How it works, your rights and responsibilities

A Management Company is normally formed by the Developer/Landlord (Lessor). The Company is normally a limited Company either by shares or membership and has Directors. Initially, the Directors will be representatives of the developers or their Agents. Once the development of a site has been completed and the last property sold, the existing Directors will resign and the Lessees/Residents will set up a recognised committee and appoint their own Directors to act for the Company as the Management Board. All Lessees join the Company when they purchase a property and will normally be responsible for the running of the Management Company.

Due to the complexity of operating a Management Company, many companies appoint a Managing Agent to act on their behalf.

Sometimes the Landlord carries out the management of the property himself; alternatively, a Managing Agent may be appointed to manage and maintain the building on behalf of the Landlord, in accordance with the terms of the lease, current relevant legislation and codes of practice. The Agent takes instruction from the Landlord (or Limited Company Board of Directors), not the individual leaseholders, but should constantly be aware of the leaseholders’ wishes and requirements. The Agent will receive a fee, which will usually be paid by leaseholders as part of the service charges. This may be based on a specified percentage of the day-to-day service charges, but good and common practice is for it to be a fixed fee per annum. Where major works are involved, the Agent may charge an additional fee, which will normally be a percentage of the total cost of such works.

Agents are not solely responsible for the operation of a development and may need to seek instructions from the Company in respect of lease matters or maintenance.

The Landlord owns the building as a whole and the lease will set out the obligations of the Landlord in respect of maintenance and insurance. In basic terms, it is the Management Company’s responsibility to maintain the development and pay any associated costs for the same. In turn, they collect the fees for these services as service charges.

The role of the Landlord is limited and they may contact you to notify you of rent due. Most developments have a ground rent to pay. Ground Rents are normally demanded and collected by a Landlord.

A lease is a contract between the leaseholder and the Landlord giving conditional ownership for a fixed period. It is an important document and leaseholders must ensure that they have a copy and that they understand it. The wording of leases is usually in legal language and can vary from property to property. Leaseholders who do not understand their lease can and should get advice.

It is difficult to change the conditions of the lease after you buy, so make sure that the services provided in the lease are those that you want or can accept. The lease sets out the contractual obligations of the two parties: what the leaseholder is contracted to do, and what the Landlord is bound to do. The leaseholder’s obligations will include payment of the ground rent (if any) and contribution to the costs of maintaining and managing the building. The lease will probably also place certain conditions on the use and occupation of the apartment. The Landlord will usually be required to manage and maintain the structure, exterior and common areas of the property, to collect contributions from all the leaseholders and keep the accounts.

Leaseholders are not necessarily entirely free to do whatever they want in or with the apartment – the lease comes with conditions, to protect the rights of everyone with an interest in the building. For example, retirement schemes will usually have restrictions on the age of those who can live there.
 
When an apartment changes hands, the seller assigns all the rights and responsibilities of the lease to the purchaser, including any future service charges that have not yet been identified.

Read the lease – understand your rights and responsibilities. Ask if the Landlord or manager produces a plain English summary for you to read and whether there are any additional house rules.

Principally, these will be the requirements to keep the inside of the apartment in good order, to pay (on time) a share of the costs of maintaining and running the building, to behave in a neighbourly manner and not to do certain things without the Landlord’s consent, for example, make alterations or sub-let. The Landlord has an obligation to ensure that the leaseholder complies with such responsibilities for the good of all the other leaseholders. These rights and responsibilities will be set out in the lease. Probably more than you think. There is a wide range of rights set out in the legislation and advice is readily available; however, where a dispute arises, the first step should be to ask the Managing Agent for full details and/or an explanation.

• Information – the Landlord must provide his name and a contact address within the UK, which must be stated on every demand for service charges. Leaseholders can demand summaries of the service charges, details of the insurance cover and have the right to inspect accounts and other documents.
• Consultation on major works – the Landlord cannot carry out major works to the building without first consulting the leaseholders in the proper fashion. If he fails to do this, he may not be able to recover all the costs.
• Consultation on long-term agreements – the Landlord cannot enter into certain agreements or contracts for any service over 12 months without first consulting the leaseholders.
• Challenging service charges: leaseholders can apply to the FIRST-TIER TRIBUNAL (PROPERTY CHAMBER) to seek a determination of the reasonableness of the charges, whether already paid or not. 
• Challenging administration charges: leaseholders can apply to the FIRST-TIER TRIBUNAL (PROPERTY CHAMBER) to seek a determination of the reasonableness of other charges arising from the lease in addition to the service charge. For example, consents for alterations and sub-letting, or fees for providing information on resale. 
• Right to manage: if leaseholders want to change the management of property whether it is deficient or not, they can do so by using the right to manage. This is a ‘no fault, no compensation’ process that will allow leaseholders as a group to decide the management arrangements for the property. This right does not apply to local authority landlords. 
• Appointing a manager: if the landlord’s management is deficient, then leaseholders can apply to the FIRST-TIER TRIBUNAL (PROPERTY CHAMBER) for the appointment of a new manager (except for housing associations and local authorities.) 
• Extending a lease: an individual leaseholder who satisfies certain conditions can demand a new lease from the landlord, with the price to be agreed between the parties, or, if this is not possible, set by the FIRST-TIER TRIBUNAL (PROPERTY CHAMBER). 
• Buying the freehold: groups of leaseholders who satisfy certain conditions can get together and enforce the purchase of the freehold, again with the price being agreed between the parties or, if this is not possible, set by the FIRST-TIER TRIBUNAL (PROPERTY CHAMBER). 
• Right of first refusal: where the landlord proposes to sell his interest in the building, he must offer it to the leaseholders first or he can be prosecuted (except for housing associations and local authority landlords).

