Tenancy Agreement
An AST or assured shorthold tenancy should be provided at the start of any tenancy. It will be provided by the landlord and will detail the obligations (keep the windows cleaned) and constraints (no animals or late night music). The agreement will show the length (term), rent and importantly where the deposit is held.
The Landlord is responsible for ensuring the tenant receives details of where the deposit is held and how to obtain it at the end of the tenancy. This is known as the prescribed information. If a possession order is required by a Landlord evidence may be required by the court proving the tenant received this information. Recently I had to ask the letting agent for a statement stating that the prescribed information had been delivered by him to the tenant.
Similarly the Landlord must protect the deposit. If it has not been insured or protected in a deposit scheme the possession order is unlikely to be granted and the Landlord risks a fine of up to three months rent. The tenant may even issue proceedings when the tenancy has expired. Otherwise the deposit is held in case of damages or unpaid rent.
The Landlord must provide a tenant with the government guide on “How to rent – the Checklist for Renting in England”, energy performance certificates for the premises and gas safety certificate for all gas appliances. There is also an obligation on Landlords to check that any tenant has a right to rent prior to the start of the tenancy. You can use the on-line Home Office landlord checking service – It takes two days and comes with a unique reference number.
The lease should contain a clause requiring the tenant to check the alarms regularly, replacing batteries if needed and notifying the landlord if they don’t work.
Lodger Agreement
This type of agreement is similar to the Tenancy agreement but the major important difference is that it does not provide exclusive use to the property for the duration of the tenancy. The agreement is normally know as a licence as opposed to a tenancy. Landlords do not have to protect any deposit for a lodger but do for a tenant.
Service Charge
One of the main principles in service charges is that the Landlord is only allowed recover for services expressly set out in the lease. If it is not in the lease then the Landlord is not entitled to charge for the service and the tenant is not required to pay. The Landlord is also not allowed to make a profit but is entitled to recover his expenditure for works carried out.
The works carried out on the property must be to a reasonable standard. The contractor selected need not be the lease quoted and again no profit is permitted.
Lease Extension and Deed of Variation
If you own a leasehold flat, you only own it for the number of years specified in the lease. This period of time is usually 99 years but leases exist nowadays for 125 or 999 years. After this period of time the property returns to the Landlord or Freeholder as the lease has expired.
Rather than the property returning to the Landlord/Freeholder you can apply to ‘extend’ the lease before it expires. The Act allowing this provides that the existing lease will be extended by an additional 90 years and the ground rent will reduced to zero “peppercorn” Under the Act if you have a lease with 70 years you may extend it by 90 years to 160 and if you pay a ground rent (say £50 per year) this will now be a peppercorn (if demanded). In addition the Landlord will require a premium and you will also be responsible for his legal and surveyor fees.
The cost of the new lease is based on the unexpired term of the lease plus the associated ground rent. The Landlord also needs to be compensated for not receiving possession of the property upon the expiry of the original lease. If the lease is below 80 years the increase in capital value of the property is shared between the landlord and owner equally.
The wise rule is to extend the lease before it falls below 80 years.
The Procedure
You must be the registered owner of the property for over two years, this is known as a “Qualifying Tenant’. The lease must be for at least 21 years and the property a “Qualifying Flat”. This is as opposed to a house which falls under different rules. The Landlord must then be served with the appropriate notice to commence the process. The Landlord is normally the freeholder but care must be taken to ensure the correct people are served. The Landlord often arranges the building insurance and collects the cost directly so you will obtain his address from his demand. It may be the case that a management company collects ground rent and insurance on behalf of the freeholder. If the latter other methods and obligations exist to obtain the name of the Landlord.
The Notice (Section 42) must be served on the freeholder and ideally a record of the service of the notice kept ( proof of posting, recorder delivery etc,). It must contain specified information such as the tenant of the property, details of the lease, the premium, the date by which the Landlord must serve a counter-notice. Both parties may negotiate the terms and if no agreement emerges either party may apply to the first tier tribunal for a decision. Most disputes are over the premium and resolved before a hearing at the tribunal. At a tribunal hearing each party must bear its own costs which is conducive to a settlement. There are strict timescales as any application to the tribunal must be made within 6 months of receipt of the Counter-notice from the Landlord. If this is not done the application to extend the lease is treated as withdrawn and no reapplication can be made until a year has passed.
