Opinion- Not happy, so not paying the Bill

 Owners regularly struggle with the ideas that common practise in most leases is that

1 You pay in advice the estimated costs of services “what they think they will spend”

2 The actual expenditure is not totalled until the end of the year “what they actually spend”

3 The difference Profit or loss known as surplus or deficit is then distributed.

Distribution may mean a repayment or a credit against the current service charges, rolled into the current year’s budget or transferred to reserves.

The logic of “I don’t pay for meal until I am happy and eaten it, do I?” doesn’t apply it is a canteen.

 I am omitting some leases where the interim is small often for historic reasons or where they are charged for in arrears.

The single tow biggest misconceptions are

1 It’s a one off inclusive fee to the landlord or their  agent who in turn employ sub contactors and have to provide service no matter what and accept the cost and risk on non-payment just like anyone elks.

2 That the monies are held on trust separate from the landlord or their agent own corporate money, and therefore any expenses are deducted from this for the block/estate whether its cleaners or the landlords costs or agents fee.

This is the only money they have to drawn upon and non-payment only leads to further diminution in services.

Most modern lease are service subject to payment of service charge and while in simple terms this is not entirely true or enforceable, it means that in practice the LL or agent will reduce service quality and frequency to  a level  not expected by anyone  and ensure there is enough to pay utilities and insurance.

In such cases if services are reduced then the actual costs is compared to the amount estimated and distributed as earlier stated.

Owners can discuss or formally challenge whether 1 above is fair and reasonable at the Tribunal, but must remember that it is an estimate and that they are unlikely to have the detailed understanding of  complex services.

The most common source of dispute is what s actually being done for that estimate and costs and what an owner thinks is  or should be done.

It is key to establishing that and gaining an understanding of complex services and in some cases that may need professional advice.

At the end of the year landlords, should they choose not to do so, should be compelled to certify the costs as the lease requires or  under Section 21 and 22 landlord and tenant Act 1985.

Now  note many companies are set up for residents to run and in some cases the owner are told that under company law as a shareholder or member they have no right to see the bills which form the accounts etc. Now that is correct, however the service charges are demanded and under the control of the leases and under the control of the above act and therefore the right does exist as a leaseholder if the rights under the Act are exercised.

Now key to dealing with disputes during the year and at year end is, bearing in mind what has been said, to keep a detailed record of issues and evidence  while trying to effect changes in service or ultimately asking the tribunal to reduce the amount.

It is important that it is recorded and presented in such a way that an independent person can quickly assimilate the information and see the issues as they will be unfamiliar with the block.

All this is counter intuitive and seen as a rip off. What is not understood is that if landlords and agents did operate on all risks basis the fees which form part of the service charge would vastly increase as in general the rate of return on block management fees is around 4% to 6%. That’s why some try and take the money elsewhere and doing the least they can.

But its also a huge opportunity- a sensible residents group that takes a mature approach to work with an agent can vastly increase the performance of the blocks services and the home environment and therefore make it better for both the agent and the owner residents and owner investors.

Where situations do deteriorate, an agent may in fact be quite open to an approach to turn to it all around.

You should agree  to

- a list of priorities

- stage payments to fund those

- encourage non payers that the standard to be set and delivered is being monitored by your group

This will build confidence  and resolves most situations.

Typical roadblocks are

-          agents or LL’s refusing to budge “until its all paid up”, so try and agree to this process  rather than resorting to litigation and right to manage or similar. nb  staff often don’t have that authority and you may need senior level approval especially where automatic processes are in place to pay insurance old bills or fees first

-          - owners wanting to extract revenge or compensation, bit while some cases do merit a good kicking, the immediate well being of your home and investment is far more important

-          Legacy issues  where it is important to agree to settle these separately under mediation arbitration or tribunal determination, as the later is now often expensive, don’t overlook arbitration as a cheaper alternative

-          Major project and a lack of trust which may require owners paying into an independent solicitors client account ( held on trust) and paid on certification by the projects contract administrator

These steps might avert a long and expensive battle if both sides take a realistic view and the issues are not insurmountable- nor need formal determination or the removal of the landlords role as a manager.

