A Right To Manage Claim could be the perfect solution
Far too often we hear of leaseholders who are at a loss as to what to do, due to their landlord’s poor management of their property, astronomical service charges incurred for what seems like little, or no, ‘service’ and of disrepair to the buildings their flats are situated in. A leaseholder in this position may well feel trapped and unable to take control of a situation which impacts the enjoyment of their property on a day-to-day basis.

This is where a Right to Manage (RTM) claim, if eligible, could be the perfect solution. The Commonhold and Leasehold Reform Act 2002 grants leaseholders the right to form a company and use this company to acquire the landlord’s management functions. The company itself does not have to deal with the management and can still delegate these duties to a Managing Agent, just as a landlord could.

The right to manage is only available to leaseholders of flats, not of houses and any leaseholder will need to ensure they qualify in order to initiate the process.

Do I qualify for a Right To Manage claim?
For your building to qualify the following criteria must be met:

The property must be a self-contained whole or part of a building (and that part must be structurally detached).
It can be a part-commercial building, but the non-residential part must not exceed 25% of the total floor area, excluding common parts.
The property must consist of at least two flats and at least two-thirds of the flats must be let to ‘qualifying tenants’.
What does ‘Qualifying tenant’ mean?
This is a leaseholder who was originally granted a ‘long lease’ that is one that has an original term of more than 21 years. The leaseholder does not have to be the occupier of the flat so if you are a leaseholder of a buy-to-let property, you will still qualify.

The RTM will not apply where the immediate landlord or any of the qualifying tenants is a local housing authority. The RTM will also not apply where the premises fall within the ‘Resident Landlord Exemption’. For this exemption to apply the following 3 criteria would ALL need to apply:

The premises must be other than a purpose-built block (e.g., a converted house);
They must comprise not more than 4 flats;
One of the flats must be occupied by the freeholder and/ or adult members of their family as their only or principal home for the last 12 months.
I think I qualify…
If your building qualifies, you will need 50% of the leaseholder’s, including you, to participate in order to form a RTM Company. There must be a minimum number of qualifying tenants amongst the members of the RTM Company and the required minimum number of qualifying tenants must be equal to at least half the total number of flats in the building.

The RTM Company will then be formed by you and your fellow leaseholders and then a notice to participate must be served on all of the other leaseholders. This is the formal way of inviting them to join the RTM Company.

What is the process for Right To Manage claims?
Step 1 – When you have decided which leaseholders wish to participate, those leaseholders, on behalf of the RTM Company, will serve a Notice of Claim on the landlord. The landlord will have a month to reply with a Counter-Notice.

Step 2 – If the landlord does not object in his counter-notice, then from the point of receiving consent, the RTM Company will have 3 months to prepare to take over the management of the company. A formal acquisition date will be decided.

Step 3 – Understandably, the process is much longer if, in the landlord’s counter-notice he alleges reasons why the RTM Company is not entitled to proceed. The landlord is only able to dispute on the following grounds:

The building does not qualify; or
The RTM company does not comply with the legislative requirements; or
The members of the RTM company do not represent half the flats in the building.
Step 4 – An application will then need to be made to the First Tier Tribunal within 2 months of the date of the counter-notice, for a determination. If an application is not made in time, then the claim is deemed to be withdrawn. The First Tier Tribunal will then make a determination as to whether the RTM can be granted.

What costs are involved?
The RTM Company is responsible for reimbursing the landlord for any costs incurred in the process. Where the RTM Company is successful in their claim this will be limited to any legal expenses associated with ‘the notice, any accountancy or audit costs arising from provision of accounts or transfer of monies and the costs of his solicitor or managing agent in the hand-over of management records and functions’.

The landlord cannot recover their costs in relation to a Tribunal hearing unless the Tribunal finds against the RTM Company. Where costs are disputed, an application can be made to the Tribunal for determination.

How can we help?
Our dedicated enfranchisement team have years of experience in dealing with Right to Manage claims and acting for both leaseholder’s and landlords. We are able to assist in serving the relevant statutory notices where there is no dispute between parties and also in dealing with applications to the Tribunal and legal issues presented by this where the RTM claim is disputed.

If you would like to speak to one of our team members in relation to a potential RTM claim or have any queries over whether you would qualify as a leaseholder, please do get in touch.

0800 84 94 101 or email: enquires@mayowynnebaxer.co.uk

Why you should not delay extending your Lease

Essentially, a lease is a contract between two people which enables the ‘tenant’ to occupy the leased property to the exclusion of all others and to use the property in line with the terms set out in that contract. Most leases are granted for a set period of time, known as the ‘term’ of the lease. Residential leases are granted for various lengths but the most common tend to be 99, 125 or 999 years.