All these rights are covered in various publications available from LEASE.

Service charges are payments by the leaseholder to the Landlord for all the services the Landlord provides. These will include maintenance and repairs, insurance of the building and, in some cases, provision of central heating, lifts, caretaking, lighting and cleaning of common areas etc. Usually the charges will also include the costs of management, either by the Landlord or by a professional Managing Agent.

Service charges can vary from year to year; they can go up or down without any limit other than that they are reasonable. Details of what can (and cannot) be charged by the Landlord and the proportion of the charge to be paid by the individual leaseholder will all be set out in the lease.

The Landlord arranges provision of the services. The leaseholder pays for them. All costs must be met by the leaseholders; the Landlord will generally make no financial contribution. Most modern leases allow for the Landlord to collect service charges in advance, repaying any surplus or collecting any shortfall at the end of the year.

The Landlord can only recover those costs which are reasonable. Leaseholders have powerful rights to challenge service charges they feel are unreasonable at the First Tier Property Tribunal (previously the FIRST-TIER TRIBUNAL (PROPERTY CHAMBER)).

When considering the purchase of a leasehold apartment, it is important to find out, for personal budgetary purposes, what the current and future service charges are likely to be. Also, check if there is a reserve fund, and what plans are there for major works that could affect the service charge in the next few years after your purchase.

It is the leaseholder’s obligation to pay the service charges and ground rent promptly under the terms of the lease. If they are not paid and the landlord is able to show that the charges are reasonable, then he can begin forfeiture proceedings. If approved by a court, this can lead to the landlord repossessing the apartment. However, under the Commonhold and Leasehold Reform Act 2002, the right of the landlord will be restricted.

Typical Service Charge Budget

Each year, agents are required to provide you with a Service Charge Budget. This budget is devised by the Management Company/Agent/Landlord to allow the development to demand reasonable Service Charges. The budgets are devised by comparing actual expenditure and estimated future expenditure. This budget would normally include a provision for future reserve funds to allow the Management Company to deal with the obligations as set out within the lease. This may include external decoration, internal decoration, roof refurbishment and other costly expenses likely to be incurred by your development.

If your Company overspends and has a need to recover the additional costs, your lease and legislation allows the overspend to be paid by you by means of a levy. Some sites have a very precise budget and additional levies are often required. Similarly, significant under spends can also be credited to the lessees.

Many leases provide for the Landlord to collect sums in advance to create a reserve or ‘sinking’ fund to ensure that sufficient money is available for future scheduled major works, such as external decorations or lift replacement. The lease will set out the sums involved and when regular, cyclical, maintenance works are due. Contributions to the reserve fund are not repayable when the apartment is sold.

The lease will normally require the Landlord or Management Company to take out adequate insurance for the building and the common parts, and will give him or her the right to recover the cost of the premium through the service charges. This policy will not normally cover the possessions of individual leaseholders. 

Insurance

If you own a flat or apartment, it is more than likely that the Service Charges include your Buildings Insurance Premiums. The Landlord or Management Company administers such policies, and the premiums paid for by your service charge fees. The buildings policy does not cover your own contents. It will typically cover the bricks and mortar, the roof and supporting walls. It is necessary to maintain the buildings in a good workman like manner to help reduce the need for insurance claims.

Building Maintenance

This is a very important topic.  Rather like cars that need servicing or they will grind to a halt, buildings need to be cared for and looked after and whilst they won’t grind to a halt, they will fail in one way or another.  The basic concept of a building is to keep the occupants warm and dry.  To keep people warm and dry, buildings need to be watertight and have no gaps or holes.  Unfortunately, a lack of building maintenance reduces the capability of the structure to be warm and water tight.  Why?

