Leasehold Information and Questions
Buying a flat is not an easy process due to a) the sheer size of the information that surrounds leasehold tenure and b) the numbe of parties to a lease. The first attempt to make the process easier was that of the introduction of prescribed lease clauses, a summary of the information contained within the lease. Since then 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 of using these forms is to make it easier for solicitors to advise clients because the information will presented in a standardised and consistent format. Great, but their use is not mandatory.
There are key differences between leases written before 2006 and those written after. Leases written before 2006 are usually very long in length, written in legalease and requiring reading all the way through to find the relevant parts. The main elements of these leases usually fall into 6 categories:
- Premises Demised by the Lease – This section of the lease identifies precisely the property being leased and should also contain a floor plan of the unit and include ownership of party walls;
- The Rights Granted and Accepted – This section should include all rights and restrictions including rights of access to the building and its common parts and the right to run services such as gas or electricity through the building into the flats;
- Restrictions relating to Noise or Pets;
- Repairs, Alterations and Decorations – This section identifies whether it is the landlord or the leaseholder that is responsible for carrying out repairs, alterations and decorations;
- Insurance – This section defines which party is responsible for insuring the building and describes the required extend of the insurance.
- 5a and 5b) Ground Rent and Service Charge – This information is usually located in two separate sections of the lease and both are paid by the leaseholder.
Leases written after 2006 have what are known as prescribed lease clauses, which not only summarise the details of the lease but contain all the information that the Land Registry needs to allow it to faster and more efficiently complete registration.
The details must be supplied correctly, in the format set out by the Land Registry and attached to the front of the lease where they can easily be found.
There is the option for the buyers solicitor to obtain a contract package from the seller’s solicitors. As a minimum it should contain the following:
- The lease;
- A completed sellers leasehold information form;
- Official copies of register of title (a bundle of documents pulled together to prove the current legal owner’s ownership of the title) and;
- A fixtures and fittings form.
Note: If the seller answers ‘unknown’ or ‘not to my knowledge’ on the sellers leasehold information form it is not an implication that any investigations or enquiries have been made before completing it and the buyer should be made aware of this
Those that have been extracted from LPE1 are noted accordingly.
Buildings insurance is a condition of taking out a mortgge and is a single policy that covers what are known as the common areas of blocks of flats, i.e. any areas not owned by leaseholders.
- Who insurers the building? (LPE1)
- Are the 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);
- 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?
- 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, such as the requirement for individual insurance?
- Are the interests of lessees and their mortgages automatically noted on the buildings insurance Policy?
Deed of Covenant
Most leases (both old and new) will contain an obligation for the selling leaseholder to get the purchaser to enter into a Deed of Covenant with the freeholder/managing agent/management company. This will confer rights between the parties and protect what is known as ‘Privity of Contract’ which can only confer rights or impose obligations upon those who are party to the contract. Even though legislation provides the same thing, if the lease stipulates this is what is required then it must be acted upon.
The solicitors acting for the seller will usually provide a draft form of the Deed of Covenant to the purchaser’s Conveyancing Solicitors during the course of the conveyancing process. The latter will then produce the final deed to be executed by the buyer to confirm they will comply with the terms of the existing lease.
However, under s12 of the Landlord & Tenant (Covenants) Act 1995, (covenants with management companies etc) it essentially states that on any assignment of the lease, the benefit and burden of covenants made by the tenant with the third party pass to the tenant’s assignee. The 1995 Act therefore still maintains what is known as privity of contract between the new leaseholder and the landlord/management company so to all intents and purposes, the Deed of Covenant is rendered unnecessary.
Having said that, it is one of the obligations contained within the lease. There will be a restriction placed on the register of title to the flat to prevent registration of any disposition unless it has been certified that the buyer has complied with this requirement. Failure to do so amounts to a lease breach and in many cases, the freeholders/managing agents will not accept any payments for service charges or ground rent.