Over time, the lease term begins to run down and, if the tenant took no action at all, the lease would eventually run out and the tenant would no longer have a right to occupy the property. At this point, the property would return to the ownership and occupation of the landlord.

Clearly, this would be a terrible situation for the tenant which is why tenants of residential properties have a legal right to extend their leases – i.e. a tenant can pay money to their landlord to buy extra years to add to their lease term.

A short lease will also decrease the value of the flat or house because it becomes less attractive to buyers, and their mortgage lenders, who know that they will eventually have to pay to add more years to the lease term to protect their property.

There are two ways that an extension can be achieved – the landlord might be willing to offer a lease extension to you or if you have owned your leasehold property for at least two years, you are entitled to compel your landlord to give you a 90-year extension to your existing lease at a ‘peppercorn rent’.

The main point to note here is that the shorter the term of the lease, the more money you will have to pay the landlord to extend it.

The general view is that you don’t have to extend a lease with 85 years or more remaining on the lease term. Certainly, that term length would be enough to satisfy most lenders and therefore buyers. However, bearing in mind the above, we would always recommend that you extend your lease at the earliest possible. Taking early action will save you money AND hassle in future.

Should I extend my lease before trying to sell?

Extending a short lease can add to your property’s market value. Generally, the shorter the lease, the lower the market price you will achieve

You are unlikely to be able to realise your property’s true market value with a short lease term particularly where it has dropped below the number of years which a lender would find acceptable – i.e. 80-85 years remaining. This is because buyers will quickly realise that they will shortly have to take on the expense of extending and will factor that into the price they are willing to pay. In addition, when the lease gets too low, lenders will not be willing to lend buyers money to purchase the property and so you will only be able to sell to cash buyers.

Whether to extend your lease before selling largely depends on how long you have left on your lease at the point of sale. The general rule of thumb in the past has been:

+90 years = not worth extending
90-85 years = worth extending (this will improve saleability)
85-80 years = worth extending (or getting the lease extension process started)
Less than 80 years = you will need to extend or accept a much lower sale price
Most buyers are alive to the issue of term length now due to the press coverage surrounding leasehold properties and where a 99 year term was deemed acceptable previously, more purchasers want to see 110-125 years left on a lease.

Many owners of leasehold properties make the mistake of delaying obtaining a lease extension until they want to sell. The inevitability of this, is discovering that potential buyers don’t want to purchase a short lease or cannot get a mortgage unless the lease has been extended.

Trying to obtain a lease extension at this point can be very challenging. It can take anything from 2-18 months to complete a lease extension. This kind of delay would put most buyers off! Conveyancing is complicated and delays can lose you your buyer. Don’t wait until sale to extend. Ideally you should try to deal with any lease extension at least 6-12 months before selling if you can.

Should I extend my lease before obtaining a re-mortgage?

A short lease will affect your ability to re-mortgage your property if the term isn’t long enough for your lender. You may well have seen an attractive mortgage product on offer, but if your lease is unacceptably short for the lender, you could miss out on a lower interest rate. Worse still, you might get to the end of your fixed rate and have to pay a much higher rate until the lease extension is sorted out. If your lease is below 85 years – you are likely to encounter an issue.

Should I extend my lease to avoid ground rent issues?

Ground rent is a fee you must pay to the freeholder of your property as a condition of your lease. Unlike service charge payments, the payment of ground rent does not go towards the services in the building that you have the benefit of. It is purely a source of income for your landlord.

Ground rents have been payable on leasehold properties for many years and one of the arguments for retaining them is that without them, why would the owner of the freehold continue being interested in managing and maintaining the estate for the benefit of the tenants? There may be some merit to that argument, however, in recent times the level of ground rent payable by a tenant has gone from £50 or so a year, perhaps doubling 3 times in a 99 year term, to increases every 5 or 10 years starting at £250 which lead to thousands, if not millions, being payable by the end of the term which would clearly be unaffordable.

Not all doubling ground rents are unacceptable, particularly where they started low and don’t increase very often. However, if your lease contains a troubling doubling ground-rent clause, it will be more difficult to sell your property. Again, this will impact on the marketability and mortgageability of lease when you come to sell. Some high-street lenders may not agree to offer a mortgage on a property with a doubling ground rent clause, so this is something to watch out for.

Importantly, leases with a ground rent of over £250 per year (outside of London), or £1,000 per year (in London) automatically become Assured Shorthold Tenancies. This gives the Landlord the right to seek possession of the property more easily than usual if the ground rent is unpaid for more than 2 months. Lenders and lawyers have become increasingly wary of this unintended impact of higher ground rents.

One way to resolve the issue of an unsatisfactory doubling ground rent is to exercise your right to a statutory lease extension. In addition to adding years to your lease term, you can also reduce your ground rent to a peppercorn (whether your landlord likes it or not!).

