So, you have found the dream flat and made your offer and it has been accepted – and then, someone starts mentioning the lease. It had 99 years when it started out but now it is down to 74 years. A pity, if it had been extended before it went under 80 years someone would have saved themselves a pretty penny, but nonetheless, here we are – everything perfect, except for the lease.
So what is the solution? Simple, get the seller to serve a notice seeking a lease extension and have this transferred to you when you buy the flat. Sounds easy doesn’t it ?
Well it should be, but there could be a few hiccups along the way – but it goes without saying that you need to get a solicitor on board who knows what they are doing, to reduce the risk of it going wrong and costing you lots of money.
So, what do you need to know? Firstly, make sure the practitioner is an expert – such as an ALEP member. Secondly, have a look at these handy tips for buying a property with the ‘benefit’ of a lease extension:
Firstly, you are not going to be able to do this unless the seller has owned the property for at least two years and qualifies for the right to extend. If they do, they can pass this right on to you and save you the two year wait (and some increased costs as the lease gets shorter and property values increase in the meantime).
What if they have served a notice already? – that is fine – provided that the claim has not been withdrawn or abandoned. If this has happened they will need to wait a year from the point at which the claim was ‘lost’ before starting again.
What if it is a probate sale? Well, it should still be possible to extend provided that the deceased would have qualified when they died ( i.e. they owned the property for at least two years) and provided also that the executors serve the notice within two years of getting the ‘grant of probate’ to deal with the estate.
Here the position may be complicated by the fact that you are limited to the ‘standard’ auction terms (completion within 28 days, so this tends to be cash buyers only) and the fact that unless the seller has offered to serve the notice in the ‘special conditions’ set out in the auction pack then you won’t have any legal right to insist that they do serve a notice.
Remember, if you are buying a property at auction then if your bid is accepted, then you are deemed to have exchanged contracts there and then. In other words any investigation and ‘due diligence’ including questions about the lease extension will have to be done up front, before you go to the auction room and bid.
Assuming the seller will play ball they best thing to do will be to arrange to have the notice served between exchange and completion. This way the seller does not become bound to start the process until they are committed to sell and you are legally bound to buy the flat from them.
It is also normal for them to ask you to indemnify them against any costs incurred with the landlord in investigating the claim. This is because you would be liable for these if you had served the notice and will be liable for them at completion of the lease extension claim along with some other ‘recoverable’ costs as well.
Where we act for a client who is buying we normally take over the notice serving so as to minimise any risk at this point in he process.
At completion the claim then needs to be properly assigned to you and if this is not done, because of various technical legal reasons the claim will be deemed to be withdrawn.
In a word, ‘no.’
An important thing to realise in all of this is that if the lease extension is carried out under statute then the lease will not be extended at the time you complete on your purchase of the flat. If the lease has a shorter lease that is not suitable for lending purposes, then you won’t be able to buy the flat if your mortgage lender needs the lease to be extended at completion.
However, if the current lease length isn’t a problem for your lender, then so much the better, as you probably won’t need to pay for the lease extension until about 6-9 months down the line. This will leave you some time to save up for the further expense.
The only initial outlay (aside from the professional costs) will be a deposit of 10% of the amount out forward as the offer figure in the initial notice of claim.
If you are buying a property with a short lease then you certainly need valuation advice.
This is for two reasons; firstly, if the lease is ‘short’ then you need to know that an appropriate adjustment has been made to the price you are paying to reflect this.
Secondly, in order to start the lease extension process, you will need a valuation report carried out by a surveyor specialising in statutory lease extensions.
The surveyor’s role will be to help give you an idea about some important future costs. Firstly, the likely price that you will end up paying for the lease extension and secondly, the correct ‘offer’ price to put into the notice of claim. If this figure is too low you may risk the claim being held to be invalid – but also there is a risk that you may be paying too much for the flat.
Therefore, you may not want to rely upon any views of the lease extension price provided by the seller or the estate agent. In the first instance, you may find an online lease extension calculator – such as the one that appears at http://www.bishopandsewell.co.uk/lease-extension-calculator. However, this sort of calculator is no substitute for proper valuation advice.
The only way this can work is if it is possible to do a deal with the landlord / freeholder directly. If this happens, then provided that the freeholder will play ball, the lease extension can be granted at completion and even paid for out of the proceeds of sale of the property.
This sounds ideal – so, what’s the catch? There may be none – provided the terms of the deal stack up and it is essential that the price and other terms are looked at closely, ideally by a surveyor.
