Flat / Apartment Lease Issues
Where the property in sale is a flat/ apartment, or where is otherwise part of a larger structure with privately managed parts, the unit is usually held under a long lease. Leases are typically shorter than those in Ireland and ground rents are typically higher. A lease of 120 years at a ground rent of £300 per year would not be unusual. The lease acts as a mechanism to secure the management of the common parts, and the ground rent may constitute an investment for the original developer.
Commonly, the landlord’s reversion is sold by the developer after completion of the development. The right to receive the ground rents many represent a significant asset. It is, in effect, the capitalised value of the sum of all the ground rents in the development. The legislation requires that the developer gives the owners, a right of first refusal when the freehold interest / ground rents are sold. The right may only be exercised collectively by the owners. There are procedures for exercising this right of pre-emption. In practice, the collective right to purchase is not commonly exercised.
The management obligations may be undertaken by or on behalf of the landlord itself, who may be the original developer or its successor. There may be a landlord party only to the lease. There may be management company, which is also party to the lease. In this case, the landlord party to some rights and obligations, such as those relating to rent, while the management company may be to the obligations in respect of service charge and the management, maintenance and repair of the common parts.
The landlord or management company almost invariably retains professional management agents to manage and maintain the common parts. The management agents will collect the service charge which is payable under the long lease (or commonhold arrangements) in order to finance the management and maintenance of the common parts. They may also collect the ground rent for the landlord.
The management company, if there is one, (as opposed to the management agents) is commonly owned and controlled by the flat owners. This need not necessarily be so. It may be a company limited by guarantee or a company limited by shares. The same concepts as exist under Republic of Ireland Companies law, apply. There is no direct equivalent of the Irish Multi-Unit Development Act, but there are important statutory protections, including the right to change the management company.
The original flat lease will contain the landlord and / or management company’s obligations in respect of management, maintenance and repair. It will set out what services it may or must provide. At a bare minimum, from an owner’s/lessee’s perspective, this must include repair and maintenance of the structure and common parts, insurance, payments of head rents, furnishing, cleaning and lighting of external and internal common parts, maintenance of grounds, and maintenance of lifts. Discretionary services may include caretakers, heating, caretaking and security.
The leases will provide a mechanism for apportionment of the service charges between the owners. This may be equal or based on floor area, rateable valuation or some other criteria such, as a fair apportionment. The mechanism for calculation of the service charge and its charge to owners will be set out. Typically, there will be an annual budget which is billed in conjunction with an adjustment figure for the prior year. The adjustment figure will be ascertained after accounts have been finalised for the prior year.
A reserve or sinking fund is desirable to meet long-term capital renewal costs. The level of reserve within the fund will be an important consideration in the purchase of an older property.
The fact that a flat/apartment title is held under a lease raises title issues in respect of the nature of the lease. The ground rent may be burdensome. The remaining unexpired term of the lease may be unacceptably short. While there exists significant enfranchisement legislation in England and Wales, is it not as generous as the ground rent purchase legislation in Ireland. The level of ground rent is likely to be relatively higher than in Ireland so that it may be a significant cost, even where the enfranchisement legislation applies.
The lease is likely to contain terms and conditions regarding the assignment. Apartment lease commonly requires the landlord’s consent to the assignment. Landlord and tenant legislation provides that consent must not be unreasonably withheld or delayed. In practice, provided the tenant is broadly compliant with the lease covenants and has paid his or her service charge in full, consent is unlikely to be withheld. At a minimum, there will usually be a covenant obliging the lessee to notify assignments to the landlord and in some cases, with the management company as well.
Commonhold
2002 Legislation provides for commonhold ownership. This allows for the creation of management schemes for flats and other units with common parts, without the creation of a series of leases in common form. The type of ownership is common in other jurisdictions, including many Continental jurisdictions and North America.
Each unit is sold for a freehold interest, and the common parts are held by a commonhold association, which responsible for repairs and maintenance. The commonhold association is a private limited company, of which the unit owners are members. The commonhold community statement sets out the obligations of each unit owner, including the obligation to pay the service charge. Positive and negative obligations are binding on successors.
In practice, commonhold has not been commonly used, and the more traditional flat management schemes, which will be familiar to practitioners in the Republic of Ireland are most commonly used.
Practice and Procedure in Flat sales
When dealing with the purchase or sale of a flat/apartment, additional considerations to those arising from purchase and sale of a stand-alone dwelling house arise. It is essential that the scheme coherently provides for the management, maintenance and repair of the common parts. The buyer’s solicitor must make appropriate investigations, and the seller solicitor must take corresponding instructions.
At the outset of the transaction, the seller’s solicitor should contact the landlord and management company. They may be the same or separate entities. The seller should ascertain the landlord’s requirements for assignment of the lease. The ground rent account must be up to date. The tenant must generally be in compliance with its covenants. There will generally be a registration fee payable to the landlord’s representative. This will involve that a certified copy of the assignment is sent to the landlord’s representative and is noted and acknowledged.
A new LPE1 form has been introduced for use in leasehold property cases, in 2014. It has been prepared by the Law Society in conjunction with the Royal Institute of Chartered Surveyors and other professional property bodies. The form combines requests for both landlord and management company information. It seeks details of the landlord’s requirements in relation to assignment and sale.
The LPE1 form seeks a range of information in relation to service charges and common part issues. This includes, in particular, details of the service charge, accounts, reserve funds, collection issues, maintenance and management issues, prospective increases in the service charge, details of the building insurance, disputes and enfranchisement / purchase out of the ground rent interest. It requests a range of documentation. The larger management agent firms provide a standard pack of information, in addition to that requested in Form LPE1. A fee of £250 to £450 is usual.
The seller’s solicitor should request his client to complete Form TA7 which deals with leasehold and common part issues. A specimen Form TA7 is included in the Appendix. This is completed by the seller and sets out a range of matters relating to the leasehold tenure, management and common part issues. It is to be provided to the buyer solicitor as part of the protocol.
The buyer’s solicitor should review the information supplied by the seller and his solicitor. He should request further information in relation to anything disclosed, which is relevant to the buyer’s decision to proceed. Further questions may be required; (for example in relation to disputes, difficulties in collection, proposed maintenance, prospective increases in service charges, etc.). These matters should be confirmed to the buyer’s satisfaction, prior to exchange of contracts. Once contracts are exchanged, then in the absence of special conditions to the contrary (which would be highly unusual) the issues are closed, and the buyer must accept them, as they are.
After completion of the purchase, the buyer’s solicitor must notify the landlord (and the management company, if separate) of the assignment. A fee will be payable to their or registration of the assignment. “Registration” in this sense is not registration in a public register, such as the Land Registry. It is an updating of the landlord’s and management company’s records of the lessee / owner. A fee of between £40 and £120 is commonly charged. The registration of the change of lessee is important in that it formalises the substitution of the buyer for the seller as lessee, with the consequent change of responsibility for the relevant lease rights and obligations.
The seller’s solicitor should also notify the sale to the landlord and management company, so as to ensure that the seller is no longer left with the liability as lessee, in the event that the buyer delays in or fails to notify registration. Ideally, the landlord/management company should be asked to contact the seller if the buyer fails to register the change of ownership within a number of weeks.
The fact of leasehold title with ground rent and service charge will add an additional element to the apportionment of the purchase price on completion. At the date of completion, the seller as outgoing lessee will typically have prepaid or should have prepaid ground rent and service charge for the current period. The buyer will want to vouch that these have been paid. The seller will apportion the prepaid amounts so that the buyer will be reimbursed for the remainder of the period for which he has prepaid.
