What is a leasehold property?
As a purchaser of a leasehold flat, it is in your interest to understand the legal nature of the ownership and be clear on your rights and responsibilities. Leasehold flats can be created in purpose-built blocks, in converted houses/buildings or above commercial/retail premises. The terms of the lease may be in one core deed and varied by reference to other deeds or leases. You should read carefully all the relevant deeds to the property you intend to purchase.
There is quite a bit of jargon used in leases-especially older ones and the words ‘lessor’ and ‘landlord’ are interchangeable as are ‘tenant’ and ‘lessee’.
What is a lease?
Simply a contract that grants rights to occupation and use of property for a period of time – the “term” of the lease – in return for a rent that is fixed or variable amount. The lease is an interest in land granted by a freehold owner or by a landlord with an existing lease who wishes to grant a sublease of shorter duration than his own lease. Typically the owner or landlord might grant a lease to another person who develops the property and then lets it for occupation in units that may be for residential or commercial use.
A residential lease may be for 99, 150 years or longer term and the property, a flat, duplex or maisonette, may be bought and sold during that time so long as the lease permits this. The term is fixed and so decreases year by year until it expires (unless extended). The length of the unexpired term of the lease is important to both buyer and any lender. Most lenders will require in excess of 60 years left to run on a lease – but some lenders permit shorter periods. The length of the lease has less of an impact on value in certain Central London estate locations.
Both the landlord’s interest (the reversion) and the tenant’s term will have a value in the open market and may be transferred subject to the terms of the lease. When a leasehold flat is sold, the seller transfers (assigns) all rights and responsibilities of the lease to the purchaser, including any future charges which have not yet been identified.
Leases of longer than 7 years are registrable at the Land Registry, and there are specific requirements as to the format for leases and their plans in order to be registered.
What’s in a lease?
The lease of the flat usually relates to everything within the boundaries of the dwelling and may include plaster to walls and ceiling, floorboards and windows – but does not usually include the external or structural walls. The Landlord usually retains ownership of the structure of the building and the land it stands on and in the lease takes responsibility for maintenance and repair of the building.
The lease is a private contract between the Landlord and the Tenant and may include other parties such as a Management Company. The original tenant retains contractual liability after the lease is passed on although where the asset has a capital value the landlord will initially take up other remedies such as forfeiture (cancellation) against the current tenant rather than revert to the original tenant.
The lease contains promises by both parties. These will be in relation to insuring, repairing and maintaining the physical premises. Other terms govern conduct and use of the property and prescribe those situations in which landlord consent may be needed such as making alterations or applications for planning consent. The terms of a lease can only be changed by mutual consent, or a Court or the Residential Property Tribunal Service or Upper Tribunal (replacing the Lands Tribunal), so if any of the lease terms are unacceptable or onerous, the Landlord’s co-operation is required to make changes or variations. Such co-operation may be given at a price or not at all where the landlord has the power to refuse agreement.
Some leases contain general clauses about tenant rights to use common areas such as forecourts, communal gardens, communal/visitor parking, washing/airing areas and the like. Your solicitor will need to know that the plans accurately reflect the physical extent of the property you intend to buy and any garden, garage or parking space and refuse bin area.
You should also check for internal and external access and further enquiries will be needed where you may need to gain access over parts of the building that are not within your lease.
The lease sets out the obligations of the parties, what the tenant has contracted to do and what the landlord and/or management company is bound to do. The tenant’s obligations will include payment of ground rent and contribution towards the costs of insuring, maintaining and managing the building, and the lease will place certain conditions on the use and occupation of the flat. The Landlord will usually be obliged to insure and maintain the property and to manage and collect contributions from all tenants and keep the accounts.
What about the other tenancies in the same building?
It shouldn’t be assumed that all flats in a building are let on the same form of lease and this should be verified. Tenants are not generally entirely free to do whatever they want in or with the flat, but every tenant has the right to “quiet enjoyment” meaning peaceable occupation of their flat for the term of the lease,
A tenant has no direct contractual relationship with other tenants in the building; whereas the Landlord does. So if one tenant wishes another tenant to do or stop doing something, then provided the other tenant has lease with a relevant covenant or prohibition then the Tenant will have to rely on the Landlord to enforce that lease against the offending tenant.