Opinion-Landlord bashing

LANDLORD BASHING

This is a popular support and  while it has focused on one group in particular its nothing  new to long established landlords in London.

A key issues is that residents complaints and withholding payment  is seen as and end in itself  on the misplaced belief that  it costs the LL money and profit  they wont pay their subcontractors  and he will have to sort it .

Thats wrong, yes it is- its an area full of misunderstanding.

1 Service charges are not the LL’s or Agents Money from which they

- take a profit and

- pay subcontractors

- and accept the costs and risks of non payment

The SC money is held on trust separate to the landlords money and payments made out of it  are to the various trades and services inc the Agents Fees or landlords costs .

2 Leases state in most cases that the provision of services are conditional on  payment on account by the leaseholder. Not as some would like “ I don’t pay for the meal until I have eaten it”

3 Non payment is not simply the LL/Agents fault or problem as bad debt are apart of every companies cash flow. Its important to understand that skulduggery aside  there is no profit or contingency element in SC or Fees to do so because the of the limitation on those costs  both contractually and under section 19 “fair and reasonable”.

While the landlord does still have  the responsibility to provide services where there is non payment then the standard and frequency of services is adjusted often far short of what is expected.

Funds are used to pay for insurance and utilities and gardening and cleaning less frequent and repairs on Health and Safety basis only..

The inevitable effect of a stand off is that the cycle of falling standards and trust arises to the detriment of all, as it is usually resolved with punitive legal costs visited on those that haven’t paid and DCA contact with your mortgagee.

Having understood this it is vital to understand that both owner and LL have a role to play in dealing with the cycle.

Owners should avoid wallowing in the problems and feasting on outrage, diverting that instead to identifying and  resolving the issues. In the main agents and LL’s are realistic  about such matters and where the wheels have fallen off its important to look at whether nuclear options are need or a problems negotiated.

Negotiated settlements can include

- listing and prioritising matters to be done

-understanding how much is outstanding

-stage payments to allow funding for chasing the non payers and dealing with the list

Mediators are very useful in achieving this

Consider -separating some issues that need to be resolved and not creating road blocks at the cost of  immediate progress allowing those to be determined later or by mediation or Tribunal hearing.

Where this cannot work anger and frustration is better channelled into the nuclear options of independent managers RTM RTE or Compulsory Acquisition

Advice- Leasehold Logic

Much time is wasted in undoing owners opinions derived from

• a mish mash of common sense & logic
• applying irrelevant and inapplicable experience or  comparisons, often from entirely different business models,
• after hours of searching for opinions that match theirs and therefore must be right
• and finally choosing one of the above and asserting with complete confidence that the sun must therefore rise in the east.

It is therefore vital to understand that leasehold and residential property law has its own law logic and quirks, and you need to learn them and moreover be willing to accept them, like it or not, instead of substituting your own.

I am fine - I will just charge you the time to do so, but it will be quicker and cheaper not to.

Advice -Permission to Let or Alter-Why!?

The extent to which permission is required varies lease to lease, some are silent, some are generalised and some prescriptive.

In all cases of letting, there is the basic need for the landlord to know who you are and where you are, to communicate and of course get your money in, and to ensure that the occupant is familiar with and even bound by the rules and regulations in the leases.

Bog standard AST agreements are unlikely to mirror sufficiently the relevant terms of leases leaving the tenant and flat owner is a difficult position.

In the case of alterations. The broad argument is that the  property is to be handed back at the end of the lease in a comparable condition and standard, or of the owner stays on , they are a renting tenant and the landlord will become responsible for many items which formally the owners.

Converting a 3 bed 2 bath flat into a open plan studio will decrease the value significantly in most markets.

