Q&A on the Freehold The freehold for the 3B s has recently been purchased from Freshwaters by a group of 83 leaseholders together with a property fund. This Q&A is an attempt to answer some of the questions people may have, especially for those who have not been involved in the process and who will not have had visibility what has been happening. The process is complicated, so here is a quick glossary of terms used in this document. Freshwater TCMC or The Three Courts Management Company BBB Courts Michael Richards The Fund Freehold Share of Freehold or SOF Leasehold Leaseholders Until recently, Freshwater owned our freehold. They also own 17 flats within the blocks. Until recently, the management company responsible for running the blocks. Company formed to own the freehold. From now on, this new company will take over responsibility of running the blocks. Our current managing agent. TCMC, and now BBB Courts appoint Michael Richards to run the blocks on our behalf. A property fund ( Enfranchisement Investment Properties ) who we used to fund the purchase of the freehold on behalf of the non participant leaseholders. The owner of a freehold owns both the property and the land on which the property stands outright. Previously our freehold was owned by Freshwater, now it is owned by BBB Courts. Where a property is split by multiple ownership, a company can be created to own the freehold, and each owner then owns a share of this company, essentially allowing the ownership of the freehold to be shared. In our case a SOF corresponds to a share in BBB Courts. The owner has a lease which gives them the right to live in that property for a number of years, as specified in the lease. Those who own a SOF will have their leases extended to 999 years. Other leases in the property range from around 20 years to 125 years. People (or companies) who own a lease within our building. 1
Enfranchisement Participants Non participants The process enabling leaseholders to buy their freehold from the freeholder. Leaseholders who took part in the enfranchisement process, who now own a share of BBB Courts. Leaseholders who did not take part in the enfranchisement process. Why has this happened? The main reason for this is so that the participating leaseholders can extend their leases. Many of the leases in the blocks are under 70 years and this meant they were becoming difficult to mortgage or sell. The cost of extending a lease is nearly the same as buying a share of freehold and then granting a 999 year lease, so it was decided that we should collectively join together and do the latter. This process of purchasing the freehold by leaseholders is called enfranchisement. Tell me a bit more about what happened... In simple terms, leaseholders have the right to buy their freehold if 50% or more of them act together to purchase it from their freeholder. Since our blocks contain 138 flats, we needed at least 69 participants. In 2007, the TCMC board approached a company called ELS to co ordinate this process as such a large number of flats were involved. The share of the freehold represented by the non participant flats also had to be purchased and it was decided to use an external property fund ( Enfranchisement Investment Properties, henceforth referred to as the fund ) to do this. There were many complexities involved in the legal preparation for this, mainly relating to the fact that the leaseholders already managed the block and also the Orange aerial on Beverley Court, and the garages. By August 2011 a majority of leaseholders had officially banded together and we served notice on Freshwater. The negotiations over the price to pay carried on for around a year and were set back by ELS the company being wound up part way through, but were settled in late 2012. The transaction 2
completed on 16th August 2013. I wasn t part of this process, why wasn t I included? Every effort was made to contact all leaseholders and include as many as possible. All leaseholders were written to and invited to join. Any one from whom we didn t receive a response was chased by phone or by visiting their addresses where possible. Information was also posted up on the notice boards within the blocks. After the legal documents were prepared in early 2011, no additional participants were allowed to join the enfranchisement process, so if you purchased your flat after this point and the previous owner was not a participant, you would not have been able to take part. There is a group of leaseholders who did not take part in the enfranchisement who are looking to group together to buy their shares of freehold. If you are interested in joining them, please contact threecourtsmanagement@yahoogroups.com and we can put you in touch with them. Will anything change as a result of this? In order to explain what will change, it is important to understand the previous situation. Until the collective enfranchisement completed, a company called Freshwater owned the freehold. Freshwater also held the leases for 17 of the properties, which they rented out. About 25 years ago a number of leaseholders, who were frustrated at Freshwater s poor management of the blocks, took over the management of the building by agreement. They set up the Three Courts Management Company Ltd (TCMC) in order to do this. TCMC then owned the headlease, managed the building, rented the roof of Beverley Court to Orange (the mobile phone company) and owned the lease for Aarron s flat. 133 leaseholders own a share in TCMC (5 leaseholders do not). TCMC had a board of directors and a chairman who were volunteers from amongst shareholders. TCMC appointed Michael Richards to manage the blocks under the board s guidance. The diagram on the following page attempts to illustrate the previous structure. 3
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For the purposes of enfranchisement, a new company, BBB Courts, was formed which now owns the freehold. Currently the directors of this company are (more or less) the same directors of TCMC. The 138 shares (one for each flat in the block) in this company have be given out to the participants, Freshwaters (for their 17 flats) and the Fund accordingly. The new company is in the process of granting 999 year leases to the 83 participants. The diagram below shows the current structure. 5
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What has happened to TCMC? TCMC remains as the owner of Aarron s flat, but this will be it s sole responsibility; it will not be responsible for managing the blocks. Unfortunately, the laws surrounding enfranchisement meant that when BBB Courts purchased the freehold it also had to acquire the headlease vested in TCMC as well and merge the headlease with the new freehold. There was no way around this and therefore now BBB Courts will manage the blocks. Moving ownership of Aarron s flat from TCMC to BBB Courts would have been costly and complicated from both a legal and tax perspective, so it was decided to leave it under the ownership of TCMC. TCMC did participate in the enfranchisement, so does have a share in the new company and will own a 999 year lease on Aaron s property. Ownership of the common parts will pass to BBB Courts as it owns the freehold. The common parts include the roof of Beverley Court and consequently, the rental contract for the Orange mast will transfer to BBB Courts. I didn t participate in the enfranchisement, but own a share in TCMC. Will I no longer have a say in how the blocks are run? Unfortunately you will no longer be able to legally vote on BBB Courts matters. However, if you wish to take an active involvement in the running of the blocks, there is provision for non shareholders to join the BBB Courts board. Essentially you will be in the same position as leaseholders who do not hold a share in TCMC are now. You will be invited to attend the AGM each year, but will not be able to take part in any official votes. TCMC was always run for the benefit of all leaseholders and this will continue to be the case for BBB Courts. Furthermore, all the legislation that has been brought in over the last 30 years to afford protection for individual leaseholders rights to information, rights to be consulted on major works and long term contracts, rights not to be charged unreasonable service charges, etc. apply just as much to resident controlled landlord companies as outsider landlords so flat owners who didn't participate will obtain the same protection as as before in this respect. Does anything else change for leaseholders who did not participate in the enfranchisement? 7
