How to manage your solicitor


30/10/2012
by: Mary-Anne Bowring

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How to manage your solicitor

First Experience

I remember when I bought my first property how it was essential to go and have a face to face meeting with the solicitor. Feeling a bit nervous with sweaty palms at the tender age of 18 taking on such a big responsibility I walked into the solicitor's office with a little fear and trepidation. When I sat down, I felt rather important as the secretary bought me a cup of tea, and then the solicitor went on to spend a good 35 minutes with me, giving me some good old fashioned advice, helping me understand what the freeholder and leasehold really meant, telling me who had rights of drainage over my prospective garden, which fence I would be expected to replace in the future, exactly why the neighbour was allowed to share my rear gutter, as well as what was expected of a leaseholder; and a whole list of promises that I doubt I had really contemplated whether I really wanted to make.

Summing up I was reassuringly advised that the lease I was buying was better than most, had the number of good provisions within it, such as CAN EXPAND IF YOU LIKE. And even if I did live to be 115, that I would not be thrown out into the street at the end of the lease; but that I would have the opportunity to stay in the property as a secure tenant paying rent on market terms. I was congratulated on my purchase as made to feel a member of a very special club. I duly signed the deeds and became one of Britain's proud homeowners; it seems unlike our friends in Europe this is still what every middle class British person seems to believe is still their destiny. It is sad to look back and see that what seems to have happened in the last 20 years since I received this personal care and attention.

Conveyancing costs seem to have gone down in real terms and I've even heard about do it yourself on line conveyancing which arguably have much to contribute. However, it seems that it is now the buyers job to manage their solicitor. Being asked to write an article about how to manage your solicitor is rather a novel idea for me, as my day job is managing the part that looks after leasehold and we certainly have to manage a number of awkward or dud leases! It is also sad to see how few purchasers appear to get the advice and attention that really set me up and on my way.

It is my personal belief that all solicitors should be made to do at least 1 year of their training working for a Managing Agent, implementing leases and understanding the problems that bad drafting can cause for the next 99 years or so, long after they have had their fee and gone. I have come across clients advised by their solicitor not to buy a property because the lease was short, where clearly the right advice would have been how to get the seller to serve a notice for you, so that you can inherit their right to a lease extension; and arguably buy a cheaper property and via two transactions (purchase then lease extension) to actually increase the value of the property and save money! I've also come across numerous buyers who just do not get advised that they are actually buying their previous owner's service charge arrears! and possibly also the accounting deficit arising from the service charge account, one or more years before!

So my tips on how to manage your solicitor are:

1. Ask what the service charge regime is.                                                                                                                                                                                     

     Are you buying a good lease that allows the development to create a service charge budget, (estimate of expenditure likely to happen in the year); Will service charge demands be paid up on account of expenses likely to be incurred, or was the lease drafted many years ago and does it expect the freeholder to pay for all service charge costs and then ask you for the money at the end of the year? Great if you are a rich freeholder like the Grosvenor Estate, bad if you live in a block where you own a share of freehold and have to keep lending money to the service charge pot to meet costs whilst others refuse to pay in advance, then you are left to unravel the whole mess at the end of the year.

2. How many times you have to pay service charge once a year in advance.                                                                                                                       

Two or four times spread throughout the year? Most leases don't let you pay after the due date in instalments, typically the leaes will say you are in arrears and therefore breach of your lease, if the payment is not made within 21 days of the due date. Whilst many Managing Agents offer payment plans these fit in with the lease so should operate like a TV savings stamp, i.e, you are actually paying to collect up for the next instalment meaning you will have to be up to date before you will be allowed to set up a direct debit.