The compelling argument is that layout changes particularly those affecting the structure  need to be approved  as the landlord has a broader obligation to all the owners to ensure that, in simple terms your open plan studio roof, which is someone’s floor, doesn’t collapse, and in any event any and all  works are carried out with  due regard to other building users.

Its tempting to say “ what owner would do dangerous works in their home” well quite few, not least those who aren’t keeping on the medication. In general though  owners are very often unaware of ( and much less care about)   the scope and complexity of building work and can be duped by a inexperienced or conniving  contractor. They, not the contractor, bear the principal liability.

Even where consent is not required, the layout plan and description may need amending so that the lease shows what has been granted for the purposes of a future sale or loan.

A common mistake is altering that which is not yours eg removing a chimney breast or converting a window to a balcony door when the wall below is not yours.

And finally a word about timing. Consent is not available overnight or by return nor should the landlord be regarded as it being his problem.

In most cases 2 clear weeks will be needed for simple works and for more complicated issues at least 4 weeks.

Pressing ahead can be very expensive – the architect who rocked at 4.50 pm on Maundy Thursday to say here are several plans and an inch thick spec, we start on Tuesday was told to leave. He threatened to go ahead and in turn his client got instead a hand delivered letter from Solicitors that day threatening any work starts and we injunct with costs.

Advice- All our costs are in the Service charge, right?

WE BOUGHT THE FREEHOLD EXERCISED RIGHT TO MANAGE ALL OUR EXPENSES ARE COVERED BY SERVICE CHARGE, RIGHT?

Ignoring the recovery of service charges costs I am focusing on the operating expenses of these companies form the annual return fee to legal expenses or directors insurance. In most cases the leases were to drafted to anticipate this arrangement to the freeholder, or RTM must ensure that their agreement or articles  allow for those expenses to be met by the participants, until such day as all leases are amended to do so.

In may cases of complex ownership eg commercial units or freehold houses , they may never be amended.

When buying the freehold the default advice is to “ extend the leases to 999 years and a peppercorn rent” but spare a  thought about ground rents. They are a good source of income to meet these expenses and to build up a reserve in addition to or instead of a sinking fund.

In the long term they add value to the freehold, so at some future point if disaster strikes and funds are needed the freehold can be sold. In the meantime a group can resolve year to year not to collect the rents .

Take for example a roof replacement  of £40k, meaning say £10k each. Selling a freehold with leases at £250 GR per annum  could raise half that money, at the cost of future payments of ground rent of £250.

advice- YOU HAVE A LEAK- BUT MY FLOOR ISNT WET

Hardly a week goes by without one flat leaking into another, with the reply “ my floor isn’t wet, it’s not me”

While the source can come from common supplies or higher properties or externally via common ducting, the flat above is the first place to start. In most cases it’s a seal or joint to a bath, shower, or floor/wall joint on tiles as many bathrooms/kitchens aren’t tanked wet rooms, or otherwise as low leak from a pipe.

Most building instances cover trace and access and it is the primary responsibility of the flat owner above to take a look, as the most likely cause is items which they are responsible for,

 though higher service level agents may assist. The flat owner should agree with the freeholder or agent about costs should the problem be from another source.

These leaks cause considerable disruption and can lead to significant increases in the insurance premium and excess on water damage. 

As all these claims do carry an excess, who pays this is determined by the cause, the scope of the policy and the wording of the lease and whether there is actual fault by the owner, that can be proven.

Flat owners are therefore advised to

-maintain a comprehensive contents policy for water damage as building insurance rarely covers this

-ensure that they know where the shut off valve for the flat is and that it works

-ensure a landlord or agent has an emergency contact for you

-when refurbishing consider a waterproof membrane or treatment to prevent leaks and fitting inexpensive alarms under baths and kitchen units

-check washing machine or dishwasher connections which work loose over time

Opinion-LEGAL COSTS AND INSURANCE

Like it or not and despite the ink split over evil freeholders it is fact that like driving a car or going on holiday, problems arise in home ownership, and it is prudent to take out insurance. Legal expenses cover is available as part of many policies , and in the case of landlords, especially residents groups, can be invaluable. 

