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23 July 2018

How can a group of 10 leaseholders contribute fairly towards the purchase of the freehold of their building?

This article was first published by City AM, Monday 23 July 2018.

There are a few issues to consider here.

If all of your leases are on similar terms and have the same amount of years left to run, there is scope to agree that you all contribute equally towards the purchase price. However, there are also reasons why the leaseholders should not contribute equally.

For example, if some of the leases are shorter than the others, one lease has onerous ground rent provisions, or a leaseholder has carried out unauthorised alterations to the flat and (rightly or wrongly) the landlord is requesting additional payment. These are reasons to increase the sum attributable to a particular flat and for that particular flat to pay more towards the premium than the others. Your valuer can consider such issues, the impact it has on the price payable for the freehold, and specify who should pay more than the others.

Another issue to consider is that certain flats may request parts of the freehold be transferred to them upon completion. Often, the ground floor flat will request the basement or garden area is demised to that flat. Similarly, the top floor flat may hope the loft space is transferred to that flat.

Following on from this, the relevant leaseholders may intend to undertake works to the additional areas. In these circumstances, extra sums could be payable by the relevant leaseholder because these are otherwise valuable assets that belong to the freehold (and therefore all leaseholders collectively).

Another school of thought is that all things being equal, the contributions towards the purchase should be the same as service charge percentages contained in the leaseholders’ leases. The service charge reflects the proportion the flat occupies in the building and is a percentage of the total costs of repair, maintenance, management and insurance of the building.

This could mean that those who pay more have more of a say in the running of the building. However, this may not be an appropriate formulae to apply because the leaseholders are collectively buying the building, which is a different interest to the flats.

In order to simplify the decision-making (rather than allowing certain flats to have more votes or control in the building) and corresponding ownership of the freehold, leaseholders can also agree to have an equal say and one vote regardless of the size of their flats.

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