Kat Callo's blog - Transforming UK apartment ownership

Life After You Buy Your Freehold: the New 999-Year Lease

You've reached the finish line. You're tired. Buying the freehold of your building has required more work than you and your neighbours anticipated.

Time to rest, right?

Wrong!

It's time to starting reaping the benefits of having Collectively Enfranchised your block of flats by granting new 999-year leases to the leaseholders that participated in the freehold purchase.

Many owners of flats tell me that they bought their building freehold years ago -- sometimes it's 10 or 15 years ago -- but the resident-owned freeholder never granted new 999-year leases to participants.

The more time that passes after your freehold purchase and without the granting of new leases, the greater is the scope for confusion.

When you and your neighbours join forces to buy your building freehold, you should set up a company limited by shares to act as the entity acquiring the freehold, ie- the "Nominee Purchaser". You and the other participating flat owners become the shareholders, ie- the owners, of the company.

The new freeholder has a right to grant leases and it should get on with the task of creating 999-year leases for participating flats.

Any flat in the building that opted not to join the freehold purchase project does not get a new lease. This leaseholder carries out with his/her existing lease, which is still fully valid. It's just that now there's a new freeholder that owns the building.

So what should go into the new 999-year lease?

There's no reason to rewrite the lease if the wording of the old lease does the job. But buying one's freehold presents a valuable opportunity to eliminate any historic defects and to include clauses that address important issues not covered in many old leases.

Many blocks of flats that have no Reserve Fund (also known as a Sinking Fund) insert a clause into the new lease that says the freeholder has the right to create and maintain such a fund. Any sizable residential building should have a Reserve Fund.

If you look around London at the many beautiful 100-year-old red-brick mansion blocks, you will usually find that the best-maintained buildings are those with a Reserve Fund. Many of the buildings that are badly run and whose leaseholders experience panic and disarray when major works such as roof repairs are required are those blocks without a Reserve Fund.

Another clause to include in the new lease is about "mutual enforceability". This clause says that a leaseholder has a right to compel the freeholder to enforce on other leaseholders the obligations contained within the lease. Some mortgage lenders complain if this clause is missing.

I highly recommend that your new lease contain a clause on wooden floors. It should say that the leaseholder must get written approval from the freeholder before removing carpets and installing wood floors. The clause should also state that the leaseholder must install adequate sound-deadening underlay and must get prior written approval of the proposed underlay from the freeholder before work may begin. This is an important clause because of the many complaints about noise from people living in a flat beneath neighbours walking on wood floors.

Some blocks of flats use the creation of the new 999-year lease as an opportunity to improve the quality of life for residents by restricting the hours during which noisy renovation works may be carried out.

Some modern leases say, for instance, that no noisy works may be carried out on Saturday or Sunday and that weekday noisy works are restricted to the period from 8am until 6pm. Some leaseholders go even further by creating a new rule within the lease that there can be no noisy works during an identified lunch time break on every weekday. A word of caution on this last point - be sure to consult all leaseholders before creating such a "no-noisy-works-during-lunchtime" rule since decreasing the permissable period of time for noisy renovation works increases number of days the works will last. Increasing the number of days of a renovation project can end up causing even more distress to neighbours, many of whom are at work during the day anyway. Also, the greater the number of days of a renovation project, the larger is the expense to the leaseholder that is getting the work done. So there's balancing act to achieve here.

Another important clause to have in your new lease is one that enables the freeholder to recover from the service charge account any legal fees incurred as a result of service charge debt collection or other reasonable legal fees.

I have seen things get very messy in some beautiful old mansion blocks prior to an Collective Enfranchisement, because the old landlord failed to chase after non-payers of service charges, partly because the lease did not provide the freeholder with a right to recover legal fees from the service charge account. Any owner of a flat that runs up service charge arrears should be compelled to clear his/her account and also pay any legal fees incurred by the freeholder in pursing the debt collection action. But sometimes the freeholder cannot recover the legal fees in this way. In such a case, the legal fees should be refunded to the freeholder from the service charge account.

Creating a new 999-year lease is often the first big transitional task for most resident-owned freehold companies. It can often take six months, because you will want to consult first with leaseholders and compile a list of best-practice clauses that need to be inserted.

But don't spend forever on the creatio of the new template lease for your building. It's best to get on with it in the first year following the freehold purchase. You and your neighbours have other transitional work ahead of you. Your shiny new 999-year lease will help set the scene for improving management of your building.

If you'd like help in creating a new 999-year lease, feel free to contact me at www.rosettaconsulting.com.

Life After You Buy Your Freehold: Noisy Neighbours

Some blocks of flats are much better run after the leaseholders jointly buy the freehold. Other buildings are managed more badly after this big collective event, and the flat owners discover that they are an incompetent landlord.

Many buildings that have Collectively Enfranchised go through teething pains and a transitional stage. Things get bad for a while, but then the situation improves, as the new resident-owned freeholder gains knowledge, experience and confidence about how best to run the building.

Distress caused by noisy neighbours is a recurring theme when people are trying to improve building management after buying their freehold.

I get many complaints from leaseholders about loud noise. They say their quality of life is damaged because they are not able to relax and enjoy the quiet of their home.

Happily, the noise problem is one that can be solved. But addressing it properly requires focus, resolve and patience.

My blog posting on September 12 looked at one frequent source of noise complaints -- wood floors. Because that posting provides best-practice solutions for tackling the wood-floor-noise problem, I won't talk about that today.

I suggest we look at the other big source of noise disturbance -- loud music -- which presents a different kind of challenge.

A good place to start addressing a problem caused by a loud-music-playing resident is to look in the lease.

Does the lease say that loud music cannot be played after a certain time in the evening or before a certain time in the morning? It should. If the lease does not say this, then you should get this changed when you grant yourselves new 999-year leases or when you make some other change to the lease, say, in the next year or two.