An alternative is to try to agree a variation to your ground rent with the landlord. We have found that most landlords are sympathetic to the problems that tenants are experiencing with doubling ground rents and are keen to try to come to a satisfactory solution.

Call us if you would like to discuss this further.

Should I extend my lease to amend any defects in my lease?

Some leases are drafted in such a way (primarily older leases) where they could be defective against modern conveyancing standards. This could be because there is some error/emission in the lease, covering matters such as a repair/maintenance clause etc. This can cause problems when trying to sell a property as it can affect a potential buyer’s ability to obtain a mortgage. Some lenders may refuse to lend money to purchase a leasehold property if the lease does not cover certain provisions, forcing the buyer to withdraw.

Our experts will review your lease and consider whether there are any problems or defects as part of the lease extension process. If we spot any issues then we will let you know and we will seek to negotiate a variation of your existing lease as part of the lease extension process to resolve the defect if possible. Not all solicitors will take this extra step for you – some will only extend the term and change the ground rent – but we consider this a crucial opportunity to try to avoid future problems.

Should I extend my lease in order to avoid the ‘marriage value’ trap?

‘Marriage Value’ is the increase in the value of the property following the completion of a lease extension – i.e. it reflects the fact that a longer lease has a greater market value than a shorter one. It is a rather complex area which is outside the scope of this article, but put simply, when a lease falls below a term of 80 years, the freeholder is automatically entitled to an increased premium.

This means that the day before the lease term falls below 80 years the freeholder isn’t entitled to receive the marriage value, the day after he is! This can increase the premium considerably.

You should always look to extend a lease before it hits the 80-year mark. Check your lease now and make sure you’re well above 80 years. If it’s coming up – get in touch immediately to avoid spending more on a lease extension than you have to!

If any of the above applies to you, or you would like further advice in this matter, please contact one of our specialist Leasehold Enfranchisement team at Mayo Wynne Baxter. We are experts in the field and members of the Association of Lease Extension Practitioners (ALEP). Our team can provide advice you can rely on.

My Landlord hasn’t been collecting ground rent from me – what do I do?

I regularly come across situations where tenants are very concerned that their Landlord does not collect ground rent even though it is actually payable under the terms of the lease.

This can be for a number of reasons including: because the Landlord does not know that they are entitled to ground rent from the tenants, perhaps doesn’t know how to demand it, or even because the Landlord abandoned the freehold many years ago and takes no interest in it.

If you own a flat but your Landlord doesn’t collect any ground rent from you – what should you do?

When do I have to pay my ground rent?

Your lease sets out the level of ground rent that you must pay annually. Your lease is always the starting point when you are trying to work out what you need to pay.

There may also be a deed of variation that was put in place after your lease was completed which increases or decreases the rent. You can check whether your lease has been varied by looking at your Land Registry records – known as your ‘title deeds’ or ‘office copies’ to lawyers. Any deed of variation will be recorded in the Proprietorship Register. Your lease cannot be altered without your agreement so these documents are fairly conclusive.

The ground rent provisions are usually included in the first couple of pages, or in the definition of ‘Rent’. You should be able to identify the amount that you are required to pay, any clauses which enable the Landlord to increase the rent during the term of your lease, and the date on which the amount is charged each year.

Ground rent is not the same as service or maintenance charges. Ground rent is a payment that you make to the Landlord for their benefit.

Service charges are charges that you pay for services you receive. For example, you benefit from the roof being watertight and in good condition and so the Landlord fixes the roof and then you pay for your share of the repairs via the service charge set out in your lease. You don’t get anything back from your Landlord in return for your ground rent payment. It is a source of ongoing income for the Landlord and some Landlord’s argue that this source of income is what incentivises them to continue managing and maintaining the freehold estate or block. The service charge is meant to be a means for the Landlord to recover their expenses from the tenants who have the benefit of the services it provides. It was never intended that Landlords should profit from the collection of the service charge which is held on trust for the benefit of the tenants.

Even though the lease tells you how much ground rent you have to pay, you do not have to pay it until the Landlord has sent you a ground rent demand in writing that complies with the requirements of section 166 of the Commonhold and Leasehold Reform Act 2002. The ground rent demand must be in the form required by the Act and must specify:

The amount of the payment
The date on which the tenant is liable to pay it (which must be at least 30 days after the notice is given, but no more than 60 days)
The date on which you would have been liable to pay it in the lease (if different to point 2)
Your name
The period covered by the demand
The name and address of the person or company the payment should be made to;
The name and address of the landlord (or agent if this applies) who is giving the notice; and
Some supporting information (included as notes to the notice).
The Landlord can send the notice by post to the address of the house or flat it relates to unless you have already given the Landlord a different address for sending correspondence. This is why it is crucial to keep your correspondence address updated in your Landlord’s records (and at the Land Registry).

