Buying the freehold: set up a company or buy as trustees?
Collective Enfranchisement - Getting Started
Outlining the qualification criteria and procedure in relation to collective enfranchisement (buying the freehold) of a residential leasehold building (flats)
By Dona Awano, Legal Adviser
You have got together enough leaseholders to participate in collective enfranchisement but do you set up a company or buy the freehold in your individual names as trustees?
The number of individuals participating is important. An interest in land can be held in up to four names. This means that up to four names can be registered at the Land Registry as the freeholder. If for example there are seven flats in the building with ten individuals in the seven flats participating in buying the freehold, four individuals can be registered as trustees and the other six leaseholders will be beneficiaries. This can be complicated and disputes may arise over who becomes a trustee or beneficiary. Thus if there are more than four individuals participating, the leaseholders will often prefer to incorporate a company so they are all shareholders or members in the company.
If you opt for a trust, it is advisable to enter into a deed of trust for certainty in order to set out the share held by each flat and to govern your relationship as trustees. With a company, the articles of association act as the constitution of the company setting out how it should be run, how decisions are made, functions of directors etc.
There is comparatively little administration required with a trust. With a company, it has to be incorporated, and the officers of the company have to ensure they comply with the requirements of the Companies Act and file annual reports and annual returns at Companies House.
Decisions made by trustees must be unanimous. Differences can be dealt with by the court. With a company, a majority of the shareholders or members can pass resolutions and the directors of the company may have powers to make certain decisions on behalf of the company.
If a flat is sold, all the trustees must sign the Transfer document to dispose of the share of the freehold to the new owner. With a company, a stock transfer form is used to transfer the seller’s share in the company to the new owner.