A lease is an agreement, usually by way of a document in writing, which passes, affirms, or confirms an interest, right, or property and that is signed, witnessed, delivered and in some jurisdictions, sealed.
This is commonly associated with transferring title to property, where an interest in the land or property is created, for a finite term of years. This on the face of it seems simple enough, but if there is one area in conveyancing that really demonstrates the client’s need for sound and robust advice from a competent practitioner, then this must be it.
The reason is that leasehold conveyancing is full of pitfalls and problems for the unwary or ill-informed buyer. The explanation for this complexity is contained in the nature and format of the lease document itself.
Over time, leases have become longer, with scores of covenants (regulations in the lease which governs how the property can be used by the leaseholder) and conditions, provisos and rights, included to try and cover every possible eventuality.
Different types of leases with diverse contents are required to deal with different types of property. No one lease is exactly the same as another. As an example, neighbouring leasehold properties may have different individual clauses in the lease relating to the leaseholder’s rights to a car parking space and/or bin storage units and/or balcony.
The matters of interest to a potential buyer of a leasehold property would relate to, among other things:
- The exact description of the property, known as the demise, must correspond with the buyer’s viewing of the property, so that their inspection reflects the lease plan and matches what they believe they are purchasing.
- The term of the lease should be of sufficient length to give the buyer good title and to satisfy the requirements of any lender.
- Any additional rights for the particular property with regards to the use of a garage and/or parking space, a bin or storage area or balcony.
- A bicycle/cycle shed, etc.
The buyer’s main concerns will relate to confirmation that they have:
- Adequate rights for the access to and from the property from the public highway.
- The rights to use any roads, footways or paths within the estate, which are known as estate roads.
- The property has adequate rights of support for the property and adjoining properties in the building.
- The landlord (the party which originally granted the lease) and/or his managing agents or management company will insure the building of which the property is part.
- Confirmation that there are adequate clauses in the lease to enable the leaseholder to enforce the same clauses against another leaseholder within the building, if that particular leaseholder’s behaviour is in breach of clause(s) in the lease that are causing a nuisance to the buyer. This clause would normally be in addition to a clause that the leaseholder who seeks to have the landlord or managing agent enforce similar covenants against other leaseholders of the building, would have, to cover any costs that the landlord incurs in enforcing the lease covenants against other property owners of flats in the building.
Other matters of concern to the buyer will include the level of ground rent and service charges payable by all the leaseholders in the building.
Another area for concern for the buyer would be if any future works are planned or anticipated, which could have the effect of increasing the level of service charge for the property. With anticipated future works that would potentially increase the service charge by 10% or £100.00, the landlord and/or managing agents are required to obtain at least two or three estimates, which they would provide to the leaseholders and once a decision has been made for the works that are required, notice would have to be served on the leaseholders to inform them of the anticipated works and the cost estimates, from which the leaseholders would be able to determine any potential rise in service charges.
This would have to be set against any reserve or sinking fund, which the landlord or managing agents would hold, which would be used to cover the cost incurred by the landlord for expenditure for services and/or works to the building and once this fund had been exhausted, the landlord, under the term of the lease, would be legally obliged to recover any shortfall from the leaseholders by way of the service charge.
A further point of interest to potential buyers will be the ground rent or service charge accounts.
The landlord and/or managing agents are required to provide yearly accounts to leaseholders, showing the income and expenditure, relating to the provision of services to the builders and a balance sheet would normally state if there has been a deficit or surplus for the year in which the accounts are produced. This would indicate whether expenditure exceeded income for the particular year in question, and therefore would give potential buyers some indication of how well run the day to day management of the estate is.
Of further interest to buyers would be the clauses in the lease relating to any future sales or dispositions of the property. For the new incoming buyer, the landlord will normally require notice of who the incoming leaseholders will be and whether the landlord or managing agent will charge a fee to complete the notice.
The buyer would also want to be aware of the rights that the landlord has to forfeit (a procedure by which the lease can be brought to an end, which will require court action for breaches of the terms) the lease and these normally amount to the non-payment of rent and/or service charge or other general breaches of covenants in the lease.
When a buyer is buying with the assistance of a mortgage, the lender would also require the lease has similar rights that the buyer would have an interest in, relating to rights of support for the property and adjoining properties, the rights for the landlord to enforce the covenants against other leaseholders in the building, and that the building has adequate insurance.
Of further concern to the lender would be the provisions for the rent increase and what is known as escalating clauses where the ground rent will effectively double after a given period, which can be every ten or twenty-five years, or so. In these circumstances, the solicitor/conveyancer would have to refer the matter back to the lender for their consent to the lease terms as they stood, as this could potentially have an impact on the lender’s security by way of a mortgage over the property.
These are only general matters of interest for buyers and lenders which are not exhaustive, but it is incumbent on practitioners to carry out effective investigation of the title to the property for the buyer and lender and for buyers to fully appreciate the leasehold title they would potentially be purchasing and that it fulfils their own particular requirements for their use of the property.