Often the player of the offending music is a subletter. That should not pose an insurmountable problem. The lease -- if it's a good one -- should say that any leaseholder wishing to sublet must ensure that the renter abides by the rules in the lease that apply to owners of flats.

The trickiest issue here is one of organisation and communication.

Imagine the scenario: a young person is subletting a flat and playing loud music that is keeping the neighbours awake at night. The flat is owned by someone living on the other side of the world. A local estate agent manages the rental of the flat on behalf of the overseas flat owner.

The resident-owned freehold company and its managing agent can find this situation frustrating, because the decision-maker, the owner of the flat, is absent and might seem unconcerned with problems on the ground that are being created by the loud music.

The resident management company that owns the freehold needs to work closely with the managing agent to establish a zero-tolerance policy towards any breach of lease, including a breach caused by playing loud music. The managing agent needs to communicate in writing the zero-tolerance policy to all leaseholders, including to overseas flat owners by email.

Now you have a fighting chance to solve the problem.

Think about what matters most to the leaseholder based overseas? Because this is an investment flat, what matters most to the owner is the ability to rent out the flat and to do so profitably.

If the overseas leaseholder realises he or she might lose the right to sublet this flat altogether, unless care is taken to find a renter that is a good neighbour, then you can expect swift action to put the situation right.

The porter has a special and crucial role to play here.

If he or she carries out the caretaker job in a passive manner, looking the other way when there is anti-social behavior in the building by loud music players, then you can have a long-running disaster on your hands.

But if the porter takes a pro-active stance, your loud-music problems can disappear over night. Some porters sense they have a lot bosses, because they are hired by the freeholder, supervised by the managing agent and their salary is paid by leaseholders through the service charges.

However, as long as the porter is empowered to run the building well, including to spread the word to leaseholders and renters about a ban on late-night music, the block can quickly develop a sense of community and accountability.

One colleague said to me recently she did not understand why one had to be so many rules in a block of flats. The answer is simple: living in chaos is not fun.

Having a lease and, in some cases, a separate set of building regulations, that identify the responsibilities of the freeholder and leaseholders provides the best framework for ensuring a block of flats is kept in good repair, is well-managed and is a pleasant place to live.

Do you have a loud-music story that you'd like to share? Send it in!

Life After You Buy Your Freehold: Major Works

You are lucky if your block of flats is in good physical condition by the time you and your neighbours buy the building freehold.

 

Sadly, many owners of flats that Collectively Enfranchise do not have this experience.

 

In fact, many resident-owned freehold companies inherit a mess from the previous landlord, with a building that has been neglected and now urgently needs major repairs.

 

The older the building and the worse the mismanagement by the old landlord, the more extensive will be the "major works" that need to be carried out by the new freeholder and the more money that leaseholders will have to pay for one-off special service charges that go beyond the annual repair and maintenance of the building.

 

Buying your freehold is almost always a smarter option than not Enfranchising. But receiving one or more whopping big invoices for “extraordinary” service charges reminds residents that Collective Enfranchisement is not Nirvana. With ownership of the freehold comes responsibility, including the task of getting the building in good shape.

 

Depending on how urgently the major works are needed, the board of directors of the new freehold company should address this issue in the first, second or third year after the freehold has been bought. This is a moment for the directors and all leaseholders in the building to take a deep breath and to work together to plan the best way forward, to carry out maintenance and repairs that will make the bock safe and enjoyable.

 

This is a big transitional task for the new freeholder. It usually takes several years after the Collective Enfranchisement to get a programme of major works underway.

 

Be ready to deal with conflict.

 

While leaseholders will often say they want their building to be safe and aesthetically pleasing, it is unusual to achieve unanimity regarding which major works need to be done, which should be carried out first and how quickly the works should be undertaken.

 

I know of many apartment buildings in central London in which leaseholders get unnecessarily bogged down after buying their freehold in the issue of planning major works. For instance, some flat owners will say they want to upgrade the porterage from an existing eights hours a day to 24/7, while others lobby for service charges to be lessening by cutting back on the existing porterage service. When the new resident-owned freehold company is renovating the internal common parts, some flat owners will say they want expensive wood panelling installed to replace tired old wallpaper, while others say they don't want to spend money on any renovation of the common parts .

 

Remember that it is the freeholder’s responsibility to comply with requirements in the lease to keep the building in a state of good repair. So, if the lease says that the freeholder has to, for example, get the outside of the building redecorated every seven years, no leaseholder has the authority to prevent such work being done. Nor do protests from leaseholders that don't want to pay decrease in any way the freeholder's responsibility within the lease.

 

So, where to begin?

 

The roof is leaking, the lift keeps breaking down, the carpet in the lobby is frayed and wallpaper in the common-parts corridors is stained and torn.

 

Start at the beginning.

 

First, ensure that you have a good managing agent in place, since it is the managing agent that will advise your resident-owned freehold company on the major works that need most urgently to be carried out and that will organise and supervise the works.

 

Have the managing agent carry out an initial investigation of works that appear to require the most urgent action. If yours is a large century-old mansion in London, your managing agent will most likely need to call in a surveyor and other building experts to check on structural issues. Get the managing agent to prepare an Excel spreadsheet with estimated costs and expected duration of each major works project.

 

Then organise a meeting for all leaseholders to attend with the managing agent. The managing agent and the board of directors should brief leaseholders on the works that need to be carried out in order to comply with the lease and keep the building safe. Get input from leaseholders on which works they would like to see carried out, say, in the following three-to-five-year period.

 

While this type of residents’ meeting almost never produces 100% support by leaseholders for a proposed plan of action, it is important to consult flat owners and to inform them about significant extraordinary service charge costs that are coming up in the next few years. The freehold company also needs to gauge how quickly or how slowly most leaseholders want to see the building fixed up and to rally support amongst residents for the major works programme ahead.

 

The managing agent and the board of directors of the freehold company should make it clear that proper consultation for each major works project will be pursued, but, that the final decision on which works to get done and in which timeframe will be taken by the freehold company, on advice from the managing agent.

