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Understanding your lease
By: Mary-Anne Bowring October 01, 2012
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Understanding YOUR lease

MARY-ANNE BOWRING explains why anyone thinking of buying a flat should make sure they are fully aware of what ‘leasehold’ really means

CHANNEL 4’s Dispatches programme, broadcast in August, highlighted the need for leaseholders to get good legal advice from the start of the buying process and use a solicitor who can explain their lease to them in simple terms. Not rocket science, just common sense – but too often this doesn’t happen.

It seems the days are gone when, before completing the purchase of your new flat, a conveyancing solicitor would sit you down and help you understand the key to clauses of your lease. These might include lease terms preventing you from using the flat as a business or bringing commercial vehicles on site; stating which boundaries you own and what a shared right of drainage means; ‘keep carpeted’ clauses; why you have to register any sub-letting; what a pet licence is…and the list goes on. Has the cut-price, on-line conveyancing culture simply diminished the solicitor’s role and responsibility and displaced this to the better managing agents?

Here are three key questions for the legal profession:

• Why are lawyers drafting external redecoration clauses on three or five-yearly intervals if paint manufacturers will guarantee their paint systems for seven years?

• How can so many solicitors let sales go through without retaining funds against future balancing charges?

• Why ask for the service charge accounts if you are not going to interpret them?

OPEN DISCLOSURE

What leaseholders really need is a Directive imposed on the UK Government requiring open disclosure at the time of purchasing a flat on key facts such as:

• A lease officially becomes a short lease for the purposes of mortgage finance at 70 years;

• When there are less than 80 years left on a lease you have to pay the landlord 50% of the enhanced value for a long lease;

• Service charge accounts in non-compliant form, (ie, without a balance sheet showing the reserves funds for each service charge schedule) are not worth the paper they are printed on;

• If you buy into a Right to Manage (RTM) block, you’d better check how many members are left before you become a RTM member, or else you might be left holding the baby;

• Another major issue for leaseholders – and one of which many flat owners are completely unaware – is the ‘repairs time bomb’. Blocks of flats with inadequate reserves or none at all and that have missed redecorations required under the lease, could find themselves in trouble as dilapidations (keep in repair) clauses become more severe and costly.

TAKE OUR ADVICE

Here are Ringley’s top tips for would-be flat owners

• Ask your solicitor to explain the balance sheet to you, so you know what reserves there are held against your block, check all reserve funds are separate and separate and check balancing charges have been collected – if not make sure your solicitors holds a retention against the previous owner;

• If there’s no reserve fund, check if the Memorandum & Articles can be used to collect one. When choosing a managing agent, choose one that provides a costed reserves plan within the management fee; at least then you’ll know there is a future plan;

• Understand what was last done when. Ask the surveyor who does your pre-purchase survey what repairs might cost and how much you might need to contribute towards the next decorations cycle;

• If you don’t have a good lease, invest in getting one. Use Section 37, 1987 Act to vary your lease if you have no reserve clause, need to bank roll the service charge, can’t install a wooden floor etc…, the problem is Section 37 won’t allow you to do this one as leaseholder on your own – even if it makes sense;

• If you are buying a property in a larger block and big works or roof renewal is contemplated, check if a chartered surveyors has advised you on phasing – if you’re paying for a specification of works, it shouldn’t cost more to establish phasing. There’s quite a bit of case law which has proved that everything needs doing at the same time could not only a waste of money but also an ‘improvement’ or ‘unreasonable’. Leases don’t usually provide for improvements except where such significant repairs are required that a repairs are required that a repair would constitute renewal instead;

• If you want a managing agent who can’t have incestuous relationships with suppliers or contractors then choose an RICS regulated firm who can’t charge you hidden fees and can’t employ connected parties;

• If you’re buying into an RTM ‘right to manage’ block find out how many members there are. You may be taking on more responsibility than you think, ie, bank rolling the service charge (although this only happens on arrears billed leases – say 5% of leases pre 1980).

• There are costs involved in running an RTM company that strictly speaking only fall on the RTM company members. Numbers will diminish over time as people sell on the RTM company members. Numbers will diminish over time as people sell because RTM membership, unlike freehold purchase membership is not tied to the property.

PROBLEM LEASES

Leasehold is a complex and often misunderstood form of property tenure. Leases are not standard – they are as different as the flats they apply to and this is why there is a strong need for comprehensive information to be available to homebuyers. However, ignorance of the importance of taking the right professional advice from the start of the flat buying process is not the only problem. The industry needs legislation to give the Leasehold Valuation Tribunal greater powers to vary leases when there is no adequate provision for the service charge.

The Tribunal has no power to deal with leases which provide for service charges in a wholly unworkable way. Examples include:

• leases with no reserve fund;

• leases which do not provide for a professional managing agent to be employed;

• leases which do not provide for independent service charge accounts to be produced (even though this is contrary to the RICS code of Practice);

• leases where even after a freehold purchase leaseholders can’t get rid of a managing agent who has been ‘written into the lease’;

• leases where the block is under ‘resident control’ but the lease still expects the landlord to pay up then recover the service charges at the end of the year – just who does the government think the new banker is?;

• leases with no decorations clauses;

• leases silent on whose responsibility balconies and roof terraces are;

• leases which expect the lessee to decorate their own windows, 10 floors up!

• Imagine how upsetting it would be to buy the freehold of your block and then find out that you can’t manage it, as that right is given to a managing agent that you did not choose for 99 years!

Or, what if the Right To Manage (RTM) legislation won’t help you because there’s a car park underneath your property which is shared with other users. Or you have 85% of owners signed up to a petition but you can’t get rid of the current management arrangements. How can this be fair – surely it was not meant to be this way?
Then there’s the problem in some resident-controlled blocks of leaseholder self interest. We have come across leaseholders cancelling or refunding reserve funds because they know they want to sell up, and even freehold or management company directors decorating their elevation only, then selling up.

The best way to avoid these and lots of other potential problems, is to understand the terms of your lease and to be aware of your rights and obligations as a leaseholder. If you seek advice from a reputable, experienced solicitor with knowledge of the leasehold sector, he or she should be able to help you through the complexities of your lease before you buy.

Mary-Anne Bowring is managing director, Professional Services Division, Ringley Chartered Surveyors

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