A modern building is built with bricks, mortar and concrete etc. which whilst man made, do not always have straight lines, so extra materials have to be used to “fill in” or pack areas.  It is these extra materials that can be susceptible to a lack of maintenance.  A classic example is a shower tray.  A shower tray abuts to a wall, but the seal is not tight, so mastic is used to form a water seal.  Over a period of time, the seal will deteriorate and will need to be replaced, otherwise water will leak into what is below.  In a block of apartments, this usually causes damage to the ceilings and contents of the apartment below due to no fault of their own.  Water is extremely adept at finding every leak and crack, so once it is released, and escapes (from the shower tray in this case) it will run across beams, down through plaster with very little stopping it.  Water damage is also extremely expensive to repair!  A simple leak of water, will require a whole ceiling to be repainting costing hundreds of pounds, an undetected leak of water could cause untold thousands of pounds of damage.

Insurance will pay for some of the costs, but a claim on a buildings policy, rather like your car will serve only one purpose and that is to increase insurance premiums or to increase excesses.  One person in a block of apartments, that does not maintain his shower tray, can cause constant leaks causing several claims per year.  In addition, unknown leaks can cause wet and / or dry rot which spreads very quickly and very often this is not insured and to eliminate rot will run into thousands and thousands!

What else can go wrong?  Flat roofs have a life cycle much shorter than a normal tiled roof, but are cheaper to install.  However, they need to be constantly inspected (every year) and repair any defects or this will allow rain water into the building again causing water damage to the fabric of the building.  On the external parts of the building, gutters are usually a weakness.  In essence, their job is to carry away water, but if they are not regularly unblocked of leaves, decaying animals etc., the rain water cannot flow away and will leak into the fabric of the building.  Finally, the exterior of a wall, needs regular inspection and repair whether its brickwork and the mortar needs checking or painted and re painting – saving money by a failure of maintaining a building is false economy and will only serve to cause damage to building, increase claims expenditure and pay more on excesses.

Making a Claim

Everyone thinks insurance is a con!  Just like everything else you purchase, if you know how to use it, it will work for you, if you don’t, it won’t!  Buildings insurance does NOT insure everything!  It cannot, but it does cover many things.  It will cover “perils”.  An example of a peril is fire, theft, escape of water and a sometimes accidental damage.  For a claim to be valid, the cause of the damage has to be one of these perils – so damage by a chip pan fire would be fire, damage by ingress of water due to storm would be storm, damage by ingress of water due to a flat roof failure is not a peril and would not be covered!

Making a claim is not that difficult.  The first thing to calculate is how much is the damage.  Obtain a quotation for the repair.  Is it underneath the excess? if so then insurers will not pay the claim.  If it’s just over the excess, is the claim really worth making?  Once a value of claim is known, report this to your managing agent who will report to insurers with accompanying information such as the repair estimate.  Dependent upon the size of the claim, the insurers may well require a loss adjuster to visit.  A loss adjuster are the eyes and ears of the insurers, they are not there to reduce the claim, but to make sure the claim falls within the scope of the policy.  Once the scope has been agreed, they will review the damage and make sure the damage is covered by the estimate of the works and report to insurers.  Claims payments come from insurers and usually directly to contractors or to the managing agent.

In the event of a major loss, insurers will react a lot quicker.  No estimates of repairs are required, loss adjusters and brokers will be on site usually within 24 hours and will take control of what happened, how it happened, is it covered?  Once the cover is agreed, the key aspect is to get the repair underway as quick as possible and this again will be arranged with the agreement of the managing agent.  If the incident is really serious, the other aspect to consider is alternative accommodation.  Most residential property policies include cover for alternative accommodation and loss adjusters and brokers will work with individual residents to agree what is best for them during the repair period. 

The Association of Residential Managing Agents (ARMA) produces a guide to appointing a managing agent, and within this guide there is a checklist of questions to ask prospective managing agents. Please note that we are not ARMA affiliated so this acts as a guide and reference to the most common questions received by us. Compete provide specific contracts to suit each client’s needs and those of your lease.

LEASE – The Leasehold Advisory Service 70-74 City Road, London, ECIY 2BJ.
Tel: 020 7383 9800 or local rate on 0845 345 1993 Fax: 020 7253 2043 
Email: info@lease-advice.org Website: www.lease-advice.org
LEASE provides free advice and guidance to leaseholders and landlords on all aspects of leasehold law, including problems with service charges, the right to manage, possession proceedings and rights to lease extension and freehold acquisition. LEASE is funded by the Office of the Deputy Prime Minister and the National Assembly for Wales.

Should I buy a leasehold apartment?

If you want to buy an apartment, rather than a house, then you have little choice. Present property law in England and Wales effectively requires that apartments be leasehold, although legislation will be introducing a new form of tenure known as Commonhold. However, this should not be a concern as long as you know and appreciate your rights and obligations. With a well-written lease and a properly managed building, a leasehold apartment should provide a perfectly good home and a secure investment.

Information supplied by LEASE. Further information can be found by visiting www.lease-advice.org