Residential Leaseholders Handbook

Charles Ward

• Publisher: Estates Gazette
• Year: 2015
• eBook ISBN: 9781135330613
• Edition: 1
• Topic: Law
• Subtopic: Commercial Law
• Index: Law

The Residential Leaseholders' Handbook explains in plain language everything leaseholders and their advisers need to know in relation to long residential leases. Among the common problems it tackles are absent landlords; spiralling service charges; the right to be consulted on significant or long term service charge items; how to challenge excessive charges; how to gain control from difficult or exploitive landlords and how to set up a management company.

The book begins with the legal framework of a typical ground lease and its main provisions including: responsibility for repairs, insurance and management of a building, the meaning of the covenant for "quiet enjoyment" and the termination of a lease due to overdue rent. The author explains what lenders look for in a residential lease; how leaseholders can insist that their lease is amended to meet lenders' requirements and the issues relating to assignment, subletting and alteration of leasehold premises.Extensive use of real life scenarios, landmark cases and some fictitious case studies illustrate how leasehold law works in practice and enables readers to effectively assess their position. Written in non-technical language this book is a reliable source for leasehold management companies, managing agents, legal advisers, students and residential leaseholders.

1

Understanding a Residential Lease

What is a lease?

It is important to differentiate between a lease (or tenancy) and other forms of residential occupancy, such as a licence agreement. The distinction is crucial.

The rights set out in this book will only apply where there is a relationship of landlord and tenant. A lodger in someone else’s home may be required to vacate at any time on reasonable notice. A guest in a hotel room will have no rights in that room beyond the terms of their booking. The issue of what constitutes a “tenancy” came before the House of Lords in the 1985 case of Street v Mountford [1985] 1 EGLR 128 when the Law Lords were called upon to decide whether an occupancy arrangement, described in the documentation as a “personal licence”, was in reality a tenancy protected under the Rent Act 1977. The Law Lords ruled that it was.

They said that in the absence of the special circumstances, a tenancy arose whenever there was a grant of exclusive possession for a fixed or periodic term at a stated rent. In other words it is necessary to look at the reality of the situation, not how the agreement was labelled. The effect of the decision was to give occupant of the premises the rights of a sitting tenant.

The distinction became less crucial after 15 January 1989 when, after a quarter of a century, it again became possible for landlords to grant short residential tenancies guaranteeing their right to take back the property so long as certain documentary formalities were complied with. The Rent Act 1977 was superseded by the Housing Act 1988 for new residential tenancies granted after that date — though the rights of existing sitting tenants were preserved. The short term lettings regime was further relaxed when Housing Act 1996, provided that almost all new private lettings, at a market rent, are automatically assured-shorthold unless the landlord has previously elected to give the tenant lifetime security.

However this book is not primarily concerned with short term residential tenancies at a market rent, but with long term residential ground leases granted at a full market premium (or price) and reserving a small annual ground rent.

At the time of writing, almost all flats and maisonettes in owner/occupation are held on ground leases. It is a workable arrangement which should ensure that the building is maintained and insured; that the cost of such maintenance and insurance is shared fairly between the leaseholders and that everyone abides by a mutual set of rules so that, as far as possible, each leaseholder can enjoy their residential unit without disturbance or unreasonable interference by other leaseholders. A freehold flat is currently unusual and would be unattractive to mortgage lenders.

Having said this the Commonhold and Leasehold Reform Act 2002 has now paved the way for a new type of freehold which developers can choose to use for flats and maisonettes, instead of selling them on lease. The new type of freehold will be termed a “commonhold” and will contain mutually enforceable rights and obligations corresponding to those contained in a traditional lease. As such it should satisfy the concerns of mortgage lenders. The new alternative will be voluntary and, for the foreseeable future, is likely to run alongside the continued grant of traditional residential leases.

The structure of a residential lease

If the reader was to compare a modern residential lease with one signed 150 years ago, they would appear to have little visibly in common.

The earlier lease would comprise a mass of shakespearean language copperplated across parchment. Its modern counterpart would be substantially longer, printed in modern legalease and on A4 paper.