 

Some people think that a block of flats becomes a commune when leaseholders buy their building freehold, with every flat owner having an equal vote in how the building gets run. This represents badly mistaken thinking. The building does not become a commune.

 

All leases remain in effect after you buy your building freehold. The responsibilities of the leaseholder and of the freeholder, as enshrined in the lease, remain unchanged.

 

The big change created by Collective Enfranchisement is that participating leaseholders now wear two hats – one hat as leaseholder of a flat and another hat as shareholder (ie- part owner) of the freehold company.

 

Even if there is strong consensus amongst leaseholders about major works projects that need to get done, the freeholder still has to follow a legally-required consultation process for each project. This includes a requirement for the freeholder to serve a "Section 20 Notice" on all leaseholders, advising them of a planned major work project and inviting their input. It is the managing agent, on behalf of the freeholder, that sends the Section 20 Notice (in letter form) to each flat owner. The Section 20 Notice begins a staged consultation process that usually takes a few months. The proposed work must be put out to tender and the leaseholders must be consulted before a contractor is instructed.

 

Keep in mind, when preparing to fix up your building after years of neglect by the old landlord, that projects often take longer and cost more than anticipated. This is true of a residential block of flats, an office building, an airport, a home renovation or any other building project. Sometimes cost overruns in a major work programme in a block of flats occur because contractors have initially quoted unrealistically low fees in hopes of winning the tender.

 

Because of the known probability of time and cost overruns in many big projects, it is best practice for the managing agent, when estimating the cost of each project, to add a reasonable “contingency fee”. This might be 10% of the total expected cost, or more or less. The freehold company needs to agree with the managing agent on the amount of the contingency fee.

 

When the managing collects extraordinary service charges from leaseholders for a planned major works project, the managing agent needs to ringfence these monies for the specific project. This is to ensure that money collected, for instance, to install a new lift is not spent on something else, like repairing the roof.

 

No major works project should be started until all the money has been collected from leaseholders or, at least, until enough money has been collected to pay for the works. Keep in mind that leaseholders pay all the service charges, but it is the freeholder company that instructs the contractor and that is responsible for paying the contractor’s bill at the end. Carrying out major works before sufficient funds have been collected can result in a real mess for the freehold company and its directors.

 

A word about improvements to a building. Some leaseholders feel so happy after they have bought their freehold that they want to start investing money in improving the building by creating new features or services. I know of one group of leaseholders that wanted to install a gym in the basement, with weights, for use by all residents.

 

Be careful. You need to identify first whether the lease says the freeholder can collect service charges for “improvements” to the building. In some leases, the freeholder does not have a right to do so. The landlord only has authority, within the lease, to collect service charges to maintain and repair the existing structure and services in building.

 

When leaseholders have Enfranchised their building and are drawing up new 999-year leases for participating flats, it is a good idea to include a clause or part of a clause stating that the freeholder can indeed carry out “improvements” to the building and collect service charges to pay for these.

 

One of the biggest obstacles to carrying out a major works programme after you have Enfranchised is the failure of one or more leaseholders to pay the extraordinary service charges for these works. It is important for the new freeholder not to allow one or more non-payers to delay planned major works.

 

This boils down to issues of governance and compliance in a resident-owned building. One of the most important transitional tasks for the board of directors, after leaseholders have purchased the freehold, is to put in place processes and procedures to help ensure that owners of flats pay their service charges fully and on time.

 

There’s advice about this in my blog posting of September 4, 2009, including tips on best-practice methods to create a culture of service-charge-payment compliance in a block of flats and the most effective ways to address non-payment.

 

If your building has a Reserve Fund (also known as a Sinking Fund), this can alleviate any cash-flow problem caused by one or more non-payers of service charges. My blog posting of September 27, 2009 examines setting up and running a Reserve Fund.

 

Brace yourself for one unpleasant aspect of the major works, if the building was badly neglected by the previous freeholder – it is going to cost you and others in the building to put things right.

 

While it’s a great feeling for leaseholders to bid farewell to a terrible landlord and to secure full ownership of their homes by jointly purchasing their freehold, the big bills that come with fixing up the building can feel like a hangover after the celebration party.

 

But do not despair.

 

Look at what happened to many run-down apartment buildings in New York City in the 1970s, when renters took advantage of a change in the tax system to form co-operatives and jointly to buy their buildings. This important consumer trend became known as “taking one’s building co-op”. If you know someone that owns a "co-op" apartment in Manhattan, this is in a building that was originally owned by a third-party landlord and that was later bought by apartment renters that became owners of the units and, collectively, of the building.

 

Manhattan's co-op movement transformed many tired tenement buildings into some of New York City's most sought-after property, after apartment owners invested in renovating the lobby and other common parts, and improving porterage and other services.

 

Similarly, in London we see flats increasing in value after leaseholders buy their building freehold. In fact, it happens in three stages.

 

First, there is an immediate uplift in sales values of apartments, because buyers prefer "share-of-freehold" flats to the old-style model in which the freehold is owned by an absentee corporate entity.

 

The second increase in value occurs when participants are granted their 999-year leases, since longer-lease flats are more valuable than shorter-lease flats.

 

Finally, in the three to five years after the freehold purchase – the time during which many Enfranchised buildings proceed with initial major works and improvements – the values of flats go up again. This continues, as the building becomes a more and more desirable place to live.

 

I hope your major works go smoothly.

Life After You Buy Your Freehold: The Reserve Fund

A big question to address after you and your fellow flat owners have bought your building freehold is whether to create a Reserve Fund.

If you have collectively purchased the freehold of a large block of flats, you may be too busy in the first couple of years to tackle this issue, as you will be occupied with more

urgent transitional matters, including instructing a new managing agent, creating new leases and putting in place systems and procedures to ensure proper maintenance of the building.

But, once you have caught your breath, perhaps in the third or fourth year after your freehold purchase, it's important to investigate whether to create a Reserve Fund for your building.

