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The many legislative changes made to try and make freeholders and leaseholders more equal has in fact made a complicated tenure even more complicated although it is fair to say that some of the rights granted to leaseholders have been used successfully. What hasn’t changed is that freeholder still owns everything, i.e. the structure, roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings as well as anything inside the building such as plant rooms, lift motor rooms, and meter cupboards. These are defined as common areas. Leaseholders on the other hand still only own an ‘interest’ carved out of the dominant estate of freehold in the form of a lease, a document which acts as a contract to allowing leaseholders to live in the property for a pre-determined amount of years. So the tenancy of long leasehold still falls between that of being a freeholder and a renting tenant.

Covenants

Covenants still lie at the heart of all leases, which are promises made by the parties to do certain things (positive), and not to do certain things (restrictive). For example, freeholders covenant to repair and maintain the common areas, and place buildings insurance. Leaseholders covenant to pay service charges to enable the freeholders to adhere to their own covenants and to pay ground rent (which is not exactly what it says on the tin). They also covenant not do certain things such as not to sublet without the consent of the freeholder, and not to alter the property without freeholder consent (to name just two)  but how many covenants and what they are depend on how the lease is drawn. Covenants are either going to expressly written into the lease or implied and its important to be aware that the latter have just as much force in law as the former.

Lease Terms

A lease of a new build property usually starts with a term of 99 or 125 years and each time the lease is sold, the unexpired term (how many years are left) reduces. Other leases in older buildings can be very short, with some having so few left that they are difficult to market due to the criteria demanded by lenders. Others are of a duration of 999 years (where leaseholders have exercised their right to group together to buy the freehold themselves) and other leases fall somewhere between the two due to another leaseholder right having been exercised, that of individual lease extensions.

The initial ground rent is usually £100 to £250 per annum in increments, the rent review frequency is 5 to 33 years with the most common rent review type being a fixed uplift, a regular rise according to the Retail Price Index which allows the rent to track inflation. Other types are the House Price Index or the percentage capital value of the property.

QUESTIONS WHEN BUYING A LEASEHOLD FLAT

To prove just how complicated purchasing a leasehold flat is today, just take a look at the following guide to a number of questions that have to be asked:

About the Lease

  1. Are the leases in a similar form throughout the development (which ideally they should be);
  2. How many flats are there?
  3. Are all the flats sold on long leases:
  4. How many unexpired years are there remaining on the lease?
  5. Can the lease be extended?
  6. Have there been any breaches of the lease by the freeholder?
  7. Have any lease breaches been remedied or are they still ongoing?
  8. Does the lease allow the keeping of pets?
  9. Does the lease allow you to use a car park or space and allow access to the gardens?
  10. Are there any other conditions or restrictions in the lease which impacts on how the property is used?
  11. Is a direct Deed of Covenant required? This often applies to leases written before 1996 which have a need for the new leaseholder to give their details to the freeholder/managing agent in the form of a Deed of Direct Covenant meaning that they agree to abide by all the original lease terms before completion and through the duration of ownership. It will be provided by the solicitor acting for the selling leaseholder in a draft form to the buyers conveyancing solicitor, and the latter will then produce the final deed for the buyer to confirm that they will comply with the existing lease terms

Buildings Insurance

  1. Are there any defects in the lease relating to buildings insurance?
  2. Who insures the building?
  3. Are the buildings insurance payments up to date?
  4. Are the interests of lessees and their mortgages automatically noted on the buildings insurance Policy?

Freeholders

  1. What is the name and address of the freeholder?
  2. Who are the freeholder’s solicitors?
  3. Is the freehold owner deemed a ‘absentee landlord’ i.e. are his whereabouts known?
  4. Is the freeholder deemed ‘absent’ i.e. his whereabouts are unknown?
  5. Has the Landlord ever served a Notice on the seller (or to their knowledge their predecessors in Title) in matters relating to the Lease or the use of the flat?
  6. Have there been any consents granted for alterations? If so, they should show as part of the Title Document as a Deed of Variation. If there have been structural alterations made without permission then this renders the lease defective and it must be remedied;
  7. Is there a head lessee?
  8. Is the flat ‘share of the freehold’?
  9. Is the company limited by guarantee?
  10. Is the purchaser required to become a member of the company?

Note: If the propety has an absent freeholder it is less attractive to mortgage lenders. If they agree to lend but then have to reposses a mortgaged property the size of the market they can then sell to will be limited. This may result in the property having to be sold at auction and at a loss to the lender. It will also not be possible to exercise the right to buy the freehold during the conveyancing process because a premium needs to. be agreed with the freeholder.

On the other hand if a clear title can be provided (also known as a  “clean title,” “just title,” “good title” and “free and clear title”) which is a title without any kind of levy from creditors or other parties, they may lend as there is no question as to legal ownership.

Ground Rent

  1. Can a copy receipt be obtained from the landlord showing that the seller has paid the ground rent for the last three years?
  2. Is the ground rent paid to the landlord separately to service charges paid to managing agents?

