Residential property management companies - report on Sandgate House Ltd  and Mead House Ltd

Report: 6
Date: 19 November 2001
By: Commissioner

Summary

This paper summarises the legal relationship between the MPA and the residential property management companies that were established to facilitate the break-up and sale of flats in residential blocks.

It reviews their future development opportunities and particularly two development proposals that concern Mead House and Sandgate House.

A. Recommendations

1. The Sub Committee’s agreement is sought to authorise Property Services Department, in partnership with the management company and the leaseholders, to negotiate the possible disposal of part of the grounds to Sandgate House and to report the outcome to the MPA Estates Sub Committee; and
2. The Sub Committee’s agreement is sought in principle to permit the proposed development of the roof space at Mead House and for the nominee directors to act accordingly on the basis that part of the proceeds are utilised to refurbish the common parts; and a report will be brought back to this Committee on the risks and uncertainties of the project.

B. Supporting information

Introduction

1. Twenty-four residential property management companies have been formed to hold title to those blocks of flats previously identified where flats could be sold. At the time, the blocks were mainly occupied by serving police officers but there were a number of vacant units in which recruits showed no interest. The management companies were incorporated and registered at Companies House. Each company holds property title to the block, subject to a declaration of trust in favour of the MPA. This means it cannot deal in the title without the express consent of the MPA. In addition, each company is responsible for their residential block’s management of common parts and structure. The responsibilities are defined in a lease for each premises. This makes provision for a service charge to be levied on leaseholders to cover management costs, including insurance, repairs (minor/major), grounds maintenance, cleaning and lighting common parts and administration, incurred by the company.

2. The property titles were transferred to the relevant companies at nil cost but the MPA retains an interest in each MPA flat together with a share in the ownership of the associated management company. As subsequent disposals are completed, the declaration of trust operates and the sale proceeds are passed to the MPA in return for granting a long leasehold interest in that flat and assigning its share in the management company. The inherent value in each block is therefore unlocked on a progressive basis with the sale of each flat.

Development proposal

Sandgate House

3. Sandgate House is located in Ealing, W5 and comprises 24 flats with communal grounds. The MPA retains ownership of seven flats; the remainder are owned privately. (Some leaseholders are police officers). The management company is responsible for the maintenance of the grounds, which are defined in the leases as common parts. All leaseholders have contractual rights of access over, and use of, the common parts.

4. Several property developers, interested in acquiring either the whole site or a large part of the grounds for (re) development, have approached the management company’s Board. The local town planning authority would not support the redevelopment of the whole site but might look favourably upon building additional residential units on part of the grounds, which would produce a substantial capital receipt. Linked with the offer to buy is a proposal to improve and refurbish Sandgate House which would include new windows, doors, car-parking areas, security measures and landscaping – all to be funded by the disposal proceeds as a condition of sale.

5. Due to the declaration of trust, any disposal proceeds would belong to the MPA who could otherwise veto a disposal by the management company. In return, some 17 private leaseholders have legal rights over the grounds that would have to be ‘bought out’ before a disposal could be completed.

Mead House

6. Mead House is situated in Notting Hill, W11 and comprises 30 flats. The building was erected in the late 1950s and is constructed on basement, ground and five upper floors, all under a flat asphalt roof. The MPA retains ownership of six flats occupied by police officers.

7. A private leaseholder has approached the management company’s Board with a proposal to refurbish the entrance hall at Mead House and other common parts. The funding would come from the construction and sale of two new luxury flats on the roof. He proposes to bear the cost of the entire fee work (but no actual construction costs) in return for being given options to buy the flats. No detailed scheme has been drawn up and therefore it is difficult at this stage to produce a financial assessment. However, existing flats within Mead House, which are unimproved, are valued at £280k-£290k.

8. Although the roof area clearly forms part of the common parts, it is maintained by the management company for the benefit of all leaseholders. It is not an area over which leaseholders have specific or probably even implied rights of access and use. On that basis, any sale proceeds must ultimately be due to the MPA.

9. This particular proposal is not clear-cut. The financial benefits for the MPA are difficult to quantify. There are procedural issues and risks and uncertainties that might not be capable of being resolved or negotiated. A report will be brought back to this Committee once these issues have been considered.

10. The general standards and décor to the entrance area are tired and the block would benefit from refurbishment. An appropriate scheme would make a more attractive environment for all residents (police and private owners) in which to live. The conventional method to fund such a scheme would be through the service charge with perhaps a sinking fund element that would accrue monies to pay for a programme of works.

Conclusion

11. The declarations of trust ensure that the MPA’s interest in the blocks is safeguarded whilst it retains flats for use as residential quarters. However, this situation was not envisaged when the management companies were established and it might be necessary to propose amendments to the Articles of Association and obtain approval at an extraordinary general meeting.

12. The Board for Sandgate House met on 8 August 2001 and passed a resolution in favour of the principle to dispose of part of the grounds for development. The residents support the Board. Subject to negotiations with the Board and interested parties, it would be equitable to consider sharing proceeds of any sale with the Management Company, who may distribute the funds to shareholder/flat owners. The Board has proposed a 50/50 division of proceeds. However, PSD would anticipate a higher share for the MPA and will report the outcome of the negotiations once concluded if members authorize the sale in principle.

13. The proposal at Mead House has less potential to be financially advantageous for the MPA. The Board has yet to discuss the matter formally. As the MPA would claim to be solely entitled to the full disposal proceeds that would arise from the sale of the newly constructed flats, it is very likely that further discussions would prove abortive.

C. Financial implications

A capital receipt could be generated at Sandgate House, part of which would be a capital receipt to the MPA to be determined.

D. Background papers

None.

E. Contact details

The author of this report is Trevor Lawrence, Director, Property Services Department.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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