A Reserve Fund, also called a Sinking Fund, is a pool of money into which leaseholders pay and which is destined for future works at the building that have not yet necessarily been planned or even identified.

In short, a Reserve Fund is a kitty for a rainy day, an account into which flat owners pay money so that, when major works are required, these works can be carried out swiftly, without waiting months or years for the necessary funds to be collected.

In a converted house that has just two or three flats, a Reserve Fund is not normally needed. The two or three leaseholders simply pay for any works when the works need to be done.

But in a large block with, for instance, 50 flats, the creation and maintenance of a Reserve Fund is almost always a good idea. Major works in a big apartment building are often expensive, whether it's the replacement of a lift or repairs to the roof or redecoration of all the common parts.

By creating and paying each year into a Reserve Fund, leaseholders are able to smooth out these expenses over several years, rather than to have pay a huge bill all at once when the works are about to start.

Directors of resident management companies often ask me how much money they should instruct their managing agent to collect each year for the Reserve Fund. This is a how-long-is-a-piece-of-string question. The answer depends on the amount of money, roughly estimated, that the board believes will be needed for repairs in the coming years, after the board has been advised on this matter by the managing agent and any relevant structural building adviser.

Of course, a newly-constructed high-quality apartment building will require fewer major works than will a century-old mansion block that has been neglected for decades by the previous freeholder.

One building that I know and that falls into the latter category is presently collecting about £4,000 from each leaseholder in annual service charges to run the building and an additional £1,000 annual payment for the Reserve Fund. The resident management company is effectively building up a war chest with which it will address over the next decade the many areas of work that the old landlord should have, but never did get carried out.

There can be a problem with the lease, when creating a Reserve Fund.

Some old-style leases have no clause that gives the freeholder the right to create and maintain a Reserve Fund. The lease only authorises the freeholder to collect service charges on an annual basis that pay for identified on-going costs.

When you and your neighbours join forces and buy your building freehold, you can fix this defective-lease problem by inserting a clause into your new 999-year lease -- the new lease that, hopefully, you will create within the first year of owning the freehold -- that authorises the freeholder to create and maintain a Reserve Fund.

The Reserve Fund should always be held by the managing agent company that is instructed by the freeholder to run the building. The managing agent needs to identify separately in the annual service charges accounts the amount of money in the Reserve Fund. This money should not simply be mixed in which the general funds paid in to the service charge account by leaseholders.

Remember that the Reserve Fund is always held in trust by the freeholder on behalf of the leaseholders and that the funds belong to the leaseholders.

A Reserve Fund should never, repeat never, be held by leaseholders.

I recall the sad story told to me by a neighbour that lived in a different block of flats in London before moving to our building several years ago. He described how the head of the residents' association in that building disappeared with £180,000 from the leaseholders' Reserve Fund. The money and the head of the residents' association, who had also been the association's treasurer, were never seen again. The leaseholders were so embarrassed by their their stupidity in entrusting the money to one person in the building that they never reported the theft to the police.

The best way to avoid embezzelment of leaseholders' funds is to entrust the money to a reputable manging agent company and to require a written account of the Reserve Fund balance, including interest earned, at least on a quarterly basis.

When the managing agent sends the service charge invoice to each leaseholder, often on a six-monthly basis, the invoice should quantify the amount due for the annual building running costs and the separate amount that will go into the Reserve Fund.

Upon buying your building freehold, you inherit, unfortunately, the effects of any neglect by the previous landlord. I know one beautiful 100-year-old mansion block in London that was very badly mismanaged by the last landlord. Now the board of directors of the new resident-owned freehold company is having to work hard to plan and to get executed by the managing agent a whole series of major works repairs. It will take years for them to get the building into a proper state of repair and they know this. The creation of a Reserve Fund will help them, over time, to smooth out the annual costs to be borne by leaseholders in the building and to speed up commencement of each major works project, since the money will be there in the bank.

Some people think they should be able to get their Reserve Fund money back when they sell their flat. This is wrong.

It is important to include in the Reserve Fund clause within the new 999-year lease that the leaseholder's payment into the Reserve Fund is non-refundable. Any attempt to try to create a Reserve Fund that is like a savings account into which a leaseholder deposits money and then later can withdraw it would be a nonsense, as it would create an unworkable layer of complexity for the managing agent and a confusing mess of the service charge accounts.

The good news for a leaseholder that plans to move away from the building and that has already paid the latest service charge invoice, including a payment into the Reserve Fund, is that he/she is selling a flat in good standing, ie- one that is paid up. The buyer needs to know that. The resident management company that owns the freehold should not agree to the sale of any flat that is not fully paid up.

A final word on Reserve Funds. I have seen many blocks of flats over the years held hostage by a small number of non-payers of service charges. Because all monies for planned major works were not collected, these works were delayed by months or years, or sometimes the works were never carried out. All leaseholders suffered as a result.

The creation of a Reserve Fund enables a building to grow up and to free itself from the tyranny of one or two non-payers of service charges. With a Reserve Fund the resident-owned freeholder has the funds required to keep the building in good repair and well-maintained.

The resident management company still has a responsibility to pursue a zero-tolerance policy towards the non-payer and to take proper steps, legal action if required, to ensure full payment of service charges. But at least this pursuit of the non-payer becomes a side issue for the resident management company -- rather than a do-or-die legal battle that will determine whether that dangerous old lift ever gets replaced.

I'd love to hear your views on managing a Reserve Fund. Please send me your input by clicking on "Comments" below or by sending me a message from www.rosettaconsulting.com/contact.php. Thanks!

Life After You Buy Your Freehold: Subletting

Joining forces with neighbours to buy a building freehold is an exciting, empowering step for today's flat owner. But Collectively Enfranchising your block of flats does not represent a magic pill that will solve all problems in a residential building.

Owning the freehold simply means leaseholders of flats now have the power -- and the joint responsibility -- to tackle problems themselves, rather than to wait for an absentee freeholder to take action.

When leaseholders tell me about badly-managed blocks of flats, one frequent complaint is about subletting.