Upon agreement a draft lease is prepared and both sides have a strict time schedule within which to sign and complete the transaction. The finalised lease extension is then registered at Land Registry.
There is also the opportunity of extending the lease without following the act. This provides the opportunity of extending the lease for a lower term of years and also a lower premium. It may expedite the process but it really depends on the Landlord and tenant. Either party may change their mind and pull out of the process. The Landlord may withdraw and the tenant could then proceed using the statutory procedure. I recommend if dealing outside the Act to initiate the extension at least one year before the term drops below 80 years.
The tenant extending his lease is subject to stamp duty where the extension premium is over £125,000. Most extensions are less.
If it’s more, use the HMRC calculator to see how much you’ll pay:
What can go wrong?
- The premium quoted in the Notice may not be the price eventually agreed after negotiation or determined by the Tribunal, The premium proposed must be a genuine opening offer, the temptation to quote a very low figure in order to reduce the amount of deposit must be avoided or the Notice runs the risk of being found invalid.
- The Landlord is missing
This often occurs if the Landlord converts a house into two or more properties and then moves abroad. It also occurs if the property is repossessed and the tenant also owned part of the freehold. The lender may have a claim on the lease but not on the freehold leading to later difficulties finding the Landlord.
The problem can be resolved in other ways.
- If the landlord cannot be found then the Notice cannot be served. In this case the leaseholder may make an application to the county court for a Vesting Order. The leaseholder much show that sufficient effort was expended trying to find the Landlord. If the court is satisfied as to the leaseholder’s eligibility for a new lease then it will, in effect stand in the place of the Freeholder and grant the lease. The premium will be determined by the First tier tribunal.
- Different rules apply if the landlord is a company in receivership or bankrupt. The Notice may be served on the Receiver or Trustee in Bankruptcy. They stand in the place of the Landlord and act as Landlord.
Freehold Enfranchisement or Purchase
The Leasehold Reform Housing & Urban Development Act allows the owners of flats in a building the right to buy the freehold of that building. The tenants purchase the interest of the freeholder providing them control of the building putting them in charge of maintenance, repairs, managing agents, insurance and other property matters.
If at least 2/3rds of the flats in the building are owned by qualifying tenants and 50% of those tenants participate and the building qualifies the landlord must sell.The procedure is governed by strict time limits to which all parties must adhere and respond within the statutory time limits.
The Leaseholders form a Company which will be the Nominee Purchaser or the buyer of the freehold. An initial Notice is served with the details of the property required and allowing the Freeholder at least two months to reply. The ‘valuation date’ for the premium will be the date of service of the S13 Initial Notice and the value effectively crystallises so it will not change during the enfranchisement. The Notice must be signed by or on behalf of all the participating tenants and then served on the freeholder and any other landlord or head- lessor. The nominee purchaser may receive demands for information and must comply with the timescales provided for response. Once the Initial Notice is served on the Freeholder then the tenants must pay for the “reasonable” fees incurred by the Landlord. If no agreement can be reached and an application is subsequently made to the Tribunal each party must then bear their own costs. Accordingly many disputes are resolved prior to a hearing at the First Tier Tribunal.
Evidence of title may be requested of participating leaseholders within 21 days of receipt of the Initial Notice as in lease extensions. Similarly the Nominee Purchaser or the Company must respond to this request if any within 21 days. The Freeholder must serve a Counter-Notice by the date specified in the initial Notice and if he fails the tenants must apply to the courts within six months. If this does not happen the notice will be deemed withdrawn. After service of the Counter-Notice, if terms cannot be agreed, either party may apply (discretionary) to the First-tier Tribunal (Property Chamber). The application can only be made two months after the service of the the Counter-notice but it must be made prior to the expiry of six months from the service of the counter-notice.