But, there are two possible issues – one is that the landlord may not want to offer terms that are as generous as those under the statute – (this would give you an additional 90 years – so if the lease is 74 years, this will go back up to 164 years. Also there will be no more ground rent to pay.
Additionally, If the freeholder wants to sell you a lease extension then they may offer a term of 99 or 125 years and may also want to keep a ground rent. Provided that the ground rent is not excessive this will not cause any problems, but there are unfortunate cases where the rent doubles at very short intervals and is ‘high’ to start with which can in fact make the property unsaleable. So you do need specialist advise to check out the terms of any ‘deal’ to make sure that there isn’t a sting in the tail.
Finally, of course, if the property cannot be purchased with out the lease being extended then the freeholder may know this and use this to his advantage in negotiating the terms of any ‘voluntary’ deal.
Mark Chick is a Partner and Head of the Landlord & Tenant team at Bishop & Sewell. To discuss any of the issues raised in this article or leasehold matters generally, please email firstname.lastname@example.org or visit www.bishopandsewell.co.uk.Leasehold Houses and ground rents – Mark Chick on ITN
Mark Chick, head of the Landlord and Tenant team at Bishop & Sewell was interviewed yesterday by ITN regarding the breaking news item about Leasehold Houses and ground rents.
“There’s an imbalance in terms of the rights that are available to leaseholders, and also the quality of advice which people are receiving.”
Watch a clip of the footage on the ITN website here.
If you would like to discuss leasehold issues or enfranchisement please contact our specialist team by emailing email@example.com.Leasehold Houses and Ground Rents
Many people will have seen yesterday’s announcement by Sajid Javid that ground rents will be banned for new leasehold houses and that the government are going to look at consulting on this and other issues. This is an issue that we at B&S have been aware of and commenting on for some time. In particular Mark Chick has written a number of articles that have appeared in the sector press such as Flat Living and Leasehold Info.
Some of the recent press commentary appears here:
We have been tracking developments since the government’s recent White Paper on Housing, particularly in relation to leasehold issues.
One theme that seems to be emerging from correcting the issue of high ground rents is the quality of advice that homeowners receive. This only emphasises further the importance of obtaining specialist legal advice in relation to leasehold issues.
Mark Chick commented as follows:
“It is good to see that government have sought to carry into effect one of the proposals in the white paper to deal with the issue of high ground rents and leasehold houses. These sorts of issues only serve to highlight the importance of specialist advice in relation to leasehold issues. In particular specialists like the leasehold team at Bishop & Sewell have been working for years to improve the quality of advice on offer in this sector, particularly through our involvement in bodies such as the Association of Leasehold Enfranchisement Practitioners (ALEP).”
If you are affected by leasehold issues, or would like enfranchisement or other legal advice concerning ground rents and the advice that you have received around these then please do contact our expert team by emailing firstname.lastname@example.org.London “Divorce Capital of the World” – a warning to overseas workers
London remains an attractive destination for overseas professionals, especially those in the banking and financial sectors. While some financial institutions talk about moving their operations out of London to other European cities because of the uncertainty of Brexit, London will almost certainly remain a major financial hub and be attractive to overseas professionals. Many of those moving to London will come with their families.
Families will not move to London thinking about the possibility of divorce, but it is not something that should be ignored. The English court has jurisdiction to deal with a divorce as soon as both spouses become “habitually resident in England and Wales” which can be as soon as they have set up home in London. England (for the time being at least) is a signatory to the “Brussels II” convention which means that if the family has come from another European country which is also a signatory, then if the divorce petition is issued first in England then England has exclusive jurisdiction to deal with divorce on a “first come, first served” basis. Even if the family has come from a non-Brussels II country, the English court does not like jurisdiction fights and often will still apply the “first come, first served” principle.
London has been called “the divorce capital of the world” because of the size of awards in “big money divorces”. The English court has a wide discretion on divorce to make financial awards – the starting point is usually an equal division of all assets that have been built up during a marriage (which will include a family home even if it has been bought using premarital wealth) with the possibility of an open-ended maintenance (alimony) order as well.
The English court will usually uphold prenuptial and postnuptial contracts whether English or foreign so anyone coming to London from overseas who has a contract should be confident that the agreement will be upheld if the marriage breaks down, although it would be sensible to have it reviewed by an English family lawyer. However, English courts often do not uphold simple marriage contracts common in many European countries where people choose to contract out of a marital property regime when they marry as they do not fulfil the criteria that an English court regards as necessary for a prenuptial or postnuptial contract, e.g. each side having independent legal advice and giving financial disclosure.
