, at least, until enough money has been collected to pay for the works. Keep in mind that leaseholders pay all the service charges, but it is the freeholder company that instructs the contractor and that is responsible for paying the contractor’s bill at the end. Carrying out major works before sufficient funds have been collected can result in a real mess for the freehold company and its directors.

 

A word about improvements to a building. Some leaseholders feel so happy after they have bought their freehold that they want to start investing money in improving the building by creating new features or services. I know of one group of leaseholders that wanted to install a gym in the basement, with weights, for use by all residents.

 

Be careful. You need to identify first whether the lease says the freeholder can collect service charges for “improvements” to the building. In some leases, the freeholder does not have a right to do so. The landlord only has authority, within the lease, to collect service charges to maintain and repair the existing structure and services in building.

 

When leaseholders have Enfranchised their building and are drawing up new 999-year leases for participating flats, it is a good idea to include a clause or part of a clause stating that the freeholder can indeed carry out “improvements” to the building and collect service charges to pay for these.

 

One of the biggest obstacles to carrying out a major works programme after you have Enfranchised is the failure of one or more leaseholders to pay the extraordinary service charges for these works. It is important for the new freeholder not to allow one or more non-payers to delay planned major works.

 

This boils down to issues of governance and compliance in a resident-owned building. One of the most important transitional tasks for the board of directors, after leaseholders have purchased the freehold, is to put in place processes and procedures to help ensure that owners of flats pay their service charges fully and on time.

 

There’s advice about this in my blog posting of September 4, 2009, including tips on best-practice methods to create a culture of service-charge-payment compliance in a block of flats and the most effective ways to address non-payment.

 

If your building has a Reserve Fund (also known as a Sinking Fund), this can alleviate any cash-flow problem caused by one or more non-payers of service charges. My blog posting of September 27, 2009 examines setting up and running a Reserve Fund.

 

Brace yourself for one unpleasant aspect of the major works, if the building was badly neglected by the previous freeholder – it is going to cost you and others in the building to put things right.

 

While it’s a great feeling for leaseholders to bid farewell to a terrible landlord and to secure full ownership of their homes by jointly purchasing their freehold, the big bills that come with fixing up the building can feel like a hangover after the celebration party.

 

But do not despair.

 

Look at what happened to many run-down apartment buildings in New York City in the 1970s, when renters took advantage of a change in the tax system to form co-operatives and jointly to buy their buildings. This important consumer trend became known as “taking one’s building co-op”. If you know someone that owns a "co-op" apartment in Manhattan, this is in a building that was originally owned by a third-party landlord and that was later bought by apartment renters that became owners of the units and, collectively, of the building.

 

Manhattan's co-op movement transformed many tired tenement buildings into some of New York City's most sought-after property, after apartment owners invested in renovating the lobby and other common parts, and improving porterage and other services.

 

Similarly, in London we see flats increasing in value after leaseholders buy their building freehold. In fact, it happens in three stages.

 

First, there is an immediate uplift in sales values of apartments, because buyers prefer "share-of-freehold" flats to the old-style model in which the freehold is owned by an absentee corporate entity.

 

The second increase in value occurs when participants are granted their 999-year leases, since longer-lease flats are more valuable than shorter-lease flats.

 

Finally, in the three to five years after the freehold purchase – the time during which many Enfranchised buildings proceed with initial major works and improvements – the values of flats go up again. This continues, as the building becomes a more and more desirable place to live.

 

I hope your major works go smoothly.

Comments

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initial investigation of works that appear to require the most urgent action. If yours is a large century-old mansion in London, your managing agent will most likely need to call in a surveyor and other building experts to check on structural issues. Get the managing agent to prepare an Excel spreadsheet with estimated costs and expected duration of each major works project.

Then organise a meeting for all leaseholders to attend with the managing agent. The managing agent and the board of directors

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