In a case of an employee’s conduct leading to them threatening legal action,  the LEI on a buildings policies paid for it all. And yes the person was sacked.

While most landlords and agents would get a “C- could do better” abuses and issues crop up.

 It is ridiculous to expect that it should not be required when dealing with the most expensive asset  most will own, and the roof over your head, while on the other hand accept that holiday insurance or car insurance is a must. 

At the same time there are considerable protections and rights which owners, like finding about laws in the country you visit or the Highway Code, should become familiar with and exercise them.

After all who said “ Life should be fair” ?  Well yes ok Jesus did, and we nailed him to a tree L

WHY DO I HAVE TO PAY GROUND RENT OR SERVICE CHARGE & WTF is INSURANCE RENT

I don’t like many of the answers on many agents’ web pages and will try my own explanation. You have bought a flat which is like owning a drawer in a chest of drawers. In order for the landlord to look after the chest, you pay a contribution towards those costs. Otherwise you are left with a pile of jumpers and an old girlfriend’s bra.

Ground rents are simply an anachronism in that a leasehold property must be subject to a rent. While it was fashionable for a time to grant peppercorn rents, in the past and in more recent times, rents are a popular source of investment and have increased significantly.

It is the landlord’s money and nothing to do with common expenses, and it is charged, fair or not, “because they can”. Flat buyers are therefore warned to check ground rents, and, in newer build, there are some very punishing reviews which increase rent even more.

When it comes to extending a lease this can have a significant affect on the price of the extension.

As with ground rent insurance rent has gome in and out of fashion and  allows for the invoicing and recovery of insurance outside of the normal service charge timing and billing.

It is particularly useful where there is a superior landlord or freeholder, and the management of the building is vested in a party to the lease manager (often resident owned or a named agent), or there is an intervening head lease.

Flat and home owners must be diligent- very often standing orders only cover the service charge and these one off bills  must be checked and paid separately.

“ELF n SAFTEE GORN MAAAAD” - WE’RE FLATS NOT A FACTORY!

The common areas of a block or estate put an obligation for the landlord to ensure that these are safe for all users whether residents visitors   burglars and Greenpeace mountain climbers.

This applies to larger mixed used and  multi block schemes, especially as many new builds include roads path ways parking areas and leisure spaces and facilities, as well as the tiny shared porch in a 1 up 1 down Victorian conversion.

For all blocks the two key obligations are to carry out

1 A Fire Risk Assessment

2 A common areas and workplace health and safety risk assessment

A common question is how frequently and its important to understand  that this is an ongoing obligation  and updating should be carried out when something changes and as recommended by the Consultant doing the initial assessment .

Not having 1 can void a buildings insurance policy and not having 2 can, even if a contractor was changing a light bulb with the power on  and while standing in a bowl of water, lead to liability for failing to ensure that you had assessed the risks and that the Contractor had the required risk assessments and method statements in place.

NB There are several requirements especially where blocks  are older or more complicated.

Contractors are often said to be responsible for their own health and safety  however

1 you are still responsible that the areas they are working in are safe to use ( even if they are just going to flat 3 to work for flat 3)

2 that you are required to take reasonable steps that they are working safely in areas under your control

A common  misperception is that flats are domestic so the rules don’t apply however common areas are treated as non domestic property.

ARMA and the HSE websites give links to lots of advice and templates  which helps you understand and decide if you can do this on your own, and

A research and review what a contractor needs to do, is doing and that they are in compliance

B help in briefing and choosing a consultant

They key questions are

-Is this area our responsibility

-Are we competent to manage this

-As always  does the lease allows us to recover the cost and have we the funds or do we need to budget

While tempting to DIY even a director of a company can face personal and criminal liability for an incident, and the costs are often uninsurable. While using a consultant does not insulate you from this it does offer the defence that you took reasonable steps. Having been  interviewed by the Police after an incident ( the cleaner’s stupidity leaning over a stair rail to clear a web)  and facing a fine  or imprisonment, having the required paperwork and training in place, the problem went away.