If you are moving to London for work with your family, it would be sensible to obtain family law advice. Even if you are coming to London and your family is going to stay in your homeland, you should still take advice because if you become habitually resident in England your spouse can issue a divorce petition once you have been resident here 12 months.
If you require family law advice following relocation to the UK or in relation to Family Relationships & Divorce more widely, please email Philip Rutter. Alternatively, telephone 020 7631 4141 and ask to speak to a member of the Family team.The Crown Estate – new leases in Crown Land
The Crown Estate holds the freehold to a significant number of properties that are subject to residential leases. Leaseholders who are resident on the Crown Estate often have the benefit of living in some of most attractive properties, the majority of which are in an around London whether around the Royal Parks, Victoria Park or Eltham.
The Crown Estate is not, however, subject to the Leasehold Reform legislation generally. With the majority of the property that it is within its estate, as a result of policy decision, it will act by analogy to the relevant legislation so as to ensure that its leaseholders continue to be able to benefit from the legislation to either acquire an extended lease, buy the freehold to the block (flats) or of the freehold to their house.
The effect of this for its leaseholders is that a leaseholder or group of leaseholders can apply for an extended lease or the freehold of the block of flats or house by service of the relevant statutory notice under either the Leasehold Reform Act 1967 or the Leasehold Reform Housing and Urban Development Act 1993 and the Crown will act as if it is subject to the Leasehold reform legislation and serve a counter notice either admitting the claim for the lease extension of a property for a new term of 90 years plus the current unexpired term or to dispose of the freehold.
However, the rights of leaseholders to either extend their leases or acquire the freehold to land will be refused by the Crown where the property in question is in or intimately concerned with the Royal Parks and Palaces or where the properties have particular association with the Crown. These areas are described as “Excepted Areas”. In London the Excepted Areas are concentrated around Hyde Park, Regents Park, Richmond Park, Hampton, Egham and Eltham.
Within the Excepted Areas the Crown will agree to grant leases of properties, either houses or flats, subject to the leaseholder following a similar process as that which is set out in either the Leasehold Reform Act 1967 or the Leasehold Reform Housing and Urban Development Act 1993 and meeting similar qualification criteria to be able to bring the claim. The qualifying criteria is broadly that the property in question is held on a “long lease”, in that it was granted for more than 21 years at the original date of grant and that the leaseholder making the application has owned the property for more than 2 years.
The valuation principles in respect of any application for a new lease of a property within an Excepted Area similarly follows the same principles in respect of the property. Specialist valuation advice should be obtained from a surveyor who is experienced in dealing with such applications.
The term of the new lease will usually be for a maximum of 150 years and where there is an intermediate lease the new lease will take the form of an overriding lease. The main difference from the usual processes is that the new lease will be granted at a new modern ground rent which can in some circumstances be substantial.
Once an offer has made to the Crown’s representatives for a lease extension of the property and a counter offer has been made by the Crown, the leaseholder has 6 months to agree terms and then following agreement on the price payable, 2 months to agree the form of the new lease and complete. If agreement cannot be reached on the terms of the new lease within the 6 month period, there is the ability for the premium to be determined by arbitration but the costs associated with such an application can be substantial.
If the deadlines set by the Crown in the guidelines for applications are missed, it can affect the ability of the claimant to be able to extend the lease of the property which can be expensive.
When considering pursuing an application for a new lease of property in one of the Crown’s Excepted Area’s, specialist advice should be obtained.
If you own property in one of these areas and would like to know more about the process involved in making an application for an extended lease please email Chris Macartney on email@example.com or by telephoning 020 7631 4141 and asking to speak to a member of Landlord & Tenant team.Flat Management Companies – What is a Section 21 Accountant’s report?
A Section 21 report under the provisions of Section 21 of the Landlord and Tenant Act 1985 is an interesting but possibly useless report of the interim service charge costs. However, it might be useful to tenants wishing to make an enquiry into a service charge budget.
However, it does have a sting in the tail as failure to respond to a request for such a report is a criminal offence. So if you are ‘mining for information’ in relation to a difficult service charge budget this could well be useful.
In the following article Gordon Whelan, National Head of Service Charge Accounting at Haines Watts, a leading firm of accountants, discusses why a Section 21 report no longer has a place in our modern and professionally regulated property management sector.
Under section 21 (1) of the LTA 1985, a tenant (or recognised Tenants’ Association) can request a Landlord to provide a summary of service charge costs. Once the request is received the Landlord must provide the information within one month or within six months of the year end, whichever is later. Failure to meet these deadlines is a criminal offence.
