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Article > A Beginners Guide to Leasehold Flats Traps To Avoid | Questions to Ask | Extras To Know And Profit From

Article kindly supplied by Bernie Wales

Whenever Bernie Wales attends property investor networking events and he mentions he invests in leasehold flats, people take a step back, they take a sharp intake of breath and give him a look as though he’s trodden in something unpleasant. “Ooooh, I wouldn’t do that. There’s no profit in it – and any profit there might be is swallowed up by exorbitant service charges. You must be mad!”

Well, mad he may be but with over thirty year’s experience of working with and investing in leasehold properties, Bernie Wales knows THERE IS profit in it. Yes it can be risky – but any investment is risky. It’s just a question of quantifying that risk, minimising that risk, and managing that risk to ensure you win rather than lose. In this article, Bernie looks at the most common area of investor concern; service charges and the other costs that eat into an investor’s bottom line profit.

All land in the UK is freehold. The term stems from medieval times - the history of which we don’t have time to go through here – but in short, it means owning a piece of land ‘free from paying rent to the monarch’. Every piece of land throughout this country is owned by somebody, somewhere. They are the Freeholder, with no Landlord above them – save for the monarch, who nowadays does not take an active role in that ownership. As Freeholder they can pretty much do what they like with that land, subject to the laws of the country of course. One of the things they might choose to do is to rent out the land to someone else. They would allow someone to occupy or use their land in exchange for money; a rent. This might be for a short period, or long term. And having found someone to rent the land, the Freeholder will prepare a document recording the terms of the agreement between the parties. For short periods, the common document these days is an Assured Shorthold Tenancy’ agreement; an AST. For long periods, in excess of 21 years, the document is called a Lease. For the purposes of this article we will mainly be talking about long term agreements; Leases.

People “buying a flat” are in fact not buying at all – they are paying a premium, allowing them to enter into a leasehold agreement with the Landlord ... followed by a small rent, known as a ground rent. Leasehold therefore is the arrangement between the Landlord and the Leaseholder (the person renting) as documented by the Lease. It is a contractual arrangement, with each party having rights to enjoy and responsibilities to fulfil. When investing in leasehold flats there is one golden rule: R T L. It is imperative that you READ THE LEASE! The lease is the ‘rule book’ and it contains the answers to 99% of the questions which arise.

Leasehold is particularly important when dealing with flats. It provides a contractual way of
controlling ‘part of a building’ in relation to the other parts of that building. Thus common problems such as ‘a noisy neighbour’ can be dealt with by reference to the ‘rule book’; the Lease. It also provides a mechanism for dividing up the running costs of the building as a whole – between the ‘owners’ of the various parts of the building. Those costs which the leaseholder has to pay might include any or all of the following:

• Ground Rent
• Service Charge
• Utilities
• Rentcharge
• Administration Charges
• Residents’ Management Company Charges

It is important that before ‘buying’ a flat you examine the statements of account for each of these charges. You’re not looking here for private information about the seller of the flat. You’re looking to see what specific charges there are - and how those charges will affect your cash flow.

Having purchased your investment flat, you’ll be looking to do three things; maximise income ... minimise expenditure ... and thus profit from your leasehold expertise. In addition to utilising the rules detailed in the Lease, you can also use Landlord & Tenant law to your advantage. Now don’t panic! I’m not suggesting you read the hundreds of statutes and learn lessons from thousands of Court cases – that’s why solicitors earn such a good living – but there are four main areas where an informed leasehold investor can keep costs under control and utilise ‘the rules’ to your advantage:

• The 18 month rule
• Summary of Rights and Obligations
• Reasonable
• R T B L

These four areas are governed, in the main, by the Commonhold and Leasehold Reform Act 2002 ... and the Landlord and Tenant Act 1985. You can read them if you wish – but perhaps it’s easier to research a particular subject once one of the above four looks like it might help you.

The 18 month rule
It is a requirement of leasehold law that a landlord, or their managing agent, “demand” service charges within 18 months of the expenditure being incurred. Surprisingly, many landlords and managing agents don’t manage to achieve this. Incredible though it may seem many of them are so disorganised they can’t add up the expenditure they’ve incurred, place the figures on a piece of paper (in the correct form) and send the figures out to the leaseholders in time to meet that long deadline. That inefficiency provides an opportunity for you!

So, when you get a service charge bill – and particularly when you get a year end summary of expenditure, with a bill attached – ask yourself “Did these costs happen in the last 18 months?” If you think there’s a chance they didn’t – query the situation and suggest to the managing agent that the charges are not valid. Depending on the reply you get and the surrounding circumstances, you may be able to take this further and save yourself some expense – with some professional guidance at that point.

Summary of Rights and Obligations
Another area where you can legitimately withhold payment of service charges relates to the ‘demand’ itself. If a landlord or managing agent sends you a service charge bill ... and there’s nothing attached to it ... it is not a valid demand and you don’t have to pay (not demanded – not due).

The law requires that “a demand for the payment of service charge must be accompanied by a summary of the rights and obligations of tenants of dwellings in relation to service charges”. In short that means the demand must have another piece of paper attached to it (or it may be printed on the back of the demand) detailing the rights and obligations ... in the prescribed form ... and in a font of not less than 10 point. The law is very precise and if the landlord or managing agent fails to follow the rules exactly – you have a right to withhold payment. Apart from getting the font size wrong, many landlords get the wording wrong. Look out for two words ... Lands Tribunal. When the law was enacted the summary included those two words, about half way down the first page. But since that time, the Lands Tribunal has been abolished – and has been replaced by the Upper Tribunal. (Confusingly the Upper Tribunal is known by many as the Lands Tribunal ... and can be found via Google under those keywords.) So, if the summary says Lands Tribunal it is invalid and you can withhold payment, until such time as you’re sent a valid demand and valid summary.