Many people don't mind whether the person next door owns his or her flat, or rents it. The problem arises when the person next door is a bad neighbour and behaves in a way that damages the quality of life for people in the building.

Sometimes an inconsiderate neighbour is a leaseholder. But, in many cases, he or she is a renter, who cares less about the building and its residents than do flat owners.

When a building is plagued by a "neighbour from hell", it can ruin things for everyone in the block.

Leaseholders that ask me for advice on ways to improve things in their building describe the "neighbour from hell" as someone who plays loud music late at night or throws noisy parties or installs wood floors without an adequate sound-deadening acoustic underlway (see my September 12 blog posting about that) or leaves rubbish next to their front door at midday, despite a known rule to put out rubbish in the evening.

The "neighbour from hell" issue sometimes stems from miscommunication and a generation gap.

One finds in many London buildings, for example, young adults, including students, whose parents own the lease and live outside the UK. While many young people make for wonderful neighbours, I receive a lot of complaints from leaseholders about young adults disturbing dozens of families in a block of flats by playing loud music late at night and throwing parties in which revellers are sprawled up and down the communal staircase, like at a university dormitory.

In some instances, subletting gets completely out of control. 

This happened in a beautiful red-brick mansion block I know in central London, where, over the course of several years, absentee leaseholders rented out two flats to prostitutes that carried out their work on site. One prostitute set up a small video camera outside the front entrance of the building, without authorisation from the building management, so that she could see which client was arriving. The video camera tipped off the porter, who brought in the police.

Leaseholders that have bought their building freehold sometimes get unnerved about how to control subletting. But there is no need for panic. Just establish a workable system and then stick by it.

For instance, many leases state that a leaseholder must obtain written permission from the freeholder before subletting a flat, although the freeholder may not unreasonably withhold permission. If your building is run by a managing agent, then it's normally the responsibility of the managing agent to vet applications to sublet. If permission is granted, then the freeholder, via the managing agent's office, grants a "Licence to Sublet".

If your building and your managing agent don't have a template Application To Sublet and/or a Licence to Sublet, then you need to create or obtain these template documents.

The Application to Sublet is completed and submitted by the owner of the flat, not the would-be renter. The application should contain contact information about the renter and reference letters from the renter's bank and employer.

Remember that a Licence to Sublet is specific to each renter. So, when a renter moves out of a building, the owner of the flat must obtain from the freeholder a new Licence to Sublet regarding the next renter.

Many buildings have a rule that leaseholders may not sublet for a period of less than one year. This helps to avoid a situation in which a flat is being rented out for short stays, such as three or six months, and helps prevent a block of flats from feeling like a hotel or acquiring a transient group of residents.

The lease should state that anyone subletting a flat must adhere to the same regulations that apply to leaseholders. This is a helpful clause, since most leases, for instance, ban leaseholders from playing loud music after a specificied time in the evening or from throwing rubbish in unauthorised locations inside or outside the building.

If the owner of a flat sublets his/her property without obtaining prior written approval as required in the lease, then the leaseholder has violated the terms of the lease -- and the freeholder can and should take action.

Many complaints about the "neighbour from hell" have emerged in recent years as a result of the buy-to-let trend. Buy-to-let purchases have been  financially attractive for many small property investors, but leaseholders in a building need collectively to educate the buy-to-let owner about getting each renter properly vetted and about obtaining a Licence to Sublet before renting out a flat.

When leaseholders that collectively purchase their freehold live in a building with a porter, the porter's job changes. He or she is no longer accountable to an absentee corporate landlord, but, rather, to the freeholder company that is now owned by the residents. 

The porter plays a crucial role in knowing which flats are being sublet. He or she is uniquely placed to help the resident management company that owns the freehold and the managing agent that runs the building to create a workable system of compliance regarding subletting.

Putting an end to out-of-control subletting often requires patience, focus and tenacity once you've bought your building freehold. It can take months, even years, to create a constructive culture of compliance -- especially if the old corporate landlord mismanaged the building and allowed for an atmosphere of subletting chaos to develop.

I recommend that you take a deep breath and consider sorting out subletting as one of the transitional tasks of the resident management company, as new freeholder.

If you have any comments or questions about subletting, do send them to me by clicking on "Comment" here below or by sending me an email from www.rosettaconsulting.com/contact.php.

Good luck!

Life after You Buy Your Freehold: Wood Floors

In the early 1990s, when my husband and I bought our flat in London, a curious thing happened. British friends that came to visit would often say "This feels like a New York apartment!"

Our flat is in a traditional red-brick mansion block which was constructed in the early 1990s, so I couldn't figure out what our visitors meant. Then I got it.

We had wood floors!

At the time, many flats in the UK had wall-to-wall carpeting in most rooms.

But in the last several years, home-decoration tastes have evolved dramatically. Apartment living in the UK has become chic and many flat owners now opt for a simple, minimalist, clutter-free look -- including hard wood floors.

This makes for some beautiful apartments.

The bad news is that the floors/ceilings in many buildings were not constructed with wood floors in mind and many lack sufficient sound proofing between each storey to eliminate noise from people walking overhead.

In addition to the structural issue, many old leases require that carpets be laid in every room except bathrooms and the kitchen, and these leases provide no allowance for wood floors. This means that many buildings have no written requirement for a sound-deadening layer to be put down underneath wood floors.

Added to these construction and lease issues, there is a simple lifestyle problem. Many flat owners seem to focus more on their beautiful new renovated home than on the simple, old-fashioned principles of being a good neighbour.

I get complaints from people that for years have lived happily in a block of flats, only to find life unbearable when an older couple buys the flat above, rips up the carpets, puts down wood floors and then hands over the property to a stiletto-heel-wearing daughter. The noise from the stiletto heels at 5pm is irritating for those living below, residents tell me, but it becomes unbearable at 2am when the young woman returns home from clubbing and does not think to take off her high heels.

