Open disclosure by Conveyancing Solicitors – education on what a lease is and means

1. A lease becomes a short lease for mortgage finance at 70 years;
2. A lease extension if your leases has less than 80 years left will include paying the landlord 50% of the enhanced value of a long lease;
3. Service charge accounts in non-compliant form, i.e., without a balance sheet showing the reserves funds for each service charge schedule are not worth the paper they are written on if you buy into a Right To Manage block (RTM), best to check how many members are left, as the last RTM member standing pays all the RTM costs;

Every Solicitor should be required to deliver an understanding of the key clauses of a lease and every leaseholder needs to know:

• not to use the flat as a business,
• not to bring commercial vehicles on site,
• which boundaries you owned,
• what a shared right of drainage means,
• keep carpeted clauses,
• why you have to register your sub-letting,
• what a pet licence is...

How can so many solicitors let sales go through without retaining funds against future balancing charges? Why ask for the service charge accounts as part of a pre-sales pack if you are not going to interpret them? Or worse check if RTM costs are wrongly included in the service charge accounts!

Increase the powers to the Leasehold Valuation Tribunal

To address the repairs time bomb, blocks of flats with inadequate or no reserves clauses are the most likely to miss redecorations due and fall into disrepair. The industry needs legislation to give Tribunals greater powers to vary leases. Currently the Tribunal only has powers to vary leases where the lease does not adequately provide for the service charge. The Tribunal has no power to deal with leases which provide for service charges in a wholly unworkable way.

Examples include:

• leases with no reserve fund;
• leases that do not provide for the cost of a Managing;
• leases that do not provide for the cost of independent service charge accounts to be produced;
• leases where the ‘Managing Agent has been written into the lease’;
• no obligation for freeholder retained units to pay service charges, if the freeholder has not granted themselves a lease!;
• leases with no decorations clauses;
• leases silent on whose responsibility balconies and roof terraces are;
• leases which expect the lessee to decorate their own windows, 10 floors up!

A democratic right to remove a Managing Agent who has been written into the lease

Imagine how upsetting it would be to buy the freehold then find out that you can’t manage the block as that right is given to a Managing Agent that you did not choose for 99 years! That’s hardly democracy, surely it was not meant to be this way?

Then what if even if you have 51% of leaseholders on board? Right to manage legislation won’t help you because there’s a car park underneath your property and is shared with other users. How can this be fair? It needs addressing.

Extend the HM Land Registry registration requirements relating to service charge schemes

More information is needed when land transfers involve service charge schemes so it is easier for a good Managing Agent to resolve issues. The Land Registry could eradicate many disputes by requiring:

• registration of plot numbers and postal addresses on new build developments;
• registration of the service charge percentage(s) – as in court ‘informal agreements’ cannot be relied upon;
• a certificate of compliance prior to registration of every residential leasehold sale to protect buyers;
• registration of agreements/notices to change lease percentages or vary contributions;
• registration of licences to alter along with a new lease plan;

Put simply Managing Agents spend too much time chasing lost paperwork.

Pooled bank accounts must be outlawed

Banning mixing all Client money together legislated for under The Commonhold & Leasehold Reform Act 2002 never came into force. This leads to rumours that ‘leaseholders money is invested in the money markets’. At Ringley we go further, each Client can get a copy of a bank statement of their Client account direct from the bank – we believe in 100% transparency. Ringley have the expertise to carry out forensic accounting, trace missing money, or carry out a management audit to look at ‘value for money’, management policy and whether costs are reasonably incurred, i.e., an expert opinion of value and reasonableness.

Simplify the Companies Act for blocks of flats

Parts of the Companies Acts are simply too onerous for small blocks of flats. When a Companies House leaflet sets out that management companies should be run as ‘dormant companies’ meaning the duty is to file a balance sheet only, then why do we have to have an AGM to talk about dormant company accounts but end up talking through the service charge accounts instead?

Leaseholders are continually confused between the service charge accounts and the company accounts. If the service charge accounts had to be filed at Companies House as well as the dormant balance sheet then life would be simpler.

Prescribe an example balance sheet for service charge accounts

Consistency in balance sheet accounting : the ICAEW guidance note does not go far enough. We need a prescribed form for service charge balance sheets.