“Reasonable” is one of those words which means different things to different people. Invariably a landlord’s view of reasonable is different to a leaseholder’s view of reasonable. But it a word worth considering – in two ways. Firstly, is the costs reasonable? Secondly, is the standard of work reasonable. In considering whether service charge costs are reasonable, you must have regard to the particular circumstances, at the particular flat, within the particular block of flats, in relation to the particular lease, and all the other circumstances involved. For example, a £200.00 bill for cleaning the windows of a flat may well be unreasonable ... if that flat is on the ground floor. But if the flat is on the 23rd floor, £200.00 may well be reasonable. It’s a matter of judgment (pardon the legal pun).

In considering whether the standard of work is reasonable, you must again have regard to the particular circumstances – but in many ways this ‘reasonable’ is easier to determine. You’re looking here at 'value for money’. And the mistake leaseholders often make is “cheaper is better”. Not necessarily so. Sometimes it is better to pay more and get a more thorough job done – rather than bodge it and have to repeat the works again very soon. Get it right first time and save costs in the long run, is probably a better method of management.

So what do you do if you consider the costs or the works to be unreasonable? The first thing, as mentioned previously, is R T L. Check the wording of the lease to see what the ‘rules’ say. It may well highlight a flaw in the calculations or confirm that the works were not ‘service charge-able’ in the first place. After you’ve checked the lease, write to the landlord or managing agent detailing the circumstances and asking for your concerns to be answered. A professional property manager should respond proactively and answer your points objectively and constructively. Hopefully you can resolve the problem and move forward.

But if you don’t get a satisfactory answer, you can then refer the matter for an outside opinion- via the Leasehold Valuation Tribunal [LVT]. This body is ‘the property arm’ of the County Court system and they handle all the disputes about service charge, poor property management and the like. Although it is a Court and consequently has a formal legal framework, a large percentage of their ‘customers’ are non-legal people – so they make every effort to help the man in the street through the legal process. It’s relatively cheap. You can represent yourself and on most occasions a fair and reasonable answer is determined.

As I said earlier, R T L is the starting point for all leasehold problems. Reading the lease for your specific flat will give you the basic rules for your specific situation. Unfortunately every lease is different. There is no such thing as ‘a standard lease’ ... because every solicitor thinks their version is the best ... and because every property is different, every freeholder is different, and every property deal is different. Bespoke documents are therefore something you have to get used to. Whilst every lease is different, there are common themes. They all have a starting date and details of the original freeholder and leaseholder. They all have a term for this long-letting; e.g. 99 years from 1st January 1980. They all have details of the rent payable (ground rent); e.g. £100 per annum, half payable on 1st January and half payable on 1st July ... in advance.

There is always a description of the Building (the block within which the flat is situated) and details of ‘the Demised Premises’ (the flat itself). It’s worthwhile knowing where your flat stops and the building begins – because generally you will be responsible for repairs and costs for your specific flat ...whereas the Building repairs and costs will be split between all flats in the property. Consequently you can sometimes save a few pounds by confirming that a cost needs to be borne by the freeholder, not you, and then recovered via service charges payable by all.

There are also sections detailing “The Landlord’s Covenants” (what the freeholder must do) and the Landlord’s Rights an Obligations. The obligations will tell you what the landlord is required to do – for example, repairing the structure of the Building and ensuring it is watertight. This section is useful when you have a repairs issue you need to get remedied quickly. Conversely, there are sections detailing “The Leaseholder’s Covenants”, rights and obligations. These sections are definitely worth knowing well if you are letting the flat to a tenant – as you will need to ensure your Assured Shorthold Tenancy includes the same (and maybe more) obligations; e.g. not to erect a satellite dish on the premises. Don’t get caught between the two. It’s can be costly if you there is a legal requirement for you to do something – but you can’t force your tenant to do it for you!

Leases will all have a ‘lease plan’ or plans. This will show the position and extent of your flat in relation to the building – and give you details of areas outside your flat over which you have rights. It may seem obvious, but if your flat is on the third floor, it is worth checking that you have a right to use the stairways from the ground floor up to your flat. But the most important section of the lease – in terms of saving you money – is the section that provides “Service Charge Details”. It will make clear exactly how the number crunching is done, exactly what proportion of the costs you are responsible for (and hence, not responsible for) and also the items of expenditure which can be included in the service charge costs. Surprisingly, I often come across arguments caused by the freeholder or managing agent including costs which are not permissible under the terms of the lease. Quite often these costs seem logically OK ... topically, installing a new digital TV aerials system for the building ... but if the lease doesn’t provide for those works then you as the leaseholder may not have to contribute to that cost (leaving the freeholder out of pocket). Knowing the exact wording in your lease can literally save you thousands of pounds, where the freeholder or managing agent have been sloppy and made errors.

And so to summarise – treat your leasehold investments strictly as a business exercise and know the rules under which you’re running that business. It’s the fine detail which can make you thousands – or cost you thousands. The starting point is always R T B L, as reading the lease will answer the vast majority of questions.

If you’d like a free “Leasehold Information Checklist” outlining the 19 areas where you can save yourself money and improve your leasehold profits, check out my website

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Bernie Wales is a Residential Property Manager with over 30 years' experience as a successful entrepreneur. He focuses mainly on Leasehold Property Management and Investment - and has founded, built and sold several companies. He is a Fellow of the Institute of Directors, a founding Fellow of the Institute of Residential Property Management, and an Associate of the Royal Institution of Chartered Surveyors.




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