But while the appearance and terminology of the later document may bear no resemblance to the earlier, the actual legal structure has scarcely changed. Both will have followed a tried and tested formula which has evolved over the centuries. It is the format, which all property professionals have grown used to. It ensures that important contractual provisions relating to responsibility to repairs, insurance, alterations to the property, permitted use and relevant financial obligations can be found quickly and without having to study the entire document. The basic structure and order of a conventional lease is as follows: particulars and definitions; the demise; tenants covenants; landlords covenants; matters agreed and declared; schedules and ending up with the attestation (or signature) clauses. Each section of a conventional lease is explained later in this chapter.

It is also convention that each lease is not signed in duplicate by all parties but as an “original” and “counterpart”. Although the main body of each document is identical, the “original” will be executed only by the landlord — and the ‘counterpart’ will be executed only by the tenant. On completion of the lease, each party will exchange their signed duplicate of the lease, so that the lessee ends up with the landlord’s signed original — and the landlord ends up holding the tenant’s signed counterpart. However, the fact that lawyers have prepared leases in this way for centuries does not mean that the process will not undergo radical change in the foreseeable future.

Moves towards electronic conveyancing mean that future leases may exist only in cyberspace. Paper deeds and documents will be replaced by their “virtual” equivalents. Legislation enabling this to happen is already contained in part 7 of the Land Registration Act 2002. What is currently missing is technology sufficiently developed to provide a system of electronic conveyancing, which is secure against fraud or computer malfunction. Another likely reform, which could take place at any time, is the standardisation of all new leases within a prescribed Land Registry format, dictated by regulations. But however “virtual” or “standardised”, residential leases become, the fundamental provisions must remain the same.

Stamp duty and stamp duty land tax

Before 1 December 2003 any residential lease granted for a premium above the lowest stamp duty threshhold (currently £120,000) would be expected to bear a series of red stamps showing that the required Stamp Duty had been paid. Even for leases granted at less than this minimum threshold there would have been some duty payable on the ground rents, no matter how small. Each counterpart lease was also stamped with a nominal £5 duty.

With the replacement of Stamp Duty by the Stamp Duty Land Tax (SDLT), those red stamps have gone (as has duty on counterparts). The Inland Revenue will instead issue a certificate confirming that the relevant tax has been paid. SDLT is also paid whenever a freehold or lease is sold and duty will be calculated on a rising scale according to the price paid for the new lease or transfer. From £120,001 to £250,000, SDLT is payable at 1%. From £250,001 to £500,000, SDLT is payable at 3%. Above £500,000 it is payable at 4%. SDLT is also payable on any ground rent or market rent with a capitalised value of more than £120,000 and there is a complex statutory formula for calculating this.

Without evidence that the required SDLT has been paid, a property transaction cannot be registered at HM Land Registry. Without such registration, legal title will not transfer to the prospective lessee or purchaser. SDLT must be paid within 30 days from the “effective date” of a transaction. This time-limit is backed up with a rising scale of penalties for late payment.

The rules relating to SDLT are complex are continually being updated as the soon system settles in. Full information including a “lease duty calculator” can be found on the Inland Revenue website. Some areas within the UK are designated by postcode as “disadvantaged”. In those areas SDLT does not begin to be payable on a residential property unless the premium or purchase price is at least £150,000.

Leases and title registration

An owner’s title to a leasehold property comprises two components:

1. the lease itself — which sets out the names of the original parties to the lease, the extent of the property leased and the terms and conditions on which it is leased and

2. the information about current ownership of the lease, which is held centrally by HM Land Registry.

Until 12 October 2003 the Land Registry issued certificates of title to property owners and mortgagees confirming their proprietary interest in the property. If the property were not in mortgage a land certificate would be issued. If it were in mortgage a charge certificate would be issued. As part of its move towards computerised conveyancing, land and charge certificates were abolished on 13 October 2003 although many are still in existence. In its place the Land Registry now issues title information documents. These are not deeds in themselves and they have no intrinsic value. They provide up to date information about current ownership and any financial charges.

Each registered title is allocated with its own title number. That number will remain the same, no matter how many times the property is transferred as a single unit. The register itself is divided into the three parts.

• The property register — which provides a brief description of the leased premises cross referenced to a title plan showing the location of the leased-premises within the building within which it is situated and in relation to adjoining streets. The property register will also state the period of the lease and the names of the original lessee and lesser.

