Asking Questions When Buying Leasehold Flats
There have been sporadic attempts to make the purchasing of leasehold properties easier and since the introduction of prescribed lease clauses there have been two more leasehold forms created: the (amended) second edition of the LPE1 form released on 1st October 2015 which can be used for asking for information on behalf of the buyer about a property held by freeholders, resident management companies and managing agents.
The amendments have been made to:
- Reflect changes in the Association of British Insurer agreements with lenders;
- Provide better definitions and general wording;
- Include new questions aimed to reduce the need for additional enquiries, for example with regard to any transfer fees payable on sale.
This form was introduced alongside LPE2 (the Buyers Leasehold Information Summary) in response to recommendations from 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 freeholder consents.
The summary is not a legal document but is designed to highlight the key financial responsibilities taken on as set out in the full Leasehold Property Enquiry Form.
Note: The seller should only however respond to these enquiries if they are the following:
- The Rentcharge Owner;
- The Management Company;
- The Managing Agent;
- The appointed representative for any of the above.
The idea is that using both forms makes it easier for solicitors to advise clients because information will be received in a standardised and consistent format although their use is not mandatory
QUESTIONS TO BE ASKED
What follows is an alphabetical list of questions that need to be asked when purchasing a leasehold flat. Those that have been extracted from LPE1 are noted accordingly:
- Are the buildings insurance premium contributions paid up to date for the Managed Areas including the Property? (LPE1);
- What period is covered by the last demand? (LPE1);
- Has the premium been paid in full? (LPE1);
- Have any claims been made against the policy during the last 3 years? (LPE1);
- Are any claims anticipated? (LPE1);
- Are the Managed Areas covered by the policy? (LPE1);
- Has a fire risk assessment been completed and have any recommended works been carried out? Note: If it’s ‘no’ to either question, has the insurer been made aware of this and accepted the position? (LPE1);
- What is the date of the last buildings reinstatement cost assessment? (LPE1);
- Is the insurance premium included in the service charge budget? (LPE1).
- Are there any defects in the lease relating to buildings insurance?
- Who insures the building?
- Are the buildings insurance payments up to date?
- Are the interests of lessees and their mortgages automatically noted on the buildings insurance Policy?
- Is there an up to date health and safety risk assessment?
- Has there been an asbestos survey carried out?
- Is there an up to date asbestos management plan?
Disputes and Enfranchisement
- Are there any on-going forfeiture proceedings in relation to the Property? (LPE1);
- Are there any documented unresolved disputes with the Lessees of any of the properties in the Managed Area? (LPE1);
- Have any steps been taken by anyone to enfranchise, exercise the right to manage, form a right to enfranchise or management ccompany, extend the terms of the lease of the property or anything similar? (LPE1);
- Are you aware of any breach of the terms of the lease of this Property?;
- Has any Notice under s5 of the Landlord and Tenant Act 1987 been served? (the right of first refusal);
- What is the name and address of the freeholder?
- Who are the freeholder’s solicitors?
- Is the freehold owner deemed a ‘absentee landlord’ i.e. are his whereabouts known?
- Is the freeholder deemed ‘absent’ i.e. his whereabouts are unknown?
- 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?
- Is there a head lessee?
- Is the flat ‘share of the freehold’?
- Is the company limited by guarantee?
- Is the purchaser required to become a member of the company?
- What is the annual Ground Rent payable for the Property? (LPE1);
- Is the Ground Rent paid up to date? (LPE1);
- What period is covered by the last demand? (LPE1);
- Can a copy receipt be obtained from the landlord showing that the seller has paid the ground rent for the last three years?;
- Is the ground rent paid to the landlord separately to service charges paid to managing agents?;
- What is the name and address of the managing agent?;
- Is there a copy of the management agreement?;
Resident Management Companies
- What is the name of the resident management company (or a Right to Manage Company)?;
- Is the management company registered at Companies House and still in existence?;
- Where can the RMC (RTM) Memorandum and Articles be found?;
- Is the RMC limited by shares?
- Has confirmation been obtained that the sellers share certificate will be handed over on completion along with a (signed) stock transfer form?;
- Does the lender need a copy of the company’s Memorandum and Articles of Association?