Unless there is a clause in the lease in which the Landlord covenants to do this, the Landlord is under no obligation to take any action and cannot be made to do so by the complaining tenant. This is commonly called ‘mutual enforceability’ and where such a provision is missing from older leases it is unlikely that lenders will accept the lease as good security. It may then be necessary to obtain a deed from the Landlord to add the clause to the existing lease. However, a Landlord cannot be compelled to agree to this, or may only agree on onerous terms, such as the payment of a lump sum, plus costs and expenses.
If the Landlord does not agree, then an insurance policy may be an alternative acceptable to lenders. There are policies available that require payment of a single premium and such policies may be transferable from one buyer to the next. The average premium is between £300 -£500, and both the lack of the clause and details of the proposed policy must be reported to the Lender for prior approval. In these cases, the payment of the Landlord’s costs or the insurance premium is a matter for negotiation between the seller and buyer. We can assist with this if it arises.
What is ‘ground rent’?
Any leasehold tenancy is subject to payment of a rent to the Landlord. It may be nominal such as a peppercorn or a rent of the ‘ground’ that is more substantial – payable once, twice a year, or four times a year on the usual quarter days which in England and Wales are 25th March, 24th June, 29th September and 25th December. Ground rent is a specific requirement of the lease and must be paid on the due date whether or not invoiced. Isomer leases provide for review or increase in ground rent of fixed amounts and in others the amount is fixed by a formula and remains uncertain. Where a high ground rent may affect the value of the lease this can bee problematic and government intervention with legislation is under active consideration.
Who insures the building?
This is important and there are several ways in which this may be covered in the lease. We tell you about the insurance provisions, which are applicable to the property you intend to purchase. It is usual for the freehold owner to insure the structure of the building its boundaries and grounds and any central services such as boilers and drains. It is important that the value covered will be sufficient to enable any damage by insured perils to be reinstated. The landlord’s policy will usually cover standard risks but should be inspected for exclusions, disclaimers and conditions as well as an excess. The interest of the tenant and lenders should be noted so as to give protection under the policy.
Internal fixtures and contents of the dwelling owned by the tenant should be insured through the tenant’s contents policy for insurance.
Lender’s insurance requirements
We report on the property’s individual insurance arrangements to your Lender who may insist on approving the general insurance arrangements, the amount and type of cover and the insurance company. If the lease does not provide for insurance monies to be laid out in the replacement or rebuilding of the building and does not oblige the Landlord to insure the building for the full reinstatement value, satisfactory arrangements must be made.
Where the tenant is required to insure, your Lender may require you to add the property to the Lender’s block arrangements. We will be concerned to establish that all parts of the building are covered.
What is covered by the Policy?
The scope of the insurance should be carefully analysed to establish precisely what is covered e.g. the roof, foundations, boundaries and common parts. In blocks of flats, equipment (lifts, boilers, etc.) must also be considered. You will need to check that the list of risks covered is satisfactory as will any Lender.
Having considered what is covered and the risks included, the value of the cover will need to be established. Certain lenders insist that a flat is covered for a minimum rebuilding figure. If the current insurance does not insure the flat for the amount advised by your Lender or your surveyor, arrangements can be made to increase the cover to the amount required. You will need advice from a suitable expert on the appropriate figure.
Excluded risks may need to be covered separately along with personal possessions and fixtures, which are classified as “contents”. The disclaimer and excess on the policy will also need to be noted. Building insurance policies do not include cover for any contents. It is therefore essential that you arrange appropriate cover to take effect as soon as you move into the flat.
What are Internal Repairs?
Most leases oblige the tenant to keep the interior of the flat in a good and tenantable condition, including cleaning the windows regularly, and keeping the sanitary fitments in good order. There will usually be a requirement for redecoration to be carried out periodically.
Who is responsible for External, Main Structural and Common Parts Repairs?
The description in the lease of the flat and the block or building are critical in establishing which parts of the internal and external surfaces belong to the Tenant or the Landlord. In a well-drawn lease, the Landlord will be responsible for the roof, main walls, foundations, common parts, lifts, chutes, drains, pipes etc. The cost of repairs and maintenance is spent by the Landlord and then claimed from the tenants, usually through the service charge collected by the Landlord or the landlord’s agent.
However, in houses converted into flats or maisonettes, there can be many permutations of who owns what, and sometimes, it may be difficult to resolve this with certainty. Sometimes the lease may specify ownership, but not make it clear who is responsible to carry out repairs.
For example, the ground floor tenant may own the foundations, but there is no obligation on him to carry out repairs; or, there is a responsibility to carry out repairs and no provision in the lease to recover any part of the cost from the upstairs tenant.
Who is responsible for the exterior decoration of the building and common parts?
Some leases impose a strict repainting schedule such as . every 3 years. Others say that repainting should be carried when in the Landlord’s opinion it is necessary or desirable. The cost may arise in the year when expenditure is incurred or may be provided through a sinking fund which is built up each year for such types of periodic expense.
Who pays for major repairs?
Some leases make provision for a sinking/reserve fund into which tenants must make an annual payment. This will be necessary for buildings where roofs and boiler or lift replacement can involve large amounts. The fund is usually held in an interest-bearing account until monies are withdrawn to pay for major repairs. Where there is no such fund, a Landlord may refuse to carry out works until and unless it first receives either the full payment or an ‘on account’ payment from all tenants.
What are ‘Common Parts’?
‘Common parts’ are those areas of the building of which a flat forms part that are used in common by more than one of the tenants. Pathways, entrance hall and stairs, communal garage forecourt, communal standpipes and washing/airing facilities, rainwater goods, lifts, corridors, access ways and parking areas are all typical examples.
Decoration – What will my responsibility be?
Most leases impose an internal repainting and redecoration schedule such as once every 5 years. Some older leases may even specify the type of paint to be used!
Exterior redecoration is usually the Landlord’s responsibility – costs are recovered through the service charge, but sometimes the tenants are required to decorate the exterior of their own flat. This is obviously not as satisfactory. Some leases delegate the repairing and maintenance responsibility to a management company. The lease will usually make the party responsible for works also liable to reinstate any damage at their expense. You should ensure your contractors carry suitable insurance.
Service Charge – What is a service charge?
These are payments to the Landlord or Management Company for services provided collectively to the tenants in a building or development. Service charges can vary from year to year; they can go up or down without limit but they may be open to challenge under various Housing Acts to establish that they are reasonable. Before major expenditure is incurred a notice giving details of cost must be circulated to tenants and most well-organised blocks will provide a budget of the current and next year anticipated expenditures.
The charges may include:
- the building and third party liability insurance
- the cost of repairs, painting and maintenance
- communal light and heat
- communal carpeting and decoration
- main gate/door security
- porter/caretaker and his salary, and accommodation (if on site)
- garden tools and plants
- communal water rates
- water tanks etc.
- communal heating and hot water
- management fees and charges
- payment towards a sinking/reserve fund
- a ‘sweep up’ clause that enables the Landlord to make a charge for items not specifically mentioned elsewhere.
How is service charge contribution calculated?
The amount of the service charge may be formulated as a percentage or fraction of the total number or area of flats in the building, or the lease may provide for a specified amount of money to be paid during the year ‘on account’ of the charges. In the latter case, when the accounts are audited at the year-end, tenants are credited with any overpayment or asked to pay an ‘excess’ for the previous year to cover any under collection.
Will I be responsible for my seller’s unpaid contribution?
The service charge year is not necessarily the calendar year but will be specified in the lease. It may be necessary for the sellers’ solicitors to retain an agreed sum of money to cover the payment of the excess charge (when known) for the period of the seller’s ownership. It is unlikely that the seller or buyer can be told the exact figure by the Landlord or the managing agents, as this will only be ascertainable when the complete year’s accounts are finalised. The amount of the retention therefore is a best estimate based on available information.
How will I know the historic service charge position?
Before you commit to buy the flat we will obtain for you to see:
- audited service charge accounts for the last 3 years
- the current ground rent and service charge demand
- an estimate for service charges for the current year, if available.