Then there are the young couples that fail to realise that their adorable toddlers, by being allowed to run repeatedly back and forth in the flat every Sunday at 6am are waking up neighbours that are trying to sleep in the flat below.

Sometimes things get very bad.

I know of one senior citizen that had resided in a mansion block for decades and that became enraged by the sound of people walking above after the upstairs neighbours renovated their flat, got rid of the carpets and put down hard wood floors. The gentleman downstairs took to banging on his ceiling with a broom handle. The young couple in the renovated flat above became frantic. They told me that they took care to remove their shoes whenever they entered their flat and they were now at a loss as to what else they could do. Finally, the man downstairs put a note through the door of his upstairs neighbours, threatening to inflict bodily harm if the noise continued. The upstairs neighbours called the police and a police report was filed. In short, it was a mess.

Fortunately, most buildings are able to address the problem of noise caused by the installation of wood floors without bringing in the police.

Flat owners that have collectively bought their building freehold should view the wood-floor issue as one of the teething problems that comes with acquring the responsibility of jointly owning the building. It should not be seen as a deal killer regarding enjoying apartment living.

Today's apartment owner in the UK can take a few lessons from people in other countries that have long had unwritten codes of conduct that help to make living together in a block of flats a pleasant experience.

To address the wood-floor issue properly, one should follow best practice and ensure there are sensible written rules regarding acoustic underlays. One also needs to follow through by enforcing these rules.

When you and your neighbours buy your building freehold, you will most likely want to grant yourselves new 999-year lease. (Actually, it's the company that bought the freehold, of which you and your fellow leaseholders are shareholders, that grants the new leases.)

Be sure to include in the new template lease a detailed clause requiring that permission be granted by the freeholder before any carpets may be taken up and wood floors installed. The clause should specify that adequate sound-deadening acoustic underlay must be installed before the wood floor is laid and that specifications for the materials to be used must be approved in writing beforehand by the freeholder. This approval comes in the form of a "licence for alteration" that the freeholder grants to the leaseholder that wishes to change his/her flat.

In blocks of flats that are managed by a managing agent, it is the managing agent that, on behalf of the freeholder, vets the request to lay wood floors and to carry out other renovation work.

Finally, neighbours need to talk to each other.

Many senior citizens tell me they are delighted to see their block of flats go through a generational rejuvenation with the arrival of young families. But these same seniors seem to feel they have to suffer in silence when decades of quiet living are ended by the elephant-stampede sound of children running and jumping in the flat overhead. Many young parents seem unaware that their family is causing a noise-disturbance problem. Young couples need to tune in to the rhythm of the building and talk with their neighbours, to ensure they are not damaging people's quality of life in the block.

Apartment living when your neighbours behave in a manner that is inconsiderate is not fun. But when people in a building show respect and thought for one another, it's like living in a pleasant village.

The issue of noise from wood floors represents one of the most common complaints by flat dwellers regarding noise disturbance. But residents can tackle this issue, if they approach it in a thoughtful and rational manner, and follow best practice.

I hope it works out for you.

Life after You Buy Your Freehold: Service Charge Disputes

I receive a large number of queries from leaseholders about how best to manage their block of flats after they have bought their freehold -- so I am dedicating the next several blog postings to this subject.

One painful shock for leaseholders that have spent years trying to acquire their freehold and get rid of the old landlord is to end up with leaseholders that refuse to pay their service charges to the new owner of the building.

This happens most frequently in a block of flats where some people chose not to join the freehold purchase. But it can also occur in a building where everyone participated in the Collective Enfranchisement.

Legislation in England and Wales used to give huge power to freeholders of blocks of flats, including the right to kick out tenants for failure to pay even small amounts of money due. But, in recent years, the pendulum has swung to the other extreme, away from the owner of the building and in favour of the resident. This includes effective rights for a leaseholder to stay on in a building even after failing for months or years to pay service charges due.

The freeholder, in theory, does have a right to "forfeit the lease", ie- to seize ownership of the flat, if the leaseholder fails to comply with his/her obligations within the lease. But, in reality, courts in England and Wales are extremely hesitant to grant a forfeiture right to a freeholder. For this reason and because seeking forfeiture often represents using a sledgehammer to crack a nut, freeholders should not choose forfeiting the lease as a first option.

The most expeditious route, in many cases, for the freeholder to get payment of service charges by a non-payer is to file a straight-forward debt-collection case against the leaseholder in County Court.

Companies that are formed by leaseholders to buy their building freehold, "resident management companies" (RMCs), can best tackle the problem of non-payment of service charges by being transparent, proactive, thorough, egalitarian, professional and communicative.

RMCs should be transparent by creating a written policy regarding late payment of service charges. The managing agent that is running the building on behalf of the RMC should be instructed by the RMC's board of directors to send a template "chaser" letter two weeks after a service-charge payment deadline has passed. A second reminder letter should be sent, say, two weeks after that. A third and final letter should be sent by the managing agent to the non-payer, advising that the matter is now being referred to a solicitor and that payment of the debt will now only be accepted by the solicitor's office.

RMCs should be proactive and thorough by sticking to the agreed drill and seeing through to the end any matter of non-payment of service charges. It is mistake to make exceptions and allow some debts to remain unpaid.

RMCs should be egalitarian and professional by applying equal treatment to all leaseholders and by leaving the managing agent the responsibility of collecting service charges. Directors of the RMC should not collect service charges or get involved in bilateral discussions with a leaseholder about his/her non-payment. Sometimes an RMC director will try to be a "good neighbour" by granting a payment extension to a non-payer. This is very bad practice, as the board of directors can easily be accused of abusing power by showing favouritism to one household over another. This practice creates a dangerous precedent. All leaseholders need to be required to comply with the obligations within the lease, including to pay their bills on time. It goes without saying that the directors of the RMC have the same obligations as do any other leaseholders to settle service charge invoices fully and in a timely manner.

RMCs should, via the managing agent's office, be communicative about the freeholder's commitment to and proactive policy about collecting service charges. This includes alerting leaseholders about any general problem with non-payment of service charges.

