1. Alterations to leasehold property
Under most leases a leaseholder is required to obtain consent before making any alterations to a property. It's a simple process also known as an application for a Licence to Alter Pack.
Is it an alteration...
If you can answer yes to any of the following questions, then a Licence to Alter will be required:
- Will your proposed alterations affect any face of the building (changing a window/door, putting a skylight in etc.)?
- Will your proposed alterations cut through any wall?
- Will your proposed alterations remove any part of any wall (internal, external or partition wall)?
- Will your proposed alterations increase the amount of waste water/sewerage leaving the flat? (E.g. new kitchen, bathroom, toilet, show etc.)
- Will your proposed alterations involve any modification to a communal service? (E.g. removing a radiator attached to a communal heating system, re-routing a communal waste pipe.)
Most leases have a covenant which requires the lessee to register or seek landlord’s consent if they wish to rent out their property. The costs of complying with the sub-letting clause are not part of the normal block management fee to keep the block management fee as low as possible and to be fair to those who do not rent out their properties. The extra work to register tenancies is an administration charge under Schedule 11 of the 2002 Act.
It makes the managing agent’s job pretty hard if they don’t know who is living in each property, so sub-letting control is crucial, particularly if you want to keep things nice, help people know the rules and be able to act quickly in an emergency.
Different leases set out different sub-letting covenants, these are the most common:
- To seek consent ‘in writing’ or ‘by licence’ before you sub-let,
- To get the sub-tenant to enter into a deed of covenant promising to abide by key covenants of the lease,
- To serve notice of the letting, effectively just registering the tenant’s details.
Not complying with the sub-letting clause is a breach of lease. Usually, a responsible landlord will allow retrospective applications unless the tenants are pretty awful.
3. Consultation & recovery of money towards big works
Since 1985 the law says the landlord has to consult service charge payers where ‘qualifying works’ exceed £250 for any service charge payer. And, if they don’t recovery of is limited to £250 per payee.
The Daejan case in 2013 gave some relief as it widened the scope for a landlord claiming a retrospective dispensation where a consultation process was absent or flawed.
4. Forfeiture, leaseholders are protected, until a breach is established
Forfeiture is the name given to the process whereby a landlord seeks to bring a lease to an end and take back possession of a property, effectively dispossessing the lessee.
Since February 2004 a Freeholder can only take forfeiture action if the breach is confirmed by a Court or Tribunal judgement, and where the breach is ground rent arrears, the arrears must be more than £350. This is why mortgage companies often will not pay up service charge arrears as their security is now safer than it used to be.
We welcomed these restrictions which protect leaseholders from unscrupulous landlords threatening leaseholders, or racking up significant legal costs without due merit.
5. Demands, if the service charge demand is invalid, the money may not be due
It is not ok just to share bills, or informally pay up as later an owner could argue to get their money back on the basis that what they paid was not legally due. There are different advice notes, prescribed by law, that must be sent with service charge demands and ground rent demands and administration charges demands. A demand must include the relevant prescribed notes to be valid. But, perhaps all is not lost as assuming no change of owner, you may be able to subsequently serve the relevant prescribed notes making the money become due.
6. Buying the freehold? It pays to use the existing management company (if you have one)
If all owners want to buy the freehold, and you already have a management company written into your lease, you will save money if you use the existing management company.
Otherwise, you’ll end up doing:
- company accounts x 2
- Directors & Officers insurance x 2
- annual returns x 2
- company secretary x 2
- filing accounts x 2
If you use an existing management company you won’t need to levy members contributions on the freehold shareholders to fund the cost of running the freehold company. And, as the costs of running the management company will already be a recoverable service charge expense you can also elect not to collect ground rent.
You may need to pass resolutions to change the company articles so you can use an existing management company to buy the freehold.
7. Don't put up with a defective lease
The most common lease omissions or defects are:
- cant budget and collect service charges in advance,
- cant recover the cost of a managing agents fees,
- lease requires audited accounts which is cost prohibitive for small blocks,
- cant insure the building as 1 block, i.e., each flat has to get their own buildings insurance,
- despite being required by law to produce service charge accounts (applies to 5 or more flats) you cant recover the accountant’s cost,
- lease is silent on who owns and decorates the windows,
- lease requires the leaseholder to decorate the windows (5 stories up),
- no deterent to late payment, i.e., you cant charge interest on arrears,
- lease percentages don’t add up to 100%,
- maintenance of physical plant or facilities is not included in what is described as recoverable service charge, i.e., lift maintenance or expenditure,
- a schedule is omitted from the lease, i.e., parties that should contribute are not required to
Section 37 of the 1987 Act is quite a simple procedure whereby the Tribunal can vary a defective lease, and you don’t need 100% agreement.
You will need
- 9+ flats – you need 75% agreement and not more than 10% to blocking it,
- 8 or less flats - you need the agreement of 7 flats.
Applications can usually be considered by written track without the need for a hearing so are not too costly.
8. Consider the terms of a lease extension and how to distribute the cash
Since 1993 thousands of leaseholders have exercised their legal right to a lease extension. When you serve a Section 42 claim notice you get:
- an additional 90 years,
- the ground rent reduced to a peppercorn (effectively nil).
After a freehold purchase the freehold shareholders in a residents freehold management company will need to decide if:
- they want to sell lease extensions
- they want to sell lease extensions + a share in the freehold company
- they prefer to sell top up lease extensions (top up to 99 or 125 years) with a modern ground rent for a slightly lower premium
Factors to consider will include, the additional premium for selling a share in the freehold company, how the proceeds of future lease extensions would be split as new members buying in were not part of the original group, voting rights etc…. Sometimes, if the lessee does not need an additional 90 years, by agreeing a modern ground rent you could sell an extension for a little less and keep the value of the freehold title higher and have less friends to share the proceeds of future lease extensions with.
9. Consider when granting consent for alterations if a premium should be charged
When considering granting consent for alterations for a kitchen or bathroom, or remodelling walls it is not normal and probably not reasonable to seek a premium for granting consent. In fact many leases require that such consent is not to be unreasonably withheld.
However, when alterations increase the size of a property, change the use or change the external aesthetic appearance in considering consent you need understand the concept of ‘marriage value’.
- ‘Marriage value’ exists when interests or assets are combined to create a new interest or asset that which has a higher value than the sum of the each individually.
- Marriage value is also created when the use of a property or demise is enhanced by consenting to a different use, examples include:
- conversion of a live work unit or office to residential dwelling status,
- consent to turn an attic into an extra bedroom,
- consent to create a roof terrace on a roof,
- consent to change a window to the door giving direct garden access,
- consent to create a swimming pool in a garden,
- consent to fence of a part of the communal garden,
in these situations the grant of consent will enhance the value of the leaseholder’s interest and a Chartered Valuation Surveyor should be employed to assess the premium that should be paid.
10. Fed up with legal paperwork? Simplify, simplify, simplify!
- Corporation tax self assessment - write to your local tax office seeking a corporation tax return exemption, they will usually grant a 3 year exemption.
- Full trading company accounts - stop trading if you can to reduce the cost of accounts and detail of what you need to file. If you have traded in the past, e.g., bought the freehold, then if you qualify as dormant you can reduce to abbrieviated accounts. If your company does not have any assets and has not traded during the accounting year, you can file dormant company accounts, essentially just a balance sheet.
To become dormant you will need to
- Stop receiving income (pass a resolution to stop collecting ground rent),
- Hold money outside the company, ie, in an Agent's Client account so you do not have a trading bank account,
- Not have bought or sold any assets during the year.