3. Does the lease allow for a reserve fund?                                                                                                                                                                                         

Without a reserve fund the glamorous flat that you are buying, will be on a balance of probabilities more likely most to be tomorrows unrepaired slum. The hardship caused by a lease that does not allow a reserve fund, is in the year that re-roofing or or external decorations is to take place you need every leaseholder in the block to stump up perhaps £3,000 each. If there is a reserve fund, you should be buying the flat with an asset i.e. your share already in the reserve fund pot. Do get your solicitor to make sure if the block is not professionally managed that the owner has not arranged some sort of agreement to cash in and take your rights to this reserve fund from you. Then the question really is whether the reserve fund pot person is adequate or likely to go a significant way towards paying for the next major works. Else you'd better budget for the shortfall now. If you have had a Homebuyer Survey or Building Survey carried out you should have a fair idea of what might be required.

4. Works done or due.                                                                                                                                                                                                                       

   Whilst most solicitors ask questions of the seller and/or the Managing Agent in respect of any anticipated works or capital projects it is useful to have an idea of the lifespan of the key building elements. You can then cost and what you might be in for replacement. For example: Pitched roofs life span - say 60 years Flat roofs, life span say 20 to 25 years. Vehicle Gates: expect major overhaul at 15 years. Lifts: expect major overhaul at 25 to 35 years. Decorations: what does the lease clause say? The options will vary from as when a surveyor sees fit, to 3 yearly (typical on newer type development with softwood windows), to a 5 yearly. As a rule of thumb assuming that the wood work to say soffits, windows, etc, is in good condition, using the best modern paint system, properly applied guarantees 7 years before next redecoration. Another guide is what did the decorations clause say, if 3 yearly it is probably because the building has poor quality softwood windows, if you double the decorations period recommended and redecoration has not been carried out in this period, then you are buying trouble! So the question is knowing the amount in the reserve fund and the typical life span of building element, if you also know when decorations were last done you are better placed to know what you might be paying for next. Example; knowing the roof was done 3 years ago, should prompt the question was it patch repaired, or renewed, then using the lifespan guide above you'll know whether you are up for big expenditure or not.

5. Windows, whose responsibility?                                                                                                                                                                                                               

It sounds like a funny question. You'll probably not think that this can be the most contentious issue. Let me explain. Imagine you as a leaseholder have an obligation to paint your windows; but you are on the fifth floor on the block of flats. So how are you going to paint your windows without scaffolding to get up that high. Lets complicate it further by saying the Freeholder owns the timber windows themselves and they can sue you for not painting your windows and causing the timber window structure to deteriorate. And, the leases of the development don't allow the freeholder or management company to collect the money towards decorations through the service charge. Yes, this is a real life situation in a block of 20 flats that Rngley's Management Department have to deal with in NW5. We've had to trott of to the Leasehold Valuation Tribunal to try to resolve matters! A well drafted lease will require the same party i.e. the freeholder or the management company to maintain the timber windows and decorate them too. Also, that communal decorations are a collective activity, not an activity where you as an owner of a 5th floor flat could be served a Repairs Notice, because you personally have not erected scaffolding and painted your windows.

6. Short lease or long? The lease is short according to the manual that valuation surveyors/mortgage valuers follow, when it falls below 70 years. However, if you want to extend your lease it becomes short when it lease falls below 80 years. This is because 80 years is the point where a lease extension definitely costs more as you have to pay what is called marriage value to the freeholder. Well, if you live in Knightsbridge where many buildings have short leases (40 years-60 years is common place) but in Crouch End 90 years might be the norm! You should make sure you know the area, its not difficult as most estate agents details will quote the lease term. Understanding how a lease length affects value is quite simple: long leases are worth more than short leases, lending institutions don't like lending on leases where there is not 25 years left after you have finished making all of your payments. This normally rules out leases much below 55 years for most people. Know the typical lease length for the area you are buying into If the lease is short, choose a Solicitor who can advise you how to get the seller to start the lease extension process for you so you save money or go to www.leaseholdguidance.co.uk