The application fee to the Tribunal is £100 and the hearing fee (on receiving notice of a hearing date) is £200. The determination of the First-tier Tribunal becomes final 21 days after it is sent out. Any appeals must be made within this period.
The freeholder must provide a draft contract within 21 days of the Tribunal’s decision. The parties are expected to complete within a period of two months after the Tribunal’s decision becomes final (the ‘appropriate period’).
If the Initial Notice is withdrawn or deemed to be withdrawn the process of issuing a new Notice cannot be served again for 12 months. The 12 months delay is from the date of the actual or deemed withdrawal. A protection for the enfranchising tenants is provided by the right to register the Initial Notice with the Land Registry. If the freeholder tries to sell the freehold to another party then the sale will still be pursuant to the tenants rights to enfranchise. In other words the enfranchisement will therefore be able to continue as though the new owner had originally received the Initial Notice.
Further details are available in the guide Valuation for Collective Enfranchisement.
What can go wrong?
Absent landlords
If the freeholder cannot be found the enfranchisement may still occur as the absence can be resolved in other ways:
- if the freeholder was a company which has been struck off then the freehold property may have passed to the Crown through the Treasury Solicitor. The Treasury Solicitor will normally sell the freehold to the tenants.There will be no requirement to serve the Initial Notice.
- if the freeholder is a company in receivership, then the Initial Notice may be served on the Receiver; similarly, if the owner is an individual who is bankrupt, the Notice may be served on the Trustee in Bankruptcy. Both are acting as landlord and required to respond by serving a Counter-Notice.
- if the freeholder just cannot be found then the Initial Notice cannot be served. In this case, the tenants may make application to the county court for a Vesting Order. They must make reasonable efforts to find the freeholder first. This includes engaging a tracing agent or placing an advertisement in a local and national newspaper.
If the court is satisfied with the efforts to find the freeholder it will transfer the freehold to the tenants. The premium is paid into court and held for the absent freeholder.
Right of First Refusal
If your landlord is selling the Freehold you as Tenants of the flats have the legal right of first refusal enabling you to purchase the Landlord’s interest in the property when he decides to dispose of it. The landlord must offer the property to the tenants and is prohibited from selling it to anybody else at a more favourable price. Failure to do so can result is a fine upon conviction. There are different procedures depending on whether the Landlord sells by auction or notice. Specific procedures and timescales need to be adhered to so that the right is not forfeited.
We have just completed the purchase of the freehold under this right and can advise you of the correct procdure to obtain your freehold.
Right to Manage
A Right to manage (RTM) company allows the leaseholders of a block to acquire the management functions of the landlord utilising a company set up by them. This allows leaseholders to take control of the day to day management of their block. Initially a formal notice is served on the Landlord. After a set period of time the management transfers to the right to manage company. There are no constraints or proof of mismanagement by the landlord required. There are pre-conditions in that the tenants must qualify and so must the building (as in lease extensions and enfranchisements). Unlike enfranchisements all leaseholders are entitled to join the management company and none may be excluded for any reason. The right to manage is available to leaseholders of flats not houses.
The Notice Inviting Participation requires a statement of whether the company proposes to self-manage or to appoint professional management
Redevelopment
The freeholder will not be obliged to sell the freehold in certain circumstances. If the freeholder can show the court that he genuinely intends to demolish and redevelop the building or a large part of it he can refuse sale. There are strict conditions in that most (2/3) of the total leases must end within five years of the date of service of the Initial Notice.
Leaseback
If the freeholder owns a flat in the building which is not let to a qualifying tenant he has the option of taking a leaseback of the flat on a 999 year lease. The value of the flat is deducted from the enfranchisement price.
No Counter Notice
If the freeholder fails to reply and serve a Counter-Notice by the date specified in the Initial Notice an application may be made to the county court for a Vesting Order. This will allow the tenants acquire the freehold on the terms and premium in the Initial Notice. Care must be taken to apply within six months of the date on when the Counter-Notice should have been received. If not applied for by this date the Initial Notice will be deemed