Paying for Major Projects
Q: Our block is a property containing 14 flats owned by leasehold. The freehold is owned by our management company, which is wholly owned by the fourteen leaseholders.
We are facing two major projects—re-roofing and electricity intake cupboard upgrade—that will cost a substantial amount, probably in excess of £100,000. What I would like to do is spread the cost of these works over several years and possibly different owners as flats are sold rather than ask the current 14 leaseholders to pay their full share at the start of the project (which has been the custom in the past). Expressed in simple terms, take out a loan. The regular service charge would be increased to include an amount to service the loan.
I have not approached our bank to discuss this as I have no idea if this is something that is realistically possible. I wold be grateful for your thoughts.
FPRA Hon Consultant Gordon Whelan replies:
The works being considered are both covered under your lease and there is an obligation on lessees to contribute to these costs through the service charge. You should follow the terms of your lease and prepare the lessees for the service charge demands that need to be raised. It may be possible for you to stagger the start dates for the two different projects and this will help alleviate the cashflow impact on lessees.
The proposal for the company to take out a loan to cover the costs of these works has a number of complications but the most important point to realise is that it doesn’t make commercial sense. A lender will usually require some security for a loan of this size and the company has no assets to offer as security. An alternative may be for the directors to give personal guarantees against a loan but this is not advisable and is unfair on the individual directors. Finally, the financial interest in the building rests with the current lessees and not the management company. It is the lessees who will benefit from a new roof and this should be reflected in the resale values of the individual flats at the time of their sale.
There are two other points to bring to your attention. Firstly, there is no provision in your lease for a reserve fund to be collected. You may wish to consider varying the leases in order to collect reserve funds for future expenditure. This may help you avoid one-off large payments of this nature in the future. Secondly, the cost of the required works means that you must follow a section 20 consultation process with lessees. This statutory process is required if costs of major works exceed £250 per lessee and details of the process are available from LEASE. Also, note that your lease requires you to obtain three quotes for these works and to “select the lowest of the three estimates obtained”.
[Submitted October 2019]