These may not be available quickly, but we will send you on what we receive. Please inspect these carefully and raise with us any items/entries of concern. Problems may be encountered with absentee landlords or where there has been insolvency or the landlord entity has been struck off or is otherwise uncooperative.
What are reserve funds?Many leases provide for the Landlord to collect sums in advance to create a reserve or ‘sinking’ fund to ensure sufficient money is available for future scheduled major works, such as external decoration or lift replacement. The lease will set out the sums involved and when regular, cyclical maintenance works are due. Unspent contributions to the reserve fund are not repayable when the flat is sold.
Will I be allowed to alter the property?
Some leases forbid structural alterations altogether or changes to external features, windows and colour schemes. Others allow alterations after plans have been approved by the Landlord and/or his surveyor. The application is always at the Tenant’s expense, and if the plans are rejected, or approved subject to onerous conditions, there will be no refund of fees/expenses paid to the Landlord/agents/surveyor. If the seller has made unapproved alterations to the flat, this will need to be investigated.
Who else might have a right of entry to the property?
Every lease contains a right of entry (and forfeiture) for the Landlord and his agents to inspect the flat to ensure that the tenant has complied with his repairing and other obligations. Most leases also give the Landlord the right to enter the flat in order to carry out its repairing and maintenance obligations, usually by appointment, except in emergency. Other tenants may also have this right on the same basis. In a well-drawn lease, you should have the same right in relation to other flats and the common parts of the building.
Most leases will also grant and reserve rights known as ‘easements’ to enable the freeholder to manage the building and facilitate repairs for other occupiers and to adjoining premises and to enable the tenant to gain access to facilities and amenities. We would also expect to see cross rights of support and shelter, between flats or maisonettes.
Will I be able to Sell, Sublet or Mortgage the flat?
Most leases contain some regulations relating to disposal and require notice of change of ownership and/or mortgage to be served on the Landlord – there is usually a registration fee payable with the notice that can range up to £100.
Many leases prohibit subletting for a term longer than 3 years, or for a term shorter than 1 year. If the Landlord’s consent to a sub-letting is required, this may involve the Landlord’s solicitors, references, a formal written licence to sublet and payment of costs.
Selling the leasehold interest may require the Landlord’s licence. The landlord may have the right to approve the incoming tenant and be entitled to be satisfied that the person is financially able to make all payments reserved by the lease.
Non-UK nationals and foreign registered companies may also have to provide a UK address for service of documents or a deposit for the service charge.
Where the Landlord’s consent is not necessary, the lease may still require the buyer to enter into a deed with the Landlord to perform all the tenant’s covenants in the lease. This is called a ‘deed of covenant’.
What happened if I fail to pay the rent or service charge?
Where a tenant fails to pay the rent and service charge or persistently breaches the terms of the lease, then ultimately the Court can allow the Landlord to ‘forfeit’ the lease and repossess the flat. There is now much legislation that affects this topic to protect the tenant who will be at risk as a minimum to costs should the Landlord be forced to take enforcement action.
What other restrictions and obligations should I expect?
You should read the copy lease very carefully in the light of your intended use of the property and raise any queries or concerns. Most leases have a list of Do’s and Don’ts, which covers everything from not making noise between specified hours and prohibiting pets/animals to requiring carpeting in main rooms, inhibiting electrical equipment and not storing bikes or pushchairs in common areas or on landings/hallways. The Landlord usually reserves the right to change or add to this list in order to preserve ‘good estate management’.
What are the Landlord’s obligations?
These usually include:
- repair and maintenance
- provide services cleaning, lighting etc.
- preparation of service charge accounts
- employment of agents and contractors
- enforcement of one tenant’s obligations to benefit another
What is a Managing Agent?
A managing agent is appointed by the Landlord to manage and maintain the building on behalf of the Landlord in accordance with the terms of the lease and current relevant legislation and Codes of Practice. The agent takes instruction from the Landlord not the tenants, but should be aware of the tenants’ wishes and requirements. They are not necessarily part of the Landlord’s organisation or company.
The agent will receive a fee which will usually be paid by tenants as part of the service charges. This may be based on a specified percentage of the service charges, but a fixed annual fee is becoming more common. Where major works are involved, the agent may charge an additional fee, which would normally be a percentage of the total cost of such works.
What other rights do Tenants have?
Information – the landlord must provide his name and a contact address within the UK which must be stated on every demand for service charges. Tenants can demand summaries of the service charges, details of the insurance cover and have the right to inspect accounts and other documents.
Consultation on major works – the landlord cannot carry out major works to the building without first consulting the tenants in the proper fashion: if he fails to do this, he may not be able to recover all the costs.
Challenging service charges – tenants can apply to the Leasehold Valuation Tribunal (LVT) to seek a determination of the reasonableness of the charges.
Appointing a Manager – if the Landlord’s management is deficient, then tenants can apply to the LVT for the appointment of a new manager.
Extending lease under the terms of the Leasehold Reform Housing and Urban Development Act 1993 (LRHA) – an individual tenant who satisfies conditions (such as owning the property for 2 years as a principal or main residence) can demand a lease term extension of 90 years in addition to the term already granted. There are statutory provisions for calculating the purchase price and each case depends on its facts. If the price cannot be agreed, it will be set by application to the LVT.
Buying the Freehold – groups of tenants who satisfy conditions can get together and enforce the purchase of the freehold of a block, although some blocks of flats are excluded. This is called ‘Collective Enfranchisement’. There may be little or no advantage to exercising this right if the Freehold is owned by a Management Company where the tenants already own the shares of that company. Each case depends on its facts. Again the price is agreed between the parties or, if this is not possible, set by the LVT.
Right of First Refusal – where the landlord proposes to sell his interest in the reversion of the building, he must offer it to the tenants first.
Right to Purchase the Freehold of Houses – Under the Leasehold Reform Act 1967 and the LRA, it is possible to acquire the right to purchase the freehold of your house after the tenant has owned the property for a period of 2 years.
Useful address: ARMA – The Association of Residential Managing Agents, 178 Battersea Park Road London SW11 4ND, Tel 0207 978 2607 or email email@example.com. This professional body focuses exclusively on matters relating to the block management of residential property, whether for landlord or residential management companies. Members agree to adopt and comply with the principal objectives of the Association and undertake to follow the ARMA Code of Practice and the RICS.
What is a Residents Association?
This is usually an informal tenants grouping, which acts as a pressure group monitoring and checking the performance of the Landlord and any managing agents. Unless the association is registered, it has no legal standing, but it can be effective in making representations to the Landlord and in local affairs, e.g. road proposals/planning applications. Membership of such associations is usually a matter of choice. A nominal charge may be made for membership to cover running costs and administration expenses, but the committee is normally unpaid.
The Landlord may delegate all or some functions to a Management Company. This maybe connected to the landlord and is likely to be limited by shares or by guarantee. This is distinct from an agent appointed as a Managing Agents or a Residents Association. Please see below the note on Management Companies.
The landlord /tenants may be the shareholders and officers of the company, but not always. Where the tenants are shareholders, the lease will normally provide that on the sale of a flat, the incoming tenant must become a shareholder.
Although a non-profit making concern, a management company is still subject to all the provisions of Companies Act legislation, including filing annual returns, AGM’s and electing and notifying appointment/retirement of directors etc. In some cases, the freehold may been purchased by the management company and so the freeholder and the company will be the same.
Management Company controlled by Tenants
This can be advantageous if all tenants are active cooperative members – it gives them collective control over their own building, but it is a responsibility and important that all flat owners appreciate and understand that the company needs to be run properly, efficiently and in a legally correct manner. It may be helpful to retain a firm of solicitors to act for such a management company, who can advise on disputes and legal queries.
Dealing with insurance obligations – Insurance requirements will be set out in the leases and the risks covered by the block policy must include all the risks mentioned
Through its directors, the company should annually review the amount of the insurance cover and increase it in line with the cost of the rebuilding index – this is not the same as the rate of inflation referred to by the media. This information can be obtained from a surveyor, or insurance broker. Please note that if the leases do not allow for the cost of a professional insurance valuation, it will be necessary to obtain the consent of all the tenants before incurring the cost.
It may be appropriate to pay an increased premium to delete the “excesses” which normally apply to damage caused by certain risks, to try and avoid disputes about who bears the excess in certain cases eg if a pipe bursts in one flat and causes damage in another.
It is vital to pay renewal premiums as and when they fall due, before cover expires. If a tenant’s contribution is delayed, cover must not be allowed to lapse, and it may be necessary for other tenants to cover the extent of the delayed premium.
Who will deal with repairs and decorations?
The company should aim to maintain the whole building in a way that not only supports and enhances the value of each flat, but keeps them readily marketable as well. In deciding what work to carry out and how much to spend, two points should be borne in mind:-
- if any costs are incurred which fall outside the service charge provisions of the leases then the agreement of all the tenants will be needed, and
- compliance with Landlord and Tenant legislation (see later) is necessary.
What do I need to know about Statutory Controls on Service Charges?
Landlords and management companies are required to observe some formalities in collecting service charges; otherwise a tenant’s contribution may be impossible to recover legally under the Housing Acts 1985 onwards.
Even if work is carried out with the unanimous approval of all the tenants, the formalities should be followed in every case to avoid subsequent disputes and protect the company and other tenants from the difficulty that might arise if a flat changed hands before payment.
“Reasonableness” – Reasonable costs may only be recovered if they are reasonably incurred, advance payments must be reasonable and the work must be carried out to a reasonable standard.
“Estimates and notices” – Where the cost of proposed work exceeds a certain prescribed amount, then:-
- at least two estimates must be obtained, one of which must be from a completely independent contractor, and
- a notice referring to the estimates, describing the proposed work and “inviting observations” (with a name, address and final response date at least one month hence) must be given to each tenant, either personally or by display in the building where all tenants will see it, and
- the company must “have regard to” the observations and unless the works are urgent, they must not be started until after the specified date referred to above.
“Information” – There are detailed provisions enabling a tenant to require the Landlord to supply a written summary of costs – where there are 4 or more flats the summary must be certified by an accountant.
“Effect of failing to comply” – Non-compliance with these formalities not only makes members and directors liable to a fine, it also makes some or all the costs incurred impossible to recover from the tenant.
So a management company should: Send out service charge demands before 18 months have elapsed from the date of the work.
If this is not possible, ensure that each tenant has been notified that the costs have been incurred and of the requirement for their contribution. This is especially important when advance payments have been made, but additional monies are needed at the end of the year in a balancing statement. If the final statement with demand is not made within 18 months of the expenditure, the warning needs to be given within that 18-month period.
NB This is a brief summary only and in the case of a dispute, legal advice should be taken.
What do I need to know about the Companies Acts?
Although company law is complex, the parts that apply to a well-run management company should be reasonably straightforward. There is set out below an incomplete summary and if problems arise, legal advice should be taken on the specific issue.
- Directors meetings should be held regularly to make decisions, especially about insurance and maintenance. Such meetings may be combined with shareholders’ general meetings. Directors meetings can be relatively informal but enough notice should be given to all directors to give them a reasonable chance to attend.
- An annual general meeting (AGM) (21 days notice required to all shareholders) must be held each year. If every shareholder signs a consent form, this period of notice can be shortened. Functions of the meeting should include approval of the accounts and (re)appointment of the company’s auditors.
- General meetings may be called at other times, e.g. to pass special resolutions.
Formal audited accounts and a directors’ report must be prepared each year not only for each tenant/shareholder but also for filing at Companies House. The requirements are complicated and the accounts will require auditing by an independent accountant who is appointed at each AGM.
Each year it is necessary to file a form of annual return within 42 days of the annual general meeting together with the accounts. Delays can result in the company being struck off the Register. If this happens, legal help may be required to put things right and it is likely to take time and be expensive. In the meantime, the flats may become unsaleable and the management system cannot operate because the company has ceased to exist. So even if you are not personally involved in submitting returns, it is worth making sure that whoever is responsible is up to date. Changes in directors and the company secretary should also be registered when they happen and forms for this can be obtained from Companies House.