The RMC needs to send out the message loud and clear.

Any failure to pay one's service charges means: (1) the non-payer is denying payers' rights to ensure the building is properly maintained and repaired; and (2) compliant leaseholders are effectively being forced financially to subsidise the non-payer's presence in the building. Both practices are, of course, totally unacceptable.

After a matter of non-payment of service charges has been referred by the managing agent to the freeholder's solicitor, the solicitor will normally send one or two letters to the leaseholder requesting payment. In the event of continued non-payment, the solicitor will need to be instructed by the RMC to file a debt-collection claim in County Court. Often, a letter from a solicitor requiring payment and threatening legal action is enough to prompt the non-payer to settle the bill.

In settling the debt, the non-payer should always be required to pay the service charges and ground rent due -- and also the legal bill and any court filing fees that have been incurred by the freeholder.

Although it's a time consuming task, it is important for the RMC, after the freehold has been bought, to assign one director the responsibility of agreeing on a debt-collection procedure with the solicitor. This way, directors on the board are not being dragged repeatedly into discussions about how to address each individual instance of non-payment.

Sometimes a leaseholder will challenge the reasonable of service charges by claiming that the charges are too high or that a particular cost item cost is not justified. The leaseholder has a right, in this case, to apply to the Leasehold Valuation Tribunal (LVT) and this specialist tribunal then decides whether the service charge is reasonable. Similarly, the freeholder has the right to apply to the LVT and to ask the tribunal to determine whether a certain disputed service charge may be collected.

Leaseholders and RMCs often represent themselves at "reasonableness of service charge" cases at the LVT, since many solicitors steer clear of these labour-intensive assignments that can focus on small amounts of money. A few years ago there was an LVT case, brought by the RMC against a leaseholder that had disputed and refused to pay an annual service charge item totalling less than £20. The RMC spent a few hundred pounds in filing fees to bring the case to the LVT, dedicated long hours by one of the volunteer RMC directors and, in the end, lost the case. The LVT decided that the freeholder did not have the right to make leaseholders pay this particular cost item.

But, the resident-owned RMC, was not dismayed. Firstly, the matter had been decided by impartial body in a transparent manner, so that all confusion was thus eliminated.  

Also, by going to the LVT, the RMC, having recently bought the building freehold, succeeded in sending a clear message to leaseholders that the new freeholder would proactively enforce the requirements in the lease to pay service charges.

If you and your neighbours are planning to buy your building freehold or if you have started the process, don't feel discouraged about this talk of service charge disputes.

Blocks of flats that boast the best record of service charge payment compliance are buildings that are owned by the leaseholders. This is because resident-owned blocks are more likely than those owned by absentee corporate landlords to establish a  "zero-tolerance" policy regarding non-payment of service charges.

I wish you success in creating a grown-up culture within your resident-owned block of flats, where people take responsibility and comply with service charge payment requirements.

Insuring a resident-owned building of flats

A leaseholder that read my book The Survivor's Guide To Buying A Freehold has asked this question:

"I own a flat in a Victorian semi-detached building with three flats. The three leaseholders collectively own the building freehold. Do we need jointly to insure the whole building – or can each flat take out a separate insurance policy for his/her one-third of the building?"

The answer is that most residential blocks of flats or houses that have been converted into flats have leases that require the freeholder (ie- the landlord) to take out building insurance. Building insurance is one insurance policy that covers the entire building, including the roof. This is different from "contents insurance", which is insurance covering just the items inside your home. Contents insurance is taken out by an individual homeowner, whether the property is a flat or a house. But it's the responsibility of the owner of the building, the freeholder, to take out building insurance.

It is the obligation of the freeholder to insure the building -- even if the freeholder is a company jointly owned by leaseholders of individual flats. None of the individual leaseholders has this responsibility, even if they are shareholders (ie- owners) of the freehold company.

There are insurance brokers that specialise in providing building insurance for residential blocks of flats.

By the way, if the lease of your flat does not identify the freeholder as the person/entity legally responsible for insuring the building, then you have a defective lease and you need to get your lease changed.

At Rosetta Consulting Ltd (www.rosettaconsulting.com) I receive many questions every week from leaseholders about how best to manage their block of flats after they have bought their freehold. If you have a question on this subject or any other leasehold/freehold question, feel free to post it on this blog. Your question might help others!

Mix of Nationalities Helps Apartment Owners to Buy Building Freehold

Here's a question. Is it more likely for apartment owners in the UK to succeed in buying their building freehold when (a) all or most of them are British-born or (b) they represent a mix of nationalities?

The answer is (b). The reasons behind this reveal some fascinating dynamics when leaseholders of flats decide to exercise their legal right to force the landlord to sell to them their apartment building.

Blocks of flats with a heterogenous mix of nationalities are often most likely to have empowered leaseholders that are keen to buy their freehold.

This is because leaseholders coming from other European countries, the Americas and many Asia-Pacific nations bring to the UK knowledge of the international model of apartment ownership. According to this model, when you buy an apartment, say, in Sydney or Rome or Boston, you own it entirely and forever, and you and your fellow apartment owners jointly own the building.

Australians call it the Strata System. The French call it "co-propriété". Americans call these apartments "condominiums" or "condo's". These represent the international model of apartment ownership.

When foreigners buy a flat in England or Wales, they discover, to their surprise, the exception to the rule. They learn that they have not really bought their flat, but only a time-limited contract, a lease. They also discover that, despite not fully owning their apartments, they and fellow leaseholders have to pay all repair and running costs of the building, which is owned by a landlord or freeholder.

It's no big surprise, therefore, that leaseholders pushing for a collective purchase of the freehold are often those coming from other countries. While many British-born leaseholders show a stiff upper lip and a dogged willingness to tolerate the anachronistic leasehold system -- which dates back to the Middle Ages -- foreigners see fewer reasons to accept the status quo.