Why? Because accepting payments could mean that the right of the freeholder to enforce any of the leasehold covenants later on could be ‘waived’ in other words unenforceable. Not only that but until its completed, additional arrears and penalties could also accrue, alongside the charging of interest (if the lease permits this).
- 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.
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 company, extend the terms of the lease of the property or anything similar? (LPE1);
- Has there been 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)?;
Freeholders can be individuals, companies who have a mixed use building of both residential and commercial units, finance companies, ground rent investment companies and freehold-owning resident management companies.
- 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?
- Have there been any breaches of the lease by the freeholder?
- 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 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 the use of 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?
The requirement of leaseholders to pay ground rent is created when a freehold piece of land is sold on a long lease (or leases).
- 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?;
Most freeholders will use the services of a managing agent due to the complexities of self-managing anything larger than half a dozen or so flats. During the conveyancing process any charges they make fall outside the terms of the lease under a separate contract and are classed as administration charges .They are usually negotiated between the managing agent and the agent of the seller, and chargeable to the purchaser.
The agent is free to charge what they wish as there is no statutory guidance but are required to be reasonable.
- What is the name and address of the managing agent?;
- Is there a copy of the management agreement?;
- Are any leaseholders (including the seller) in dispute with the managing agent?
- Does they answer pre-contract enquries?
- Does they approve and supply a License for Alterations?
- Does they supply a copy of a Share Certificate/Membership Certificate?
- Does they provide a Consent to sublet?
- Does they provide a Deed of Covenant upon sale?
- Does they ensure consent is required/granted before sale?
- Does they deal with the Mortgage registration after a sale?
- Does they deal with the registration of the assignment-the change of lessee after a sale?
- Does they deal with the Remortgage Notice of Charge (including service charge & insurance information);
- Does they deal with the Remortgage Notice of Charge (receipting only)?
- Does they supply an information pack to answer leasehold enquiries?
Resident Management Companies
Resident management companies are comprised of leaseholders through tri-party leases on new builds, and right to manage companies (where they don’t own the freehold) and via collective enfranchisement, where they do own the freehold and are marketed as ‘share of the freehold’.
- What is the name of the resident management company?
- Is it limited by shares or guarantee?
- Is the company registered at Companies House and still in existence?;
- Where can the Memorandum and Articles be found and does the lender require a copy?
- Has confirmation been obtained that the sellers share certificate will be handed over on completion along with a (signed) stock transfer form?.
Leaseholders will covenant (promise) to pay service charges to the the freeholder for the latter to carry out their own covenants within the lease. These are mainly to manage the common areas of the building i.e. all areas not owned by individual leaseholders and obtain buildings insurance.
- 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?
When buying the property with the intention of subletting, the mortgage offer must be a buy-to-let mortgage. The offer will usually set out the lender’s requirements in terms of a tenancy agreement and whilst each lender is different, most will need the tenancy to be an Assured Shorthold Tenancy for a term of no more than 6/12 months; with no provision allowing the tenant to stay on beyond the expiry of the term or to perpetually renew it. The tenant must also not be arelative of the borrower.
- Is the consent of the freeholder required to sublet?
- 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?
The decades of attempts to balance the rights of leaseholders with those of freeholders have led to long leasehold tenure becoming more complicated than ever, not just in purchasing (as this article shows) but in ownership as many leases are actually defective. leasehold has been seriously under the spotlight for the last couple of years, resulting in a consensus that legislative reforms are needed to bring the tenure into the 21st century. Pressure groups like the Leasehold Knowledge Partnership and the National Leasehold Campaign have been campaigning for leasehold tenure to be abolished in favour of Commonhold, which although it has been on the statute books since 2002 has seen pitiful take-up as it would remove freeholders and leaseholders altogether!
Personally I can’t see the abolition of leasehold because of the number of invested interests in the tenure. In the meantime, the campaigns continue and leaseholders still struggle!