Company Secretary – often, but not necessarily, one of the tenants who: –
(a) attends all company meetings and keeps minutes,
(b) issues notices,
(c) deals with correspondence,
(d) makes Companies House returns,
(e) issues share certificates and registers transfers, where the company has a share capital,
(f) keeps company records,
(g) sends out copies of balance sheets and auditors and directors reports,
(h) may keep the company’s cheque book, bank statements and accounting records, and
(i) may keep copies available of the companies deeds, including the counterpart leases, the insurance policy, the memorandum and articles of association and any guarantees which relate to the common parts, e.g. rising damp or timber treatment guarantees and reports.
Generally Directors must use reasonable care (with qualified advice where necessary) to run the company in its best interests. They should ensure there is no conflict between their personal interests and that of the company and must disclose any interest they have in any proposed arrangement with the company.
It may be convenient to delegate certain management functions, e.g. responsibility for day-to-day maintenance or cleaning, to a smaller group, an individual or even a managing agent. It is however normally sensible to require at least two signatures on company cheques.
Directors are responsible to see the company’s accounts present a “true and fair” view. Directors will be personally liable for the company’s debts where they allow the company to incur obligations when it is not able to pay its debts when they fall due – even though the assets may exceed liabilities. Director’s and Officer’s insurance is advisable.
It is also the company secretary’s duty to notify the directors on becoming aware of impending or probable insolvency, and of the consequences of continuing to operate.
Failure to Comply
Company directors and the Secretary may become personally liable and/or liable to fines for compliance failure. Major omissions or delays imperil the working of the management scheme and company and hence the marketability of the flats.
Summary of Lease terms – Lease terms may have considerable impact on value, use of property and value.
|1||The property||Boundaries may be set by description in the lease or on a plan and should be compared by inspection|
|Rights||Rights of access or use of essential amenities such as gardens, refuse, parking, storage should be checked|
|2||Length of lease|
A term of years starting from a date and expiring on specific date
|Most leaseholders will qualify for statutory extension rights after 2 years ownership.|
The price payable for extending or buying freehold are fixed by statute and court rules unless is agreement is reached.
The valuation rules change once the lease term is less than 80 years but the impact may affect value before then
|3||Remaining years of term from 1st January next year||The length of remaining term may not meet lender requirements that vary between lender companies|
|4||Initial annual rent||The level of rent may affect lender requirements|
|Review and dates of rent increase|
What is the basis for increase in the rent?
|The frequency may impact on the amount of the increase in rent- e.g .doubling every x years.|
Some leases provide for rising rents and others for reviews by reference to index
|Where ground rents exceed £1,000 p.a. in Greater London and £250 p.a elsewhere in England an unintended consequence of increasing levels of ground rents is that leases are classed as an ‘assured tenancy’ under the Housing Act 1988. This means that the landlord can seek to end the occupancy by an order of the court, and attempt to evict the tenant.|
The Government is considering amendment to the Housing Act 1988 to exempt leaseholders from this legislation that was intended for assured tenancies.
Where ground rent is more than three months in arrears then a landlord can automatically seek a possession order. The mandatory nature of Ground 8 means a judge cannot refuse to make the order.
|5||Building insurance and services for property and estate amenities.|
How are actual costs certified each year?
Who approves budgeted estimate of costs each year?
Are payments on account required
each half year on fixed dates?
|Services may be supplied by landlord or delivered through a variety of possible structures and arrangements each with own governance|
There may be mechanism for payment on account based upon estimated charges
|is there any sinking fund for future expenditure or repairs?||Major repairs and replacement will be required from to time and the arrangements including cost may or may not be pre -planned|
|6||Responsibility for repairs||Some repairs will be responsibility of tenant.|
The definition of premises leased is relevant and should specify who is liable for windows, balconies, roof spaces and external doors, cellars, common or shared spaces
|7||Transfer or underletting|
What restrictions apply?