Before the widespread use of email, trying to organise a block of flats with leaseholders living overseas was, in many cases, a non-starter. The logistical difficulties foiled many early attempts by UK apartment owners to buy their freehold.

But now, with email, mobile phones and other means of interconnectivity, it is entirely do-able to organise leaseholders, whether they live in the building, elsewhere in the UK, or in Buenos Aires, Johannesburg or Oman.

Indeed, having apartment owners from different national backgrounds helps to shape the global project management that is often required to buy one's building freehold, since many participants in far-flung locations are used to doing business on an international level.

Another bit of good news -- the internationist approach to the apartment ownership model is contagious.

A growing number of British-born leaseholders that have spent time living and working in other countries bring back to the UK an appreciation of the global apartment ownership model and a willingness to take the necessary steps to buy one's building freehold.

I and my husband have loved raising our children in a mansion block in central London. The rich mix of nationalities in our building represents for our family a kind of global village.

It's nice to know that this kind of social diversity not only enhances one's quality of life -- but also, on an organisational level, helps to ensure success when you're trying to buy your building freehold.

 

Forget about Unanimity When Organising a Freehold Purchase

One issue has puzzled me repeatedly during the years that I have been working to help leaseholders of flats buy the freehold of their building. It is an issue that has come up again and again in the hundreds of blocks of flats that I have researched across England and Wales when project managing freehold purchases, writing my books and updating my blog.

It is the insistence of leaseholders in a block of flats on securing 100% participation in a freehold purchase initiative.

This quest for unanimity has puzzled and disturbed me, because unanimity is unnecessary and often difficult to achieve. Insisting on the participation by every flat in the building results in some freehold purchases being delayed for years.

Since the passage of the Commonhold and Leasehold Reform Act 2002, a minimum of just 50% of all flats in a building must take part in a freehold purchase -- known as a "Collective Enfranchisement" -- in order for the building to qualify for this statutory process.

This means that, in a building with, say, five flats, at least three flats must participate. The exception to the 50% rule is a building with just two flats. In this case, both flats must participate.

I agree that it is ideal to have the leaseholder of every flat in a building join an Enfranchisement, since this spreads costs most evenly and broadens the sense of responsibility in the freehold purchase project and in running the building after the Enfranchisement.

But it is unusual, particularly in a large block of flats, for every leaseholder to join a freehold purchase initiative.

The most common reason for the owner of a flat to decline to join an Enfranchisement is lack of funds. A senior citizen that has no budget with which to pay for his/her share of the freehold, no access to mortgage funding and no heirs lacks a financial ability to participate and lacks a long-term incentive to boost the value of his/her flat by securing a 999-year lease after the Enfranchisement.

So, my advice is, just let it be. Do not try to force any leaseholder in a building to join an Enfranchisement. If some leaseholders do not wish to join, that's fine.

One needs a significant amount of motivation and consensus to organise, see through and conclude a freehold purchase. Having participants on board that are not fully committed or cannot actually afford to pay at the end can easily scupper an Enfranchisement.

But who will pay for the share of the freehold of non-participating flats? Many leaseholders across the country put this question to me.

There are two main financing models for addressing non-participating flats.

The first model, which is the only model that I recommend, is for the participants to pay the full cost of the freehold, including the cost of non-participating flats. The good news is that the cost of the share of the freehold of a non-participating flat is almost always much less than that of a participating flat. This is because Enfranchisers do not pay "Marriage Value" for any non-participating flat.

Marriage Value is the anticipated increase in the value of a flat once the freehold has been bought. The net value increases because Enfranchisers usually grant themselves 999-year leases and this makes their flats more valuable. As part of an Enfranchisement, the leaseholders must jointly pay 50% of the Marriage Value to the landlord.

Marriage Value is usually the largest cost component in freehold purchases where leases are short. But it is important to remember that there is no Marriage Value counted for any flat that has a lease of 80 years or more. And there is no Marriage Value counted for any non-participating flat.

This means that participants jointly buy the freehold of the entire building, that they pay more for the share of freehold regarding participating flats than for non-participating flats and that -- after the Enfranchisement -- they have the right jointly to sell lease extensions to non-participating flats.

I have seen several buildings in which participants were able to recover a significant chunk of their original freehold-purchase investment, because the value of lease extensions sold years later later had increased as non-participants' leases got shorter and as the market value of flats rose.

The second common model for funding the purchase of the share of freehold for non-participating flats -- a model I do not recommend -- is to find a "white knight" inside or outside the building.

A white knight investor, in this scenario, is someone that pays the cost of the share of the freehold of one or more non-participating flats. This means the investor is buying a part of the freehhold. To be precise, he/she is normally buying a 999-year "Head Lease" to the relevant flat from the resident management company that has been formed to purchase the freehold.

I do not recommend this model mainly because it introduces a level of organisational complexity that can quickly become a deal killer for the average resident management company that is run by time-starved volunteer directors. In a worst-case scenario, it can introduce into a residential building an outside financial investor whose vision of how the building should be managed post-Enfranchisement may be misaligned with those of resident leaseholders.

Some leaseholders ask me whether they should try to arrange for the smaller, less expensive flats in their building to take part in an Enfranchisement and for larger, more expensive flats to be non-participants -- in order to try to minimise the amount of Marriage Value payable to the landlord.

The answer to this is a firm No.

This is because a landlord can seek to have an Enfranchisement declared invalid if there is evidence of the Nominee Purchaser (the entity that is going to buy the freehold) discussing behind closed doors the possibility of selling a share of the freehold to a non-participant after the Enfranchisement.

This power of the landlord to bring an end to an Enfranchisement in this way is called the Section 18 rule, based on the relevant clause of the Leasehold Reform, Housing and Urban Development Act 1993.

So, to recap, keep things simple. Invite all leaseholders in the building that are qualified to participate to join in an Enfranchisement. But don't fret and certainly don't delay the process if you get less than 100% participation. As long as you have at least half of all flats joining in -- just get on with it.