Residents' freehold owning company

Residents' freehold owning company

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Residents' management companies, where every flat owner is required to hold a share (or be a member, if it is a guarantee company) of the company which manages the common parts, are the norm. Sometimes the company owns the freehold of the block of flats, sometimes not, but we have taken on a client where there are two separate companies - one is the standard management company, but the other company owns the freehold.

Only about half of the flat owners are shareholders of the property owning company, being the ones who were willing when the property developer wanted to offload the freehold. The total cost of the freehold was split between the consenting flat owners and they paid £1 each for their share with the balance being treated as a share premium. Two sets of annual accounts have been prepared on this basis.

So far, so good, but now some of the previously dissenting flat owners have changed their minds and there are new flat owners who want a share in the freehold-owning company. The new shareholders have put in the same amount as the original shareholders and the resident who has been handling the freehold owning company has now told us that she has distributed the new money amongst the original shareholders. This seems entirely logical to her as the cost of the freehold is now being borne by more people, so the cost to each one is less, and there is nothing else for her to do with the money.

We, of course, are concerned about an illegal distribution from the share premium account. Even if one could net off payments to some people against receipts from others, which I do not believe is allowed, the overall share premium account is being reduced by the increase of the share capital, albeit only by a few £1.

How can we show these transactions in this year's accounts?

Euan MacLennan

Replies (4)

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By geoffwolf
03rd Jun 2007 10:13

flat freehold
In the block of flats in which I live ther is an identical setup to what you have described with this difference. When the freehold was purchased the total cost was divided by the total number of flats. The cost relating to those flats whose leaseholders did not then want to take part in the purchase was loaned to the company by those who diud purchase. Therefore when further leaseholders now want to purchase the new funds simply go to pay off part of the loans.

Might it be possible to restructure the original paperwork to this effect? The issue of a further share at a premium is therefore no problem.

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Euan's picture
By Euan MacLennan
03rd Jun 2007 11:10

Restating accounts
Thank you, Geoffrey. I agree that the method adopted by your freehold-owning company is the ideal solution. Clearly, someone had some foresight in your case. I doubt that much exists in the way of paperwork in my client's case and if it does, I am sure that the original investors would be happy to accept a replacement that gives them the legal right to get some of their money back as new investors join in.

That leaves the problem of two years of accounts filed at Companies House. Can we just restate both years and file the amended versions at Companies House to replace the originals?

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By djw090
04th Jun 2007 11:10

Share reorganisation
You need to do some kind of share reorganisation.

As an example the existing £1 shares could be split into 1p shares so that each original shareholder now has 100 shares of 1p each. Then each of them sells some of those shares to the new shareholders.

1p may not be the correct value. You need to play with the numbers to get it correct.

Its too early in the week for me to think about any stamp issues on this.

Such clients are always a problem if the block is not professionally managed. On the assumption that they are not able to produce statutory accounts themselves the cost of doing so will become the next problem.

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By D Howes
25th Dec 2014 10:29

Freehold owning company

Let's call the flat owners who contributed to the original freehold purchase participants. Would there be merit in also treating participants' contributions to their OWN flats' shares of the freehold value as loans? That would allow lease extensions granted to participants at zero cost to be treated as repayments of those loans, and hence representing disposals at fair value.

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