WHY CAN’T I LEAVE MY BIKE OR SHOES IN THE HALL

In  most cases what you have bought is the flat not any of the common areas. A lease may specifically state that items should not be left, and even if it does not, that does not mean that you can, as, in most cases, the only rights you have over the common areas is to enter and leave the building.  Items may seem innocuous, however at 3 am, smoke blind in a smoke filled corridor, these are obstructions that could have lethal consequences.

Rather than argue the point, try discussing making provision for bikes and prams in a storage area, and rather than paying the landlord’s contractors bill, get volunteers and install one with their consent. Similarly with the right paperwork wireless CCTV linked to someone’s PC is  a cheap security option.

Balconies have similar restrictions usually for aesthetic purposes as while some don’t mind seeing No 11’s  freshly laundered  bondage wear,  they object to no 15’s tired and holed pants. Consider some form of screening ….

WE JUST BILL EACH OTHER WHEN WE NEED THE MONEY

 

This can and does work but it is very risky.

Where something goes wrong disputes arise, “everybody lies” or circumstances change, charges not calculated in accordance with the  lease timings and  share, and without the statutory information, are open to challenge.

This is very relevant to qualifying major works  or a group of qualifying works likely to exceed £250 for any one flat.

I have seen a penniless estate and clued up representatives try and escape liability, and in one case an owner who made all the right noises, smiled and congratulated the Board for their hard work and attended every meeting, but when pressed, had  never agreed to anything, and subsequently got  brand new plastic windows  for about 20% of the  cost.

By the time they seek help from me, its not too late in most cases, but it’s a long and expensive solution.

Where an individual agrees to meet a shared expense themselves, it critical  that in addition to the above , they have clear written agreement with the other freeholders or the company, even if that is just you, next door, and the cat lady in the attic.

The requirement to consult( if you want your money back or you can risk proceedings ala Daejan) is under section 20 of the Landlrod And Tenant Act 1985.

WE’RE A COMPANY WE DON’T HAVE TO CONSULT!

Its common for those with business experience to superimpose those rules and experience without understanding why they don’t apply, or even to accept that they do!

The simplest explanation is that

A the company can do anything lawful that  its Articles permit but

B a lot of what it does is governed by it’s contracts, the leases

and those leases ( and in some cases freehold houses or commercial parts) are subject to landlord and tenant and housing law which have their own logic and rules.

So for example  a Company decides to do external decoration, but must be aware that they must consult under “Section 20” as the service charges used to fund it are subject to it. Care should be taken to avoid a situation where the general meeting decides to do something and agrees options or even the prices, without first consulting, as the consultation might be considered to be void.

Similarly its tempting to decide to do a project as it is desirable and for which there may be some support, but its vital to ensure that the lease allows the costs to be recovered. Often a change in service provision is agreed by a majority but cannot be affected as the company has the obligation in its leases to provide it “no matter what” to each and every leaseholder. 

While freehold houses and commercial premises are outside these rules, there are sometimes contractual requirements on notice and consultation, and with leases of mixed use, it is safer to include than exclude as its likely that they will be subject to it.

In some cases Articles may allow for  direct funding and it is common to meet expenses not recoverable under service charge such as company admin expenses, but can refer to expenses which are normally service charge or sinking fund items.  Specific advice must be taken as they may be treated as service charge and subject to that statutory control.

The principles above also apply to freeholder groups   RMCs and RTMs and their dealings

EXTEND MY LEASE ?! I HAVE “SHARE OF FREEHOLD”

See the post on Share of Freehold

Lease length is vital as it is what you own( as explained above) and it is essential that the lease be @90 years plus and to take it into account in your offer for leases shorter than this as the price may not reflect it. Buying into the freehold company or group does not guarantee a free extension nor obviate this problem.

