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. |
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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
“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.
R
T L
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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