• The proprietorship register which states first the class (or quality) of the leasehold title. The best title is “absolute leasehold”, which signifies that the Land Registry has checked and guarantees the landlord’s freehold title and any superior leasehold titles as well as the leasehold title created out of it. “Good leasehold”, means that the freehold title has not been warranted by the Land Registry. However, in some cases a good leasehold title will be acceptable to mortgage lenders. The proprietorship register will also state the full name and address of the current owner of the lease, as at the date title was last transferred. Finally, the proprietorship register will state any restrictions on the right of the current registered proprietor to sell or mortgage their interests.

• The charges register — will disclose any freehold title restrictions or other matters affecting the freehold which also are significant to the leasehold interests. It will also disclose third party interests affecting only the leasehold title (such as a registerable sublease). It will also list any mortgages affecting the leasehold title, giving the date of the mortgage and the name of the lender.

The Land Registration Act 2002 now requires any lease of more than seven years to be registered and given its own title number. Compulsory registration requires the application for registration to be made within two months from completion of the lease. In fact, registration must be made twice: once to create the new leasehold title — and second as a notice against the landlord’s title (if registered), to alert anyone buying or lending against the landlord’s interests to the fact that there is a lease (or leases) in existence. Compulsory registration also applies if an existing unregistered lease with more than seven years outstanding is transferred to someone else or mortgaged.

Before 13 October 2003 the threshold for compulsory first registration was 21 years. In practice most residential ground leases, being for terms of 99 years or more, will have been long registered. Though undoubtedly there are some long residential leases which were signed before compulsory registration took effect in that locality, and which has not been transferred or mortgaged since.

Compulsory first registration spread piecemeal across England and Wales over the course of a century and only became complete as recently as 1990. But if there are few unregistered leaseholds, there will be more unregistered landlords’ titles as the grant of a lease does not trigger a requirement for registration of the freehold title out of which it was created. A landlord’s title, which is registered, will be cross-referred to in the Property Register of the relevant leasehold title.

HM Land Registry operates out of a series of district offices, with specified areas of England and Wales allocated to each.

The Land Registry is also “open”, meaning that anyone can obtain a copy of any registered title and any title-plan, on completing the correct form and sending it to the appropriate district office with a small fee (currently £4 for a copy of the register and £4 for a copy of the title plan).

These title registers provide an essential source of information for any leaseholder or (group of leaseholders) wishing to exercise any of the rights set out in later chapters. It enables them, at small expense, to obtain full information about the identity of the ground landlord and other leaseholders, including relevant information about their titles, including details of mortgage lenders.

Mortgageability of leases

The main mortgage lenders jointly publish the CML Lenders Handbook for England and Wales, which is available only on-line and periodically updated. It is written for property lawyers and set out lenders’ expectations as regards the title checks and associated matters which lawyers acting on their behalf must make to ensure that title to the property is “good and marketable” and that the mortgage security is sufficiently protected. A lawyer who fails to comply with any CML requirement will be exposed to a damage claim, if the mortgage lender loses money as a result. It follows that a residential lease which does not comply with the terms CML Lenders Handbook will be neither mortgageable or saleable — at least not without expensive title-indemnity insurance or other remedial action.

A copy of the Handbook can be downloaded from the Council of Mortgage Lenders website www.cml.org.uk. Part I of the Handbook contains general guidance applying to all mortgage lenders — while Part II deals with th...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• Table of Cases
• Table of Statutes
• Table of Regulations
• Abbreviations
• Introduction
• 1 Understanding a Residential Lease
• 2 The Case of the Missing Landlord
• 3 Dealing with Landlord Default
• 4 Sale, Sublettings, Alterations and Use
• 5 Service Charges
• 6 The Right to Manage
• 7 The Meaning of Collective Enfranchisement
• 8 The Right of First Refusal
• 9 The General Right to Enfranchise/Extend Under the 1993 Act
• 10 Compulsory Acquisition of a Landlord’s Interest
• 11 Freehold Enfranchisement of Houses
• 12 When a Lease Comes to an End
• 13 Variation of Leases
• 14 Disputes Resolution
• 15 Running a Leasehold Management Company
• Index