7. Do you have a say in what goes on or not? Since 1987 there has been a series of major breakthroughs in leaseholders rights, consultation in 1985, right to extend your lease/buy the freehold in 1993 and to claim the right to manage in 2002. The right to manage is quite a special one as even if the block can't afford to buy the freehold without needing to prove the freeholder is at fault you can serve 2 notices then take over. All this means that the opportunities to have the say in what goes on in a block of flats, have never been better. There are four possible legal scenarios that the lease you are buying will fall under, you really should know which you are buying: (a) Firstly the traditional scenario where you as the leaseholder pay both your ground rent and service charge to the freeholder and have no real say in what goes on, but a right to limited statutory consultation. (b) secondly the structure where you the freeholder have a share in a Residents Management Company who collect the service charge and manage the building, leaving your relationship with the freeholder little more than paying ground rent, this way as a shareholder or member of the Management Company democratically you have a say in which Managing Agent to appoint and decisions relating to improvements and running of the block.

(c) thirdly a scenario where most or all leaseholders in the block own the freehold (look out for share of freehold on the Estate Agents details). This will have arisen because at some time in the past most or all of the flat owners clubbed together and bought the freehold, or if a new build development the developer gave the freehold to the leaseholders. If you are buying a flat with a share in the freehold, effectively you buy share in the Freehold Company as well as the leasehold title to your flat. These are 2 distinctly different hats you have to wear. A WHOLE OTHER ARTICLE Much like scenario 2 democracy rules and as a shareholder you have a say. It is also likely but not mandatory that a resolution to no longer charge ground rent has been passed or perhaps that when long leases were granted ground rent was abolished (or effectively set at a peppercorn). (d) Finally, a block which has claimed the Right to Manage as a result of the 2002 legislation, ie, 50% or more of the leaseholders got together and took over running the block from the freeholder. Here you will still pay ground rent to the freeholder but the right to manage company will actually sit in the shoes of the freeholder to manage/administer the affairs of the block. You should by now see that in scenario (b), (c) and (d) you have an opportunity to have a democratic say (usually of equal vote in what goes on in the block). In scenario (a) you merely have the protection of being afforded consultation on certain items such as expenditure on works where your share exceeds £250, or if the freeholder wants to enter into a long term qualifying agreement costing any 1 leaseholder more than £100 and lasting more than 1 year.

8. Insurance, an asset or liability? Do ask how the block is insured, specifically who insures the buildings? The answer you want is the Freeholder or the Management Company as at least then there is a sound formal structure. Of course if there is a Management Company that's the best option as you can negotiate a good premium rather than have it imposed upon you. At Ringley we manage a block in NW5 where we applied on behalf of the leaseholders (after getting 75% to consent) to vary the extremely badly drafted lease which required each flat in the block to arrange their own buildings insurance premium; i.e. the building could not be insured as a whole. Problems for leaseholders in this block were: 1 - anybody buying a flat in the block was required by their mortgage lender to buy an indemnity policy (an insurance policy a lender requires to take out where things are not quite normal) 2 - in the event of a claim, you have to either claim on your own insurance when the event was no fault of your own, or pursue your neighbour privately to recover your loss. And, even if both neighbours co-operate if either insurance policy has an excess then that's when the arguments start. If you have a defective lease and need it sorted then there's free advice and help from Flatie, the Ringley Group's champion of leaseholders rights, go to www.flatie.co.uk and sign up for free now.

9. Insurance excess or excessive? Asking what the insurance excess is on the policy is usually a good indicator whether the block has had past problems. If you find out that subsidence or water claims are now excluded from the insurance cover, it's a pretty safe bet that there is some history to be uncovered. An insurer will usually only exclude water damage claims from the policy if they have paid out so many that the insurance policy has become unprofitable. Again Ringley have helped a block in N19 recover from a total exclusion on water damage claims in a church conversion where pipes sunk into the concrete slab floors started failing 1 by 1.

10. Accounts, is the block the flat is in solvent or is it an empty pit?                                                                                                                                            We have spent hours training our property managers to understand accounts and many solicitors arguably would benefit with the same training. So here is Ringley's guide to knowing your way around a set of service charge accounts. What to check on the income and expenditure account First, go to the income and expenditure account (merely a property loss account in disguise); renamed as service charges is not supposed to be an activity for profit! It is customary for solicitors to request three years accounts, three years is enough to see a pattern of expenditure. Checks - is the year on year expenditure reasonable, i.e. that to see if there is a pattern of things which are not logical such as repairs rising from £500 to £9,500 that would prompt a question. - in respect of electricity and water large hikes could occur if the bills are on direct debit as we've all seen on the news how utility companies are not quick to reduce direct debits and like your money in their bank! - is the service charge demanded similar year on year or has the budget has to rise perhaps as too many repairs are being carried out due to no forward planning or cyclical works being carried out.

- What is the bottom line, is there a deficit or a surplus. - If there is a deficit it is important to ensure that the deficit has been re-charged. Else, you might be buying the privilege of paying your share of the deficit even though you did not live there when it occurred. - Has there been a motion after the year end accounts were produced to use deplete reserves to fund the cashflow shortfall due to the deficit, so what is truly in the reserve fund TODAY What if you cant get hold of the last set of accounts?

- If you have not been able to get a copy of the last set of accounts and it is more than 6 months post the year end you should be asking whether a Section 20B Notice under the 1985 Act has been served. If it has, even though there are no accounts, this notice signifies that there is a deficit and you will to pay it. Alternatively if the Managing Agent has omitted to serve a Section 20B Notice then as the new buyer have no obligation to pay the deficit. - This would protect you from buying a flat scenario A from our list above, but might not completely protect you if you buying into legal structure (b), (c) or (d) as you then may be liable as a shareholder/member of the company. - So if the accounts are not available the question is to ask whether there is likely to be a deficit? A good solicitor will require retain a deposit until the accounts are produced and liability apportioned between buyer and seller to protect you. Else you will end up buying somebody else's service charge arrears and possibly a deficit too. What to check on the balance sheet - The most important thing to check on the balance sheet is the reserves stated (assuming the block is allowed by the lease to collect a reserve fund). - Have previous years deficits/surpluses just been funded from reserves, or have they been debited/credited back to the leaseholders as a balancing charge to refuel cashflow as is required by most leases. You should ask what is the normal policy for treatment of surpluses and deficits for the block, this will give you a good idea of how financially savvi the block is.

- As alluded to earlier, the repairs/condition of the block and lifespan of key building elements will lead you to a decision if there is sufficient money in reserves and how healthy you are buying a block into. - Also on the balance sheet is the debtors which normally means those people who have not yet paid their service charge due. The problem being here that if the debtors are significant and if the flat you are buying is tenure type B, C or D, you may end up as a shareholder investing your own hard earned cash in chasing professional non payers. Debtors are effectively robbing the cash for day to day expenses and you might end up with cleaning or gardening being cancelled until debts are recovered. - If debtors are low (say less than 5% of the service charge demanded (shown on the income and expenditure account) then cashflow should be good. - If debtors are high the income and expenditure account may only look healthy (be making a surplus) because the money is due but not received and there is simply not enough cash to spend money on the maintenance needed and services have been cut. This is where conventional accounting does not truly fulfil the needs of running a block of flats as it is cashflow that is king.

Let me explain.. in accounting convention the income and expenditure account shows the service charge you demand, as opposed to the service charge you have received. The difference between what is demanded and what is received is hidden away on the balance sheet under the title debtors. - Creditors, these are people that could not be paid at the time of the accounts. Again creditors should be low if cash flow is good. At Ringley we have many sites where cashflow is good and contractors are paid almost instantly so creditors will show as ZERO, that's what you as a buyer want! Although you find this a bit confusing, perplexing or daunting, Ringley Group have packaged all their expertise in what they call Block Care 100, information support and tools for leaseholders, and you can get this free. Simply log on to www.leaseholdersupport.co.uk. It takes a few seconds to sign up and you will be launched into their world of step by step guides, fact sheets andmore. Alternatively if you would like to download a list of questions that you really need to know, even if it makes your solicitor work a little harder, then log onto Facebook.


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