Collective Enfranchisement: Lease Surrender, Re-grant and Completion
A solicitor will need to check the existing leases to see whether they are in a reasonably modern form and drafted to be consistent with any non-participant leases. They should include covenants to contribute to the company’s management, statutory costs and to assign the shares in the company on assignments. The leases must also not be defective or they contain ineffective, immoral or illegal clauses because otherwise they will require redrafting.
If the leases are not defective then all that will be required is for the leaseholders to enter into Deeds of Surrender and Re-grant in respect of each flat to extend the term to 999 years at a peppercorn rent. There is commonly an additional fee charged where there is a mortgage because of the need to obtain and document the consent of the mortgagee and the execution of a Deed of Substitution. There is a Land Registry fee of £50 per flat and where there is a mortgage there is often a small fee payable to the mortgagee as well.
This is also often the ideal opportunity to add any clauses in the lease that are not in the original lease, in order to get the best from it. Some of the most common additions are those of.
- Legal Fees Clause
The freeholder should be able to recover any legal fees incurred through chasing arrears through a debt collection service. This makes sense for when leaseholders refuse to pay, but personally I would be careful on this one because if leaseholders have fallen on hard times, adding legal fees to their debt is hardly going to be helpful.
- Mutual Enforceability Clause
A ‘mutual enforceability’ clause should be inserted because it gives leaseholders who do comply with the terms of their lease the right to compel the freeholder to force other leaseholders to do the same should they be in breach even though they will have to pay for any such measures taken by the freeholder.
- Sinking Fund Clause
Many leases do not make provision for the freeholder landlord to establish a sinking fund, a separate fund to cover repairs required for a building as it ages. A sinking fund clause is essential as leaseholders can rarely afford a lump sum from the normal service charge collection such as when, for example, a roof needs replacing.
- Wooden Floors Clause
Another clause that should be inserted concerns the issue of wooden floors. Not only should permission be sought from the freeholder but proof should also be provided that sound-deadening underlay will be also be installed. No work should be started until written permission has been granted.
- Works Restriction Clause
This is a very useful clause in that it can restrict the hours at which noisy renovation works can be carried out. Council guidelines already advise that on Saturdays, noisy work should cease at 12 noon but Saturdays could be excluded completely. The only thing to be aware of is that if too many ‘peace and quiet’ breaks are taken during the course of the working day then it will take more days for the works to be completed and increase the cost to the leaseholders.
The new RMC freeholder can continue to charge commissions on buildings insurance and ground rent will also be paid to them. The managing agent (if one is used which is highly likely) takes instruction from the RMC Directors but reports to both leaseholders and the freeholder. Leaseholders (in the form of the RMC) have total influence on maintenance and service charges.
On completion of the Agreement the landlord is entitled to recover any uncollected service charge expenditure so the Company may be faced with a demand for service charges before completion. This will be a demand which is un-quantified (not expressed or measured) and therefore unfunded.
The company can either choose to complete whilst reserving its position, make an application to the FTT and/or agree to a retention.
Service charge anomalies should be identified at an early stage and certainly before exchange of contracts.