Leasehold Terms Explained such as Apportionments & Retentions
In this article I explain leasehold terms that you will come across if purchasing a leasehold property or you already own a leasehold property. The terminology can be quite confusing, but hopefully the below will assist. You will find these terms referred to by the management company and your conveyancer.
Landlord: The Person or Company which owns superior title and granted the lease to you (or their successor). This person may own the Freehold or may have a superior Leasehold interest in the Property.
Freeholder: The owner of the Freehold of the entire building (the most superior title). They are usually the Landlord and the party named as the Landlord in the Lease, or their successor, the person who purchased the freehold from the original Landlord.
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.
Managing Agent: A person or organisation which acts on behalf of the Landlord, Freeholder, Management Company or Tenant’s Right to Manage Company.
Retention: A retention is a sum of money held back on completion to cover arrears or balancing payments required for service charges. 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 the 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.
Upon completion you 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 your completion statement.
Your Conveyancer 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 Managing Agent.
You should be sent a copy of the apportionments to approve. If there are any errors in the apportionments these should be resolved before completion. Unfortunately, it is difficult to remedy these afterwards. It is important that you check the apportionments sent to you and confirm if you think there are any errors.
The apportionments are based on estimated figures and there is always a risk in relying on estimates.
It is normal for a seller’s Conveyancer to retain a sum of money on completion to cover any shortfalls in the year-end accounts.
The Service Charge paid by the seller is an estimate and the works carried out may be more than estimated. As the year end accounts will be finalised well after completion occurs it is normal practice for a buyer to ask for a retention to cover any shortfalls for the seller’s period.
You will need to provide the end of year statement to claim any retention funds. Your Conveyancer will check whether the seller must cover any sums due. The retention is usually held for 12 - 18 months from completion and after that time, if no contact is made the retention is refunded to the seller.
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.
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 first granted. The Lease is a historic deed.
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. Upon completion your Conveyancer applies to have the property registered in your name. You no longer have a bundle of old paper deeds.
Please 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 GET LANDLORD CONSENT, IN ADVANCE, BEFORE EXTENDING OR ALTERING LEASEHOLD PROPERTY.
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 you
• 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 otherwise 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 your lender would lose their security, but you would still be responsible for repaying your mortgage debt.
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.
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 – MAJOR WORKS NOTICES
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 your service charges.
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.
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
Upon completion, and as per your Lease terms, your Conveyancer is required to serve Notice of Transfer and Notice of Mortgage.
Conveyancers must serve Notice on BOTH the Freeholder (as to Ground Rent payments) and Management Company or Agent (as to Service Charge payments), so they are aware of the change of ownership.
Your Conveyancer will serve ALL of the Notices on your behalf. Notices Fees are charged by the Freeholder & Management Company. These Fees are disbursements payable, and they remain your 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.
RESTRICTIONS & CERTIFICATES
There is often a Restriction in favour of the Landlord or Management Company which your Conveyancer must comply with, or they cannot register your purchase. The restriction ensures all arrears are paid and Notices served, and it is clear who the current flat 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 your 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.
If you would like to find out more from an experienced conveyancing solicitor, please contact me today.