Whose approval is required?
|8||Any restrictions on permitted use of the premises and any necessary access and services|
|9||Obligations on use of premises are enforceable between leaseholders||Lenders will not accept lease as security unless this is confirmed|
|10||Other consents – alterations, pets, etc.||Consent may be needed from the landlord and others for certain activity or changes|
|11||Forfeiture on bankruptcy clause.||Affects capital value and Lenders will not accept a lease as security unless this is confirmed|
|12||Any Restriction placed on registered title?||May need to be removed or replaced in order to sell the property|
When buying a long lease you need to be aware of all the implications of this type of title and how it compares with other properties that may be available for sale or purchase both now and in the future.
Generally speaking, a property held with freehold title has a higher value than the same property with a leasehold title. The difference in value will be a reflection of the length of lease, the rent and any other charges payable under the terms of the lease together with the impact of all other obligations (covenants) owed to the landlord(s). The restrictions on leaseholders in relation to alterations and method of use of the property are likely to be more onerous compared to the type of restrictions or reservations which may apply to a freehold but only in some cases.
The duration of a lease will be a major factor in determining its value and this is highlighted by legislation that enables qualifying owners of long leasehold interests in houses and flats to extend the lease or buy the freehold. In each case a valuation fixed by statute will establish the price to be paid and this can vary significantly based upon the remaining lease term and the rent payable to the landlord over the remainder of the lease.
In this context concerns have been raised in Parliament and legislative action is likely to set new restrictions that will apply to new leases where none exist at the moment. This is likely to impact on the amount of the rent that a landlord of a long leasehold house or flat can charge initially and on review as well as the frequency of increases in rent.
The (ground) rent payable on the grant on a new lease varies widely but now averages over £300 a year and legislation may bring that down to £10 p.a. maximum for future leases.
On a property marketed at £500,000 that reflects just 0.06% of the price at which the property is sold. However, if that rent significantly increases after each period of 10 years then it will quickly escalate and represent a much higher proportion of the market value of the property. Legislation may in the future limit rents to 0.1% of the value.
There is a complication where the rent exceeds or comes to exceed £1000 per annum in Greater London or £250 per annum elsewhere. In this situation the lease becomes an Assured Tenancy and subject to the provisions of the Housing Act 1988. This gives the landlord rights to end the lease in certain situations. That places the property in a different category from most long leases and will not be acceptable security for borrowing from lenders.
The acceptability and reasonableness of lease terms and conditions are important to enable you to evaluate the long-term value and appreciation of your property compared to other properties on the market today, your ability to mortgage the property and your ability to sell property without difficulty in the future.
The position stated as at October 2018 in government consultation on this matter is available at on the Internet at www.gov.uk/government/uploads/system/uploads/attachment_data/file/632108/Tackling_unfair_practices_in_the_leasehold_market.pdf
(A) The right to extend a Lease
You may have the right to purchase a new Lease for a further ninety years from the Landlord. This right will arise if you can show that you have owned the property for a specified period and comply with any other qualifiers. There are complicated provisions for calculating the purchase price.
(B) Right to Purchase the Freehold
You may have a right to “collective enfranchisement” – this is a right to purchase the Freehold jointly with other long leasehold tenants in the block/building. There are qualifications to be met and certain blocks of flats and Landlords are excluded. There may be little or no advantage in exercising this right if a Management Company owns the Freehold and you own shares in the Management Company.
(C) Right to Purchase the Freehold of Houses
You may be entitled to or acquire the right to purchase the freehold of your leasehold house after you and/or your predecessors fulfil certain occupation/ownership requirements.
(D) Tenants’ Right of First Refusal to Purchase Freehold
Under the terms of the Landlord and Tenant Act 1987 the landlord may not sell the freehold of the building without first giving the tenants collectively two months’ notice. If notice is not given, the tenants may have certain rights to purchase the freehold at the same price within a limited period.
(E) Statutory Rights relating to Service Charges
In certain circumstances, there are a number of statutory protections for tenants relating to service charges. Items of service charges may be challenged if considered unreasonable and where a service charge item is demanded before the costs have actually been incurred by the landlord (subject to a certain limit) the landlord must first supply the tenants with at least two estimates for works to be carried out and invite observations from the tenants and any recognised Residents’ Association.
Tenants have the right in most cases to require the Landlord to provide a written summary of costs. Where there are more than four flats in the building (or the costs also relate to another building) the summary must be certified by an accountant.