Health and Safety

  1. Is there an up to date health and safety risk assessment?
  2. Is here an up to date fire risk assessment?
  3. Is there a copy of the asbestos survey for the common parts?

Managing Agents

  1. What is the name and address of the managing agent?

Notices

  1. Has any Notice under s5 of the Landlord and Tenant Act 1987 been served? (the right of first refusal)

Resident Management Companies

  1. What is the name of the resident management company (or a Right to Manage Company)?
  2. Is the management company registered at Companies House and still in existence?
  3. Where can the RMC (RTM) Memorandum and Articles be found?
  4. Is the RMC limited by shares?
  5. Has confirmation been obtained that the sellers share certificate will be handed over on completion along with a (signed) stock transfer form?
  6. Does the lender need a copy of the company’s Memorandum and Articles of Association?

Service Charges

  1. What do service charge cover?
  2. Are the service charges calculated on a percentage or a square footing?
  3. Are there any interest charges and penalties for late payments?
  4. Will there be a surplus or deficit in the service charge accounts after the financial year-end and are they transferred back across individual leaseholders?
  5. Can the previous 3 years service charge accounts be provided?
  6. Have any problems with the service charges been reported to the lender?
  7. Is there a sinking fund to cover large items of expenditure that come as the building ages?
  8. Are sinking fund payments up to date?
  9. Is there a reserve fund to cover day-to-day maintenance
  10. Are reserve fund payments up to date?
  11. If a sinking/reserve fund is held, how much is being held for this particular property?
  12. Are there or will there be any major works either ongoing or scheduled for a later date?;
  13. Is a receipt for rent and service charges required by the lender following completion?
  14. What happens if confirmation of ground rent and service charge receipts cannot be obtained, such as when the freeholder is absent?

If the answer to any of the following questions is ‘no’ then the lease is defective in this area:

  1. Are there any service charge collection dates?
  2. Are there any incentive for arrears to be paid up quickly? If service charges are the only form of funding then this can cause a serious knock on effect as arrears increase and work can’t be carried out as expected. It’s also a particular problem for those that do pay their service charges on time, not least from a fairness perspective;
  3. Are there any provisions for advance maintenance contributions to be set because before expenditure, service charges are sometimes only equal to the ground rent that can be collected;
  4. Are there limits on flats to pay for what they reasonably use. For example, a flat on the ground floor might have to pay for the maintenance and repairs of the lift even though they don’t use it or a flat with a private front door may find themselves having to pay towards redecoration of the internal communal entrance;
  5. Does it enable the fees of a managing agent to be an allowable service charge expenditure item?
  6. Are there provisions for a reserve fund which is designed to even out normal day to day service charge expenditure?
  7. Are there provisons for a sinking fund to cover large areas of expected (or unexpected) expenditure that comes as the building ages?

Subletting

  1. Does the lease allow subletting?
  2. Is the consent of the freeholder required?
  3. Does the lease allow the subletting of the property to tenants on housing benefit?
  4. Is there a sitting tenant?
  5. Is the current mortgage a buy-to-let mortgage?
  6. Does the lender need a counter-part or a certified copy of the tenancy agreement?

SUMMARY

Whilst some  elements of leasehold purchasing is the same as that of freehold, such as checking the property title, and carrying out local authority searches many prospective leaseholders still have no idea what they are purchasing and the long-term financial commitments they are making.

There have been periodic attempts to make the leasehold conveyancing process less complicated and since the introduction of prescribed lease clauses there have been two more leasehold forms created: LPE1 for use from 1st October 2015, which has questions asked on behalf of the buyer, and LPE2, the buyers leasehold information summary which was introduced in response to the Competitions and Market’s Authority Market Study on Residential Property Management Services. This study looked to make clearer the ongoing financial obligations leasehold purchasers were committing to making. By that they meant service charges, buildings insurance, ground rent, administration charges and the freeholder granting consents such as subletting and altering the property.

We now have a new Freeholder Enquiries Form created by ARMA in March 2019 with questions to be asked on behalf of the buyer.

Note: The seller should only however respond to these enquiries if they are the following:

  1. The Rentcharge Owner;
  2. The Management Company;
  3. The Managing Agent;
  4. The appointed representative for any of the above.

I suppose the real questions are though, will any amount of forms make leasehold conveyancing any easier? Lease aren’t the same from development to development and even today, they can be badly written and therefore defective. And what about the knowledge of conveyancing solicitors who are more than likely not very well versed in leasehold? Buyers of new build properties are being kept in the dark on key issues such having to pay for road maintenance and estate services in addition to paying their Council and many of them find their ground rents sold to parties without their knowledge. As a result their ground rents have raised to such a degree as to make their properties unsellable!

Leasehold tenure is now getting a lot of attention from campaign groups and the Government with Commonhold, a third way of purchasing property introduced in the Commonhold and a Leasehold Reform Act 2002 also being revisited (as it has yet to take off) but will consumers ever see the demise of leasehold, as has happened in other countries? Unlikely considering the all the vested interests!

 

 

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