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Leasehold Terms Explained - Apportionments & Retentions

Leaseholds are complex and the terminology can be confusing. In this article I clarify the terms that you will come across when dealing with a Leasehold property. You will find these referred to by the Management Company and your Conveyancer.



Definitions


Landlord: The Person or Company which owns the superior title and granted the Lease. They may own the Freehold or may have the first (or an earlier granted) Leasehold interest in the property.

 

Freeholder: The owner of the Freehold of the building (the most superior title). They are often the party named as the Landlord in the Lease, or that party's successor. They may be the party who purchased the Freehold from the original Freeholder.   They may be the Management Company.


Management Company: A Management Company referred to in the Lease or a Right to Manage Company created by law to provide services and administer the terms of the Lease.  They will deal with maintenance and repairs to the building and grounds.  They receive the Service Charges to cover the cost of the same. They frequently own the Freehold.

 

Managing Agent: A person or organisation which acts on behalf of the Landlord, Freeholder, Management Company or Tenant’s Right to Manage Company. They are the agent employed to assist.


Service Charges: Each property owner's contribution towards maintenance and repair of the building, common parts, car parks and gardens.

 

Retention: A retention is a sum of money held back on completion to cover arrears or balancing payments required for service charges. Annual Service Charges are estimated as you will not know until the year-end the actual costs. Things can change mid-year. It is normal for the Seller's Conveyancer to hold a “retention” from the sale proceeds, so that when the final accounts are produced for that year (well after completion), any balancing charge, which relates wholly or partly to the Seller's period of ownership, can be taken from the Seller's retention before returning the balance. If there is no balancing charge then the retention can be refunded to the Seller in full.



Common Terms


What Are Apportionments?

When completion occurs Buyers may be required to pay an apportionment of the Service Charges and/or Ground rent.  This is because the Seller pays these in advance for a 6 or 12 month period.  The Seller will need to be reimbursed for their overpayment.  

 

The Seller's Conveyancer will confirm the amounts payable once a completion date is known and these sums will be added to the completion statement. 

 

The Conveyancers will endeavour to check the apportionment calculations based on the information available at the time, but they cannot guarantee that the apportionments are correct. In some instances, inadequate information may have been passed to them by the seller, his Conveyancer, the Freeholder, Management Company or the Managing Agent.

 

All parties should approve the apportionment calculations.  If there are any errors in the apportionments these should be resolved before completion.  Unfortunately, it is difficult to remedy these afterwards when payments have been made. It is important to check the apportionments sent to you and confirm if you think there are any errors. Pre-completion is the time to ask questions and raise issues.

 

The apportionments are based on estimated figures and there is always a risk in relying on estimates. There is no way of knowing the exact Service Charges at the beginning of the year so they are estimated. The work necessary becomes clear at year-end.

 

Why Retentions Are Necessary

It is standard Conveyancing practice for a Seller's Conveyancer to retain a sum of money on completion to cover any shortfalls in the Service Charge estimates. This is necessary because differences in the estimate and actual works are only revealed at year-end. 

 

The Service Charge paid by the Seller is an estimate and the works carried out during the year may be more than estimated.  As the year-end accounts will be finalised well after completion occurs it is normal practice for a buyer's Conveyancer to ask for a retention to cover any shortfalls for the seller’s period.

 

The end of year statement needs to be provided to finalise retention funds.  The retention is usually held for 12 to 18 months from completion. After that time if no contact is made the retention is refunded to the Seller.

 

Clearing Arrears on Completion

It is part of the conveyancing process that the Buyer's Conveyancer asks the Seller's Conveyancer to clear any Ground Rent and Service Charge Arrears on completion.  The Seller's Conveyancer will usually pay the arrears out of the proceeds of sale on the day of completion. Ground Rent and Service Charges are billed in advance for 6 or 12 month periods.



Read The Lease


Lease Wording

The Lease is the most important deed for a Leasehold Property but it will not be in your name.  It will show the name of the original parties when the Lease was granted. The Lease is a historic deed.  It is not re-drafted for each successive buyer. If you are the first owner and this is a New Lease, for example on a new build apartment, then you will be named in the Lease. The next Buyer will not be named but the Lease will be transferred to them and Land Registry records as to ownership will be updated. The Transfer Deed (TR1) is used to achieve this. Both Seller and Buyer sign the Transfer Deed and not a new Lease.


The up to date office copies of registered title show the current owner and will be in the Seller's name.  The Register is maintained by a Government body called HM Land Registry. On completion your Conveyancer applies to have the property registered in your name.  You will not receive a bundle of paper deeds as the office copies are a summary of these.

 

You should read the Lease to ensure you are aware of the covenants (conditions) you must adhere to and the rights which you will benefit from.   If you have any queries speak to your Conveyancer.

 

When purchasing Leasehold Property you are buying the term of the Lease not the Property.  The Lease is the written contract between you and the Landlord.

 

NB: YOU MUST OBTAIN LANDLORD CONSENT, IN ADVANCE, BEFORE EXTENDING OR ALTERING LEASEHOLD PROPERTY. YOU ARS BREACHING THE LEASE IF YOU DO NOT. (See Forfeiture article for more information.)


 

You should read the whole of the Lease paying particular attention to the following:

 

 • The Tenants covenants (legal promises)


 • The Landlords’ covenants


 • The Management Company covenants


 • Easements Rights & Privileges granted to Buyer


 • Regulations & Restrictions you must adhere to

 

• Rent review & Sub-letting terms


• Forfeiture clause - the Landlord can seek forfeiture and take possession of the Property if you do not pay Ground Rent and Service Charges or if you significantly breach the Lease.

 

Repossession proceedings can be taken by the Landlord for non-payment, whether they have demanded payment or not.  If this was successful you are homeless and your lender would lose their security, but you would still be responsible for repaying your mortgage debt. In other words do NOT breach the Lease terms.


 

Ground Rent

Note the Ground Rent payable along with any Rent Review provisions. In some Leases the Ground Rent is a peppercorn, or minimal sum, such as £1.



Service Charges

You will also be required to pay Service Charges which are your share of the cost of repairing and maintaining any communal areas and the building as a whole.  The Service Charge budget (estimate) will be provided to you and forms part of the Leasehold Management Pack or LPE1.

 

Service Charges can vary greatly from year to year depending on the amount of work carried out to the communal areas and building.

 

If major works are carried out you may find that your Service Charge can increase by several hundreds of pounds. See section 20 notices. No guarantee can be given as to future service charges, and you should take this into account when purchasing Leasehold Property.



Section 20 Notices (Notice of Major Works)

Take note of ANY reference in the Leasehold Management Pack (LPE1) to existing, future or potential section 20 Notices (Major Works Notices). These relate to repairs, decoration or maintenance.  You will be required to contribute to the cost of the same via your service charge payments.  This may substantially increase the Service Charges due.


When works are required to the building and grounds you should receive appropriate notices outlining the proposals and estimated costs. You will be responsible for your share of the works. It is recommended that you take this into consideration before exchange of contracts and committing yourself.


 

After Completion

Contact the Freeholder or their agent to ensure they have your full contact details for future Ground Rent payments.

 

Contact the Management Company to ensure they have your contact details for future Service Charge Payments.


 

Notices to Be Served Post Completion

Upon completion, and as per the Lease terms, the Buyer's Conveyancer is required to serve Notice of Transfer and Notice of Mortgage.

 

Notice must be served on BOTH the Freeholder (in relation to Ground Rent payments) and Management Company or Agent (re Service Charge payments), so all parties are aware of the change of ownership. 

 

The Buyer's Conveyancer will serve ALL of the Notices. Notices Fees are charged by the Freeholder & Management Company. These Fees are disbursements payable, and they remain the Buyer's responsibility.  You will be in breach of the Lease if you do not pay the same.

 

Where your Conveyancer is advised of the relevant notice fees before completion they will include these in your completion statement.  Otherwise, you will need to put them in funds for the same when requested following completion. Your ownership cannot be registered without a certificate from the Management Company confirming compliance (and payment). Your lender requires you to register the property and mortgage at Land Registry as this protects your lender's security.


 

Certificates & Post Completion

There is often a Restriction registered at Land Registry in favour of the Landlord or Management Company. The Buyer's Conveyancer must comply with its terms, or they cannot register the purchase. The restriction terms ensure all arrears are paid and Notices served, and it is clear who the current apartment owner is.

 

NB: Notice Fees, and other Post Completion Fees requested by the Management Company are disbursements payable to a third party and they remain the Buyer's responsibility. You will be in breach of the Lease if you do not pay the same. 


Not complying with your Lease terms (forfeiture), not making payments required, not registering the property into your name, or not registering your mortgage, will put you in breach with your lender. They can take repossession proceedings for significant breaches of the mortgage terms.




Short Term Lease & Lease Extensions

This is required where the remaining Lease term is 100 years or less. A short Lease term affects marketability and mortgage lenders refuse to accept short term Leases as security for their loans.


That makes a property with a short Lease term tricky to sell. You should get your Lease Extension sorted as soon as possible. The less term remaining the more costly the extension will be.



What Is Involved?

You will need to fund the surveyor's valuation and to pay for your conveyancer AND the Landlord's legal fees.


There are online calculators that will estimate the likely premium based on the relevant legislation. For example https://www.lease-advice.org/calculator/


The below article is also an excellent read if you need to extend your lease.





Not Paying Service Charges, Breaching the Lease & Forfeiture


Your Lease reserves the right of the Landlord to take possession of the property if you do not pay ground rent, service charges, insurance contributions, any administrative charges or otherwise consistently and significantly breach the Lease.


This is called Forfeiture.


Forfeiture applies whether payment has been demanded, or not. 


If Forfeiture is pursued by your Landlord, your lender will be very concerned since the property is their security.


Your debt to your lender remains payable even if the landlord obtains possession of the property and you and your assets will be pursued by the lender.


Best not to breach the Lease terms.






If you would like to find out more please get in touch:


07944 377029  |  02922 648003


Buying  •  Selling  •  Remortgaging


Emma Selfridge Lawyer

International House, 10 Churchill Way,

Cardiff, CF10 2HE







 

 

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