How many years can the Landlord seek back payments for?

The Limitation Act 1980 states that the ‘limitation period’ for recovery of ground rent is six years. This means that if ground rent hasn’t been paid in the past the Landlord can look to recover backdated ground rent going back for a period of 6 years.

Service charges differ; the Landlord must demand any service charge for retrospective expense within 18 months of that expenditure being incurred. In other words, if your Landlord incurs some expense in providing the services under the lease and wants to get it back from you, it can’t ask you for service charge sums to cover that expense once 18 months have passed.

I would strongly recommend that if you know your Landlord is not sending ground rent demands, you put aside funds each year to cover this eventuality.

Can my Landlord charge interest or late payment fees on back payments of ground rent?

The Landlord cannot utilise the provisions in your lease which relate to non-payment or late payment of ground rent until after they have sent you a valid ground rent demand and the date for payment in that demand has passed, regardless of what your lease says about the date it falls due. This was confirmed in a 2018 case called Cheerupmate2 Limited v. De Luca Calce.

This means that if your Landlord is seeking to charge you interest or late payment fees on sums that they failed to demand previously then you can refuse to pay them. For example, if they haven’t demanded rent since 2015, and they serve a demand for backdated ground rent from 2015-2019 on 1st September 2019, then you are only liable to pay the ground rent after you have received the demand dated 1st September 2019. Any interest or late payment charges can only be applied when you have missed the deadline for paying that demand.

If the Landlord serves ground rend demands retrospectively and also tries to charge backdated interest or late payment charges retrospectively then you should refer them to s.166(4) of the Commonhold and Leasehold Reform Act 2002 and explain that you don’t have to pay anything beyond the ground rent set out in your lease.

What if I can’t pay the whole of the amount owed?

The Landlord can demand the last 6 years’ worth in one lump sum and then if you don’t pay by the deadline it may be able to charge you interest and late payment fees if your lease allows them to. It would be best for you to pay the full sum owed as soon as you receive the invoice unless it is clearly invalidated.

If you can’t pay the whole sum then contact the Landlord and see whether you can arrange to pay in instalments. The Landlord is not obligated to agree this but most Landlords are fairly reasonably.

I haven’t owned my flat for the last 6 years – do I have to pay the former owner’s ground rent?

Your conveyancer should have ensured that when you purchased the property the seller had paid all sums of ground rent and service charge owed up to the date that you took over ownership. That means that you should only have to pay ground rent for the period of time that you have owned the property. However, sometimes it is not possible for a conveyancer to check this because the Landlord won’t reply to their enquiries at the time of the purchase. If this is the case, your conveyancer should have explained this to you when you bought.

Occasionally, after you have purchased, a Landlord will serve retrospective ground rent demands out of the blue for previous periods. Technically, in most instances, you are only liable to pay the ground rent due during the period of your ownership and the seller is liable for their period of ownership. However, in some circumstances it is possible for a Landlord to bring forfeiture proceedings against the new owner of the flat and in such situations paying up may be the easiest resolution.

If you find yourself in this position you should seek professional advice as the consequences can be very serious.

Right to Manage Company (RTM) involvement

Where the tenants have exercised their right to manage and are responsible for managing the building and collecting service charge some Landlords think that the RTM company is also responsible for collecting ground rent. That is incorrect.

The responsibility for collecting ground rent remains with the Landlord unless the Landlord specifically asks the RTM company to undertake the collection of ground rent on its behalf. Given that the RTM is collecting the service charge, this does seem like a sensible compromise.

If you are an RTM director and you know that no ground rent demands are being sent to tenants, I would strongly advise you to consider the impact on the tenants of having to pay 6 years arrears in one go. If those sums are likely to cause the tenants issues, you might want to get in touch with the Landlord to try to encourage them to serve the demands at regular intervals.

How do I get rid of my ground rent?

If you’re fed up of paying ground rent, or if you have a ‘toxic’ doubling ground rent, then it is possible to buy yourself out of it by either agreeing a deed of variation with your Landlord, or extending your lease under the Leasehold Reform Housing and Urban Development Act 1993.

Alternatively, you could get together with your neighbours and force your Landlord to sell the freehold to you but to do so a majority of flat owners in your block would have to exercise their right at the same time. This process is known to lawyers as ‘collective enfranchisement’.

You will have to pay a premium to your Landlord whichever way you proceed and will also have to pay valuers and legal fees but it may be worth it if your ground rent is having a negative impact on your property.

MWB have a specialist Leasehold Enfranchisement Team that will be able to assist you if you have any queries about your leasehold property. Please get in touch if you have any questions that we can help with.