Very little else will change. These leaseholders will be instructed to pay ground rent directly to the fund who own your corresponding share of freehold (previously ground rent payments were made to Michael Richards who then paid Freshwater). The fund will write to you directly with instructions on how to do this. You still have the legal right to extend your lease, although the fund will additionally also offer to sell you the share of freehold which corresponds to your flat for a similar price. It is expected that gradually more and more of these leaseholders will also become share of freeholders and will then have the same status of those who participated in the original enfranchisement. What will happen to leaseholders who did participate in the enfranchisement? These leaseholders will have 999 year leases granted and will no longer have to pay ground rent. They will be able to put themselves forward to stand on the board of BBB Courts and will be able to vote on important issues where relevant. Should the need arise, they will be able to extend their leases in the future at no cost (other than administrative/legal costs). Their lease and their share of freehold must always be owned by the same entity (which is also the case for all shares in TCMC). When flats are sold, the corresponding share of freehold (ie, the share in BBB Courts) and share in TCMC must also be passed onto the new owner. Why did the fund offer to pay for the non participant flats? Did they do it out of generosity? It was not out of generosity; the fund has a financial interest in the process. The laws governing enfranchisement mean that they can purchase the non participant parts of the freehold at a significantly reduced rate as they do not hold the corresponding leases. When they sell these SOF on, leaseholders will pay the full rate and the fund will expect to make a profit. Also, as time passes and leases get shorter the amount leaseholders pay increases, further increasing the financial gain for the fund. If a lease is left to expire they will take on ownership of that property. Will the fund get a say in how the blocks are run? They do have a vote, although they have confirmed in writing that they will not exercise it in relation to day to day management matters and would only use it in exceptional circumstances 8
where they felt that the security of their investment was threatened. We were also careful to ensure that they would not be able to do anything sinister (eg, build extra flats on the roof) without the consent of other freeholders. An independent solicitor was sought to review all the legal documents to ensure that this was the case. So what will change in how the blocks are run? Very little will change in the management of the blocks as a direct result of enfranchisement. Often enfranchisement is also used as an opportunity to wrestle control of an estate from the freeholder, but this does not apply in our case as the blocks are already managed by ourselves. As described previously management of the blocks will be transferred from TCMC to BBB Courts. Most people who are shareholders in TCMC will also become shareholders in BBB Courts. New directors have already been invited to join the BBB Courts board and will be elected at the upcoming AGM on the 30th September. This new board of BBB Courts directors will then take on the role of managing the blocks. BBB Courts, rather than TCMC, will in future appoint the managing agents. Michael Richards & Co will continue in this role, but BBB Courts will review and consider the appointment from time to time. Some people have expressed disappointment that there will be no changes as a result of enfranchisement, but they should understand that management of the blocks has been in the hands of (the majority of) the leaseholders for the past 25 years and will remain in the hands of (a slightly smaller majority) of leaseholders. The Three Courts has a reputation for having high collection rates. Will that change? Not as a direct consequence of the enfranchisement process. The collections constitute two components, one to the service charge (to cover the annual expenses of the blocks) and one to the sinking funds (to cover the cost of major works). The service charge has been managed carefully and has risen by an average of only 6% over the last 10 years. Bad debt has been brought down from 8,264 in 2006, to only 1,684 at the end of financial year 2012. The collections for the sinking fund have been high as we have had to take on pretty much all of the large capital projects we might face. In this period we will have undertaken major external and internal refurbishments and replaced most of the lifts and boilers. We expect to refinance 9
the sinking fund over the next year or so (to cope with any emergencies) and then to reduce collections significantly. Does TCMC receive anything as a result of selling the headlease? Yes. When the purchase completes, TCMC will receive a sum of money. It may be possible that this can be paid out as a dividend to TCMC shareholders. Further details on this may be available at the time of the upcoming AGM. I did not participate in the enfranchisement. How do I extend my lease or purchase my share of freehold? You have still have the legal right to extend your lease, although it is expected that anyone doing this would opt to buy their share of freehold in preference and grant themselves a 999 year lease. In order to buy your share of freehold you will need to contact the fund. You may need to appoint a surveyor and a solicitor to act on your behalf. You might look to team up with other leaseholders within the blocks in order to share the costs and as mentioned previously there is a group of leaseholders who are planning to do this. Email threecourtsmanagement@yahoogroups.com and we can put you in touch with them. It is advisable to purchase your share of freehold before your lease falls below 80 years as at this point the price increases significantly. I rent a cupboard in one of the buildings, what will happen to this? The cupboards in the basement of Beaumont Court are rented from TCMC and these transfer to be rented from BBB Courts. However, Michael Richards will continue to administer the payments so there will be no change in how rental money is collected. 1010 The other cupboards situated on the ground floors and above are currently rented from Freshwater. They are now owned by BBB Courts and it will be for the new board of BBB Courts to decide what should happen with these. 10