The theory is  that the freeholder gets the flat back at the end of the lease, or the owner becomes a tenant   paying a market rent. That is of considerable value to the freeholder ( see above) even if the FH is you, upstairs and the odd chap in the basement.  As the  lease gets shorter that pay day  is closer and worth more,  but extending the lease defers that pay day so a flat owner has to pay the freeholder  to compensate them.

When buying the freehold which takes into account the value of lease extensions, it is important to note that leases should be extended at or about the same time, or put in place terms for future arrangements, as this is something solicitors all to common forget to mention and buyers don’t realise this thinking that have a “share of freehold” see above.

When buying into an established set up, its important the check as a future owner with a short lease what is required by the freeholders for extending the lease.

Unless the participation agreement or other records indicate to the contrary, or individuals are prepared to litigate, it is possible, and does happen, that  the freeholders ( even if you are one of that group)  demand  a premium.    Do note that original participants have in effect paid for a lease extension and have a strong case but if time has passed  the value has increased and may  often be asked for the difference- the uplift. New participants are on softer ground- beware.

The rationale for the whole or an uplift premium is that even if the 3 of you bought the freehold together( as above) or its two oldies and you the newbie some intend to leave “feet first” and care nothing for a longer lease and want to spend your money on a cruise or two as “we will all pay something and share the proceed when the time comes”. For them, the time never comes!

The principles above also apply to freehold owning companies.

I HAVE A SHARE OF FREEHOLD- NO, YOU DON'T

I HAVE A SHARE OF FREEHOLD  is normally followed by “so that doesn’t apply to me”.

Sadly, no you don’t and  yes it does.

There “ain’t no thing” as share of freehold. At best it is a shorthand  invented by a blithering estate agent to explain something that they  hadn’t the will power to understand ( as they are watching on line Top Gear highlights or having highlights re done), and as a result buyers often believe that they have something which they don’t , a freehold flat*.

That creates a number of problems for flat owners from day to day expectations to serious expensive ones, including the rules and obligations they have to follow, that the statutory regulation still applies,  and the widespread problem of failing to appreciate the effect of a declining lease length.

The types of tenure are freehold leasehold and commonhold, and therefore a buyer will have a lease of their flat describing what they own and the respective rights and obligations of the owner to other owners and the freeholder. It is also therefore the thing that they own borrow on and sell.  A common thought is that “I am therefore, as SOF, the freeholder of my flat” when in fact that is extremely rarely the case.

The freehold is usually held by a company in which the flat owner will be a shareholder or member of, or along with owners who jointly own it, as a distinct legal entity the freeholder. So in simple terms, Mr A owns flat A, but the  freehold is owned by the flat owners and is therefore recorded as the freeholder is Mr A and Mr B and Mr C. You own the flat the freehold is owned by everybody else.

They are two distinct ownerships are not to be treated as buying the freehold and “having a lease for the flat as you need one” as I have heard it described. It is the principal asset you own and should be treated as such, and with the exception of complicated set ups the value of the freehold is minimal and its man benefit ( though not automatically free from problems  and abuses)is control of the block by a residents group.

When buying these particularly those not held by a company, that there is in place an adequate partnership agreement or declaration of trust which  sets out and governs the relationship between the freehold owners, especially with regard to voting and if disputes arise, such as where one flat owner   is in dispute with the others, and that everyone is around to sign the transfer.

In some cases not all flats participate in the freehold purchase and you will have to allow for and budget for the investigation of arrangements particularly if the company has a valuable asset such as lease extensions yet to be sold, other rental income  or a flat in the building  eg a staff flat, as in these cases in addition to the flat you can be asked to pay a sum to join the freeholders.

*I am omitting Tyneside Leases , other exceptions, and “cockups on the conveyancing front” and of course freehold flats where the freeholder owns the freehold and the flat is not subjexct to its own lease, titles have been ,erged or odditoes like wings in coverted house.