• You’ll get one accountant disguising any deficit or balancing charge by writing it off against reserves on the balance sheet ….. buy in this block and as a leaseholder cashflow and getting anything done may become rather uncertain.
• You’ll get another accountant putting the balancing charge in current assets (even if it has not yet been billed) – and what if it never is?

A clean balance sheet should not have more than one year’s balancing charges brought forward, it if does a leaseholder may get a surprise demand relating to a period before you even owned the property.

• Some Accountants and indeed Managing Agents merge all the reserve funds together. Not good if for example you own a house and don’t pay into the flats fund...... but your money is being used.
• Many Accountants will tell you it is not their job to read or understand the lease – this must become an express and absolute requirement even if the lease requirement is not audited. How else is their opinion (a) independent and how (b) can it therefore comply with the RICS Code of Practice for Managing Residential property?

Then there is the problem in some resident controlled blocks where leaseholder self-interest sees a conflicted individual cancelling or refunding reserve funds because they want to sell up.

We have Tribunals that expect management companies to apply balancing charges even if there is no cash to do so leaving blocks with disputes and arrears. Typical tri-party ‘residents management companies’ leases puts the full responsibility for covering cashflow shortfalls onto the management company Directors, hardly what a volunteer RMC Director expects. What leaseholder really buys a flat thinking they are buying into a business and therefore might be expected to fund cashflow when the times are bad?

Extend the Section 20 statutory leaseholder consultation requirements

The duty to consult leaseholders on spending over £250 is great. Is £250 not outdated, it was set in 1985? And is £500 not ridiculously low for a block of two flats as the legal paperwork for the Section 20 consultation process undoubtedly costs more than the works themselves!

Section 20 must go further and require disclosures on ‘related party transactions’ or a statement that there is no relationship by ownership or control with each of the proposed contractors. And, the absence of such disclosures should invalidate a notice.

Deal with key flaws in Right to Manage legislation

RTM memberships should become transferable with the leasehold title in the way that shares in a Freehold enfranchisement company do. Because they don’t, this leaves RTM members constantly having to track who is selling and to recruit new members. And, as members diminish the risks and costs increase unfairly between the last remaining members.

Simply legislate that for RTM Company expenses, i.e., company secretarial fees, company accounts, and directors and officers insurance for RTM Companies become service charge expenses. Else with diminishing members as RTM’s mature the RTM becomes increasingly dysfunctional with insufficient members to bank roll them.

The RTM company only has control over the ‘lease-based’ transactions as. RTM steps in to grant approvals for assignment, underletting, charging, parting with possession, the making of structural alterations or improvements or alterations of use and the like; but can only do so after up to 30 days notice must first be given to the person who is, or each of the persons who are, landlord under the lease.

However, for other matters which affect the land but are outside the lease, such as when the Land Registry requires a compliance certificate to register a sale the RTM company cannot provide this despite being the party who is managing the lease.

Green technology – not a chance!

Leases rarely allow for ‘improvements’ which implies green technologies are possibly unviable. Whilst lessees are expected to repair, renew and maintain the structure including for example, the roof, they are not entitled to make alterations such as affix solar panels or wind turbines. And, even if a resident controlled block of flats did seek freeholder’s consent to install a green technology - you can imagine who would want to receive any income or benefit. Unlikely to be the leaseholders!

Case law on repair versus improvement

Case law on repair versus improvement makes it quite clear that unless expressly stated otherwise, a lease will only allow an improvement when repair constitutes renewal due to dilapidation. For example: plastering a bare brick wall, installing an entry phone where there was none, laying a carpet if the floor was painted concrete before can only be voluntary upgrades.

Inability to secure green loans

Because resident controlled management companies (RMCs) offer poor security to utility companies loans available to individual households are generally not available to RMCs. RMCs have no security to offer, service charge schemes are not for profit and often the RMC does not even own the communal staircase. Naturally, it is the Freeholder who can offer the security but this is no help to residents.

Estimated breakeven points for green technologies:

Rainwater Harvesting	21 years
Solar PV	13 years
Light Tubes	Only viable in certain locations
Natural Insulation	900% price premium
Natural Paints & Finishes	14-40% typical price premium
Ground Source Heat Pumps	6 year breakeven
Air Source Heat Pumps	5 year breakeven
Solar Thermal	11 year breakeven
Wind Turbines	8 year breakeven