Section 21 (5) requires the summary to distinguish between,
Section 21 (6) requires that if there are more than four dwellings then the summary must be certified by a qualified accountant who is also a Registered Auditor.
The summary of costs does not add value
The analysis required under section 21 (5) is difficult for the accountant to prepare and almost incomprehensible for the poor lessee to understand. The only real way to present the information is in columnar format. I have included an extract of a section 21 summary that attempts to meet the requirements of the legislation.
Extract from section 21 summary of expenditure
|Item of expenditure||Total (£)||(A)
Costs accrued at start of year (£)
Costs invoiced in prior year but not paid (£)
Expenditure paid in
Costs accrued at year end
Costs for invoices received not paid in year
Columns A and B are required to avoid double counting of expenditure from year to year.
The information presented fails at least two of the qualitative characteristics of valuable financial information in that it is not readily understandable and it does not allow any comparison either with prior year expenditure or budgeted expenditure.
The information provided by the summary is incomplete. There is no requirement to provide a balance sheet and although there is a provision under section 21 (6) to account for accruals and creditors there is no provision for prepayments and so the outcome is hybrid form of accounting, combining some aspects of accruals accounting and some aspects of cash accounting. In short, the report is conceptually flawed!
Section 21(6) requires the accountant’s certificate to be prepared by a Registered Auditor. This is confusing for the lessee because the work involved in preparing the certificate could not be further away from carrying out an “audit” in accordance with International Auditing Standards. There is no justification for a Registered Auditor preparing this report other than that the legislation says so.
I started this article by stating that the section 21 summary and report has no value. However, the section 21 report does have posterity value as it reminds us how far the property management sector has come since 1985. The 1985 legislation was designed to protect the lessee from the rogue landlord, who in those days was perceived to have all the power in the relationship between landlord and lessee. There is no question that the section 21 legislation was well intentioned and designed to redress some of this imbalance. However, it no longer has a place in the modern and professionally regulated property management sector.
To find out more about our flat management company and service charge services, please email firstname.lastname@example.org or call 020 7631 4141 and ask to speak to Karen Bright or another member of our specialist Service Charge team.Flat Management Companies – Do you need an accountant?
Flat management companies are often set up by leaseholders who have purchased their freehold with a view to saving costs, both in terms of the service charges that they pay and in relation to other costs that were charged to them by their former freeholder, such as insurance premiums.
Saving money is all very well, but what about the accountant? In its first year of trading any freehold company will need to file statutory accounts – showing the transaction that has taken place. After this, if funds don’t flow through the company then it can file ‘dormant’ accounts.
But what about the service charge account? Particularly if the flat owners self-manage. This is an important point that is often overlooked. Lots of leases require an accountant’s certificate and even if you are saving money by running some things yourselves it may well be a false economy to dispense completely with the accountant’s certificate.
It is not uncommon for directors of Residents’ Management Companies (RMCs) to come under pressure to reduce costs and one of the prime contenders for achieving this is to dispense with the services of a reporting accountant. There are apparent benefits that make this attractive. Professional fees do not necessarily improve the quality of life at a property and it is always tempting to look at the other lessees to see if they have bookkeeping skills and be willing to help out with the accounts or even carry out a “self audit” of the records. A cosy and informal, internal arrangement might seem more attractive to directors than the annual chore of getting the accounting records ready for an external accountant.
However, the “aren’t we all good mates” approach to property management is fraught with risk for directors. The lease will often state that the reporting accountant is to be an ”independent qualified accountant”. In the absence of such a statement in the lease then best practice guidance contained in the 3rd RICS Residential Code and TECH03/11 requires that the reporting accountant is not only independent but also a practicing member of a professional accountancy body.
Failure to follow the lease or best practice may leave the directors open to criticism if a dispute arises at a later date. Directors should always remember the old adage that “near neighbours make good enemies” and it is most unusual (over a prolonged period of time) for lessees to agree on everything. If a dispute does arise then no one will thank the directors for saving money on accountancy fees if the result is a legal bill at a later date. The inevitable challenge to the directors will be that the accounts cannot be relied upon because they have not been prepared in accordance with the lease or best practice.
Directors should also consider if the reporting accountant’s fee really is just a cost to the property. The signing of the independent accountant’s report has an important role to play in the annual service charge process. It provides comfort to all lessees that the accounts have been reviewed by an independent professional. Furthermore, if the directors appoint a practicing accountant to report on the service charge accounts then they can also be assured that the accountant holds a practising certificate from their professional body and is subject to the body’s rules and obligations including carrying out the work to a required standard and holding professional indemnity insurance.
If an experienced service charge professional is appointed then that is even better as they will be able to provide further support and advice to the directors of the RMC. Additional value added services that can be provided to RMC directors include advice on the accounting implications of lease terms, Company Secretarial fees, compliance with Companies House filing requirements, management accounts, corporation and trust tax and attendance at AGMs to explain the accounts.
Under the Companies Act 2006, directors are required to exercise due care and skill and directors of RMCs are not exempt from this requirement. Directors should resist the short term popularity that arises from reducing costs if it means that the property is managed in an unprofessional manner.
To find out more about our flat management company and service charge services, please email email@example.com or call 020 7631 4141 and ask to speak to Karen Bright or another member of our specialist Service Charge team.What is a recognised Tenants’ Association?
Leaseholders who want a greater voice in the management of their building may want to think about forming a Tenants’ Association.
A Tenants’ Association can be set up by a group of leaseholders who own leases from the same landlord / freeholder on similar terms.
Forming an Association is a good way for the flat owners to express their collective views to the freeholder and / or their managing agent.
The association could be a company, but does not need to be. It can be a loose collective of people that want to work together to be recognised in consultation on service charge and management issues.
However, in order to be most effective the association needs to be officially “recognised.”
If the association achieves recognised status then the freeholder/landlord must then consult with the association on any plans for major works and notices (such as section 20 notices) must be copied to it. The association can then use its collective voice in any consultations on future works, or major cost items for the building.
The association approaches the landlord and the landlord agrees to recognise the association. The landlord then confirms this formally in writing. The association is then ‘recognised.’
Any written notification or ‘certificate’ from the landlord recognising the association will continue to be valid unless the landlord/ freeholder gives the association is given six months’ notice withdrawing recognition.
A certificate is usually granted for a specified period of time (normally four years), but it may be renewed at the end of this time. The tribunal can also cancel the certificate at the end of this period if it considers that there is no advantage for the Association to be recognised.
The other way is if a certificate is obtained from the First-Tier Tribunal of the Property Chamber (formerly the ‘LVT’ or ‘Leasehold Valuation Tribunal’). This is much more likely if the freeholder is unlikely to be a willing participant in the recognition of the association.
Who can become a Member of the Tenants’ Association?
Any long leasehold flat owners in the building who are paying variable service charges to their landlord are entitled to be members.
How many flat owners are needed?
As a general rule, the Association will need at least 60% of those flat owners who are entitled to join, to have become members. In other words, if there are 100 flats in the block and all of these are let out on long leases with a service charge, then at least 60 of the flats must join in.
How does the process work?
The formal request for recognition, whether made to the landlord directly or to the tribunal, must include copies of the rules of association or constitution, which should be fair and democratic.
The leaseholders will also have to submit the names and addresses of all of the elected members of the proposed Association with their application.
Can the landlord join?
The landlord and the managing agent are not entitled to become members of the Tenants’ Association. If there are any leasehold owners who do not pay variable service charges, then they can become members of the association, but they are not allowed to vote.
How do we go about forming a Recognised Tenants’ Association?
If you want to form a recognised Association, or to make an application to become one, then the first step is to investigate with your neighbours whether there is sufficient interest to set up an association. You will then need to consider whether to use an incorporated or unincorporated model.
Bishop & Sewell LLP have significant experience of helping leaseholders with these sorts of issues and can assist in the formation of a recognised association and an appropriate application to the tribunal.
For further information on forming an association, or if you already have an association and want to be become recognised by applying to the tribunal, contact a member of our specialist team today by emailing firstname.lastname@example.org or by telephoning 020 7631 4141 and asking to speak to a member of the Service Charge consultation team.Chris Macartney speaking at the Landlord Investment Show – 15th June 2017
Members of the Landlord & Tenant and Property teams will be at the National Landlord Investment Show at Olympia on 15th June 2017.
This event provides a platform for current and prospective landlords to keep up-to-date with industry developments and provide access to experts to gain in-depth knowledge of UK property hot-spots.
Chris Macartney, Partner in our Landlord & Tenant Department will be one of the Seminar speakers discussing ‘What to look for when buying a leasehold property’ in Seminar Room 2 at 14:35 and several members of the team will be on hand to answer questions.
For follow-up or queries please contact email@example.com or telephone 020 7631 4141 and ask to speak to a member of the Landlord & Tenant team.