Multiple-Unit Sales
Sale/Units in Private Managed Areas
Where the property is part of a large structure or where there are private managed parts, the unit is usually held under a long lease. Leases are typically shorter than those in Ireland, and ground rents are higher. A lease of 120 years at a ground rent of £300 per year would not be unusual. The lease acts as the mechanism for securing the management of common parts while also acting as an investment for the original developer.
Commonly, the landlord reversion is sold by the developer after the completion of the development. The right to receive the ground rents may represent a significant asset. It is, in effect, the capitalized value of the ground rent times the number of apartments/flats in the development.
The legislation requires that the developer give the owners collectively a right of first refusal when the ground rents are sold. The rights may only be exercised collectively by the owners. There exist procedures for the exercise of the right of preemption, and if exercised, the right for the owners collectively to purchase. In practice, the collective right to purchase is not commonly exercised.
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 scheme of leases in common form and management company. The type of ownership is common in other jurisdictions, including continental jurisdictions in North America.
Each unit is a freehold interest, and the common parts are held by a commonhold association, which is 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 holder, 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, these will be familiar to practitioners in the Republic of Ireland.
From the owner’s point of view, it is essential that the scheme coherently provides for the maintenance and repair of the common part. The management obligations may be undertaken by the landlord who may be the original developer or successor or by a management company who is a party to the lease.
There may be a landlord party only to the lease. There may be a landlord party who is a party to the covenant such as those to pay rent together with the management company, who is a party to the obligations in respect of the management and maintenance of the common part.
The landlord or management company invariably retains professional management agents to manage and maintain the common parts. The management company or landlord will collect a service charge, which is payable under the long lease (or commonhold arrangements) to finance the management and maintenance of the common parts.
The management company is commonly owned and controlled by the flat owners, although this need not necessarily be so. It may be a company limited by guarantee or a company limited by share. The same concepts as exist under Republic of Ireland companies’ law apply.
The original flat lease will contain the landlord or management company’s obligation in respect of management and maintenance. Each will set out what services it may or must provide, and a bare minimum from the owners/lessees’ perspective; this must include the repair and maintenance of the structure and common parts, insurance, payments of head rents, furnishing, cleaning, and lighting of internal and external common parts, maintenance of grounds, maintenance of lifts.
Discretionary services may include caretakers, commonly provided utility, security improvement.
The lease will provide a mechanism for the apportionment of the charges between the owners. This may be equal, based on floor area, ratable valuation or some other criteria such as a fair apportionment.
A reserve and sinking fund are desirable to meet long-term capital renewal costs. The level of reserve within the fund will be an important consideration in an older property. The mechanism for the calculation of the service charge and its charge to owners will be set out.
Typically, there will be an annual budget that is built in conjunction with an adjusting figure for the prior year. The adjustment figure will be ascertained after accounts have been finalized for the prior year. 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 critical. While there exist significant enfranchisement legislation in England and Wales, it is not as generous as the ground rent purchases legislation in Ireland. Moreover, the level of ground rents may be higher, and there may be clauses increasing them in line with inflation or other indices. Accordingly, the ground rent may be a significant right and even where enfranchisement legislation applies, may come at a significant cost.
The lease is likely to contain terms and conditions regarding assignment and transfer. It is not unusual to find an apartment lease requiring landlord’s consent to assignment. Landlord and tenant legislation provides that it must not be unreasonably withheld or delayed. In practice, provided the tenant is compliant and has paid his or her service charges in full, consent is unlikely to be withheld.
When dealing with the purchase or sale of a flat/apartment, additional considerations to those arising on the purchase and sale of a standalone dwelling house arise. I must put a note to myself (move this up). The buyer’s solicitor must make appropriate investigations, and the seller’s solicitor must take corresponding instructions.
The seller’s solicitor should, at the very outset of the transaction, contact the landlord and management company. They may be the same or a separate entity. In the case of a landlord only, the seller should obtain details of 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 solicitor. This will involve sending a certified copy of the assignment and having it noted and acknowledged as noted by the landlord.
There is a new LPE1 form. The form has been introduced for use in leasehold property cases in late 2014. It has been evolved by the Law Society in conjunction with the Royal Institute of Chartered Surveyors and other professional property bodies. The form combines both the landlord and service information.
It seeks details of the landlord’s requirements in relation to assignment and sale. It seeks a range of information in relation to the service charges and common part issues. This includes, in particular, details of the service charge and accounts, details of the reserves fund, difficulties in collection. It seeks information in relation to the maintenance and management of the property. It asks regarding prospective increases in the service charge.
It seeks details of the buildings insurance which must be undertaken in common. It seeks information regarding disputes and enfranchisement by purchase out of the ground rent interest. It seeks a range of information and documentation.
In addition to the form LPE1, the larger professional management companies offer a standard pack of information containing much of this information and certain more detailed information which is commonly asked.
The seller’s solicitor requests 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 issues relevant to the leasehold tenure and the management and common part issue. It is to be provided to the buyer through the buyer’s solicitor as part of the protocol.
The buyer’s solicitor should carefully examine the information supplied with his client. He should request further information where anything is 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, proposed increases in the charges, etc.
These matters must be confirmed to the buyer’s satisfaction prior to the exchange of contract. Once contracts are exchanged, in the absence of special conditions to the contrary (which would be highly unusual), these issues are closed.
After completion of the purchase, the buyer’s solicitor must notify the landlord and management company if separate, of the assignment. A fee will be payable to each as agents for the registration of the assignment. Registration in this sense is not registration in the Land Registry. It is an updating of the landlord and management company’s records as to who the current owner is.
A fee of between £40 and £120 is commonly charged. The registration and change of lessee are important in substitution of the buyer for the seller as the current lessee with the relevant financial ongoing rights and obligations.
The seller’s solicitor should also notify the sale to the landlord and management company so that the seller is no longer left with the liabilities as tenant/lessee in the event that the buyer delays 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.
The fact of leasehold with the ground rent and service charge will add an additional element to the apportionment or purchase price on completion. At the date of completion, the seller as the outgoing tenant 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 post-completion part of the relevant period for which he has prepaid.