- How many properties contribute toward the maintenance of the Managed Area? (LPE1);
- What is the current annual Service Charge for the Property? (LPE1);
- Is the Service Charge paid up to date for the Property? (LPE1);
- Is any excess payment anticipated for the Property at the end of the financial year? (LPE1);
- What period is covered by the last demand? (LPE1);
- In the last 12 months, has any inability to collect payments, from any party, affected (or is it likely to affect), the maintenance of the Managed Area? (LPE1);
- Does a Reserve Fund apply to the Managed Area? If ‘yes’ what is the amount collected from the lessees and held in the Reserve Fund? (LPE1);
- Is the amount in the Reserve fund expected to be sufficient to cover the known Section 20 expenditure? (LPE1);
- Can the date when the Managed Areas were last decorated, internally and externally be provided? (LPE1);
- Within the next 2 years, are any Section 20 completed but unpaid works proposed to the Property due, anticipated or N/A? (LPE1);
- Is any increase in the Service Charge over 10% or £100 (whichever is the greater), anticipated in the next 2 years? (LPE1);
- Are there any outstanding Service Charge consultation procedures? (LPE1);
- Are the Managed Areas known to be affected by Japanese knotweed and is there a copy of any Japanese knotweed management plan in place? (LPE1);
- Are there any transfer fees, deferred service charges or similar fees expressed as a percentage of the Property’s value payable on an event such as resale or subletting? (LPE1);
- Are the service charges calculated on a percentage or a square footing?
- Are there any interest charges and penalties for late payments?
- 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?
- Can the previous 3 years service charge accounts be provided?
- Have any problems with the service charges been reported to the lender (if the property is mortgaged)?
- Is there a sinking fund to cover large items of expenditure that come as the building ages?
- Are sinking fund payments up to date?
- Is there a reserve fund to cover day-to-day maintenance
- Are reserve fund payments up to date?
- If a sinking/reserve fund is held, how much is being held for this particular property?
- Are there or will there be any major works either ongoing or scheduled for a later date?;
- Is a receipt for rent and service charges required by the lender following completion?
- 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:
- Are there any service charge collection dates?
- Are there any incentive for arrears to be paid up quickly? Note: 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. There is however a marked difference between those that can’t pay and those that won’t pay;
- 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;
- 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;
- Does it enable the fees of a managing agent to be an allowable service charge expenditure item?
- Are there provisions for a reserve fund which is designed to even out normal day to day service charge expenditure?
- Are there provisons for a sinking fund to cover large areas of expected (or unexpected) expenditure that comes as the building ages?
- Does the lease allow subletting?
- Is the consent of the freeholder required?
- Does the lease allow the subletting of the property to tenants on housing benefit?
- Is there a sitting tenant?
- Is the current mortgage a buy-to-let mortgage?
- Does the lender need a counter-part or a certified copy of the tenancy agreement?
Transfer and Registration
- Is a Deed of Covenant required, and what are the costs (including VAT)? (LPE1);
- Is a Licence to Assign required and what is needed (such as references, and any applicable costs)? (LPE1);
- Has consent been given to any alterations or additions to the property? (LPE1) Note: If consent has been granted then it will 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.
- If applicable, what is the procedure and cost for obtaining a certificate in accordance with a restriction in the Proprietorship Register at the Land Registry? (LPE1);
- How many other properties are there in the Managed Area? (LPE1);
- Are they all leased on leases with similar terms? (LPE1);
- Is the building in which the Property is situated known to be an HMO? Note: if ‘yes’ can you confirm that the regulations applicable to s257 Housing Act 2004 (HMOs) have been complied with? (LPE1);
- How many unexpired years are there remaining on the lease?
- Have there been any breaches of the lease by the freeholder?
- Have any lease breaches been remedied or are they still ongoing?
- Does the lease allow the keeping of pets?
- Can the lease be extended?
- Does the lease allow you to use a car park or space and allow access to the gardens?
- Are there any other conditions or restrictions in the lease which impacts on how the property is used
Whether any amount of forms will make leasehold conveyancing any easier is still debatable and there is still the issue of conveyancing solicitors who are often not very well versed in leasehold tenure.
So will Commonhold really take off and provide the third option for owning property, or will it eventually replace both leasehold and freehold? Only time will tell but considering the vested interests in the two tenures, I doubt it.
Bodies associated with conveyancing are as follows: