Understanding What The Lease Says
Basic Facts about Leases
- A lease is a binding legal contract between leaseholder and landlord, and possibly one or more third parties such as a management company.
- There is no one standard lease type and they can vary dramatically.
- Once a lease has been made it is can be very difficult, sometimes impossible, to change the wording at a later date.
- The wording of a lease is important because it determines nearly aspect of the arrangement someone enters into when they purchase a Leasehold Property.
Important Things to look for in a Lease
- The length of the lease (number of years).
- Exactly what is being leased (in terms of the area within a building and estate).
- How the common areas of a building or estate are described and what rights of access the leaseholder has.
- What obligations a landlord has to maintain and repair the building and estate and deal with other issues such anti-social behaviour.
- How much the Ground Rent is and whether it will go up in the future.
- Whether a Service Charge can be charged, what it can be charged for, and how the charges are to be calculated.
- Whether other charges can be made for administrative functions, legal costs, and issuing of consents, and whether there are any restrictions on the amount of those charges.
- Whether other restrictions apply, for instance in relation to sub-letting the property or making alterations to the interior of the property.
The first thing a prospective purchaser should find out is how the long the lease is (the ‘Lease Term’) and when the Lease Term began.
The Lease Term does not always begin with the date the Lease was entered into. The lease will normally state a precise date when the Lease Term began, and the number of years for the Lease is granted will start from that date.
The Demised Premises is the part of the building or estate which is leased for exclusive use by the Leaseholder.
The Demised Premises will normally be described in words in the body of the lease, as well as in a plan attached to the Lease. In the event that the written description does not match what is shown in the plan, the law says that the area described in the wording is the correct one.
For flats themselves, it is fairly obvious what is being leased, however, the extent of the demised premises can vary: for instance, the front door of the flat and the windows might responsibility of either the leaseholder or the landlord, and the same questions can be asked about the floor structure or ceilings and other parts of the building.
The issue of what is, and is not, included in the Demised Premises becomes more complicated when it comes to external areas such as car parking spaces and gardens. Even more complex questions still arise in respect of whether roof spaces above a flat are included as leases can be unclear about this. A purchaser needs to check the description of the Demises Premises carefully to check that it matches their understanding of what it is they believe they are leasing and it is advised that any ambiguities are cleared up before purchase if the wording of the Lease is unclear.
Please Note: Problems frequently arise in respect of parking in particular with the promised car parking spaces not being included in the description of the Demised Premises.
Common Areas and Rights of Access
As well as wanting to know exactly what they are leasing, a purchaser of a Leasehold property will also want to know what the common areas are within their building or estate, and what their rights of access will be.
A lease should set out what the common areas are and what rights there are to access those common areas. Common areas are areas, inside or outside, which residents share a right to use.
On some developments there may be facilities, such as gyms and swimming pools, which are expensive to maintain. Whether or not the Leaseholder will have to foot that maintenance bill will depend on whether those facilities are ‘common areas’, in which case the costs can be included in the Service Charge, or whether the facility is financed as a private entity, in which case the costs should not be included in the Service Charge.
Generally the greater the extent of the common areas (ie. more facilities, lifts and recreational areas) the higher the overall service charge will be, simply because there is more to manage and maintain.
The Lease will also describe the Landlord’s role. The role a Landlord plays can vary, the key variables are:
- The services which the Landlord is expected to provide.
- Whether the Landlord is responsible for Building’s Insurance.
- Whether the Landlord has a responsibility to ensure other residents observe the rules and restrictions in their Leases.
- If the Landlord referred to in the Lease does not provide the services, whether the Landlord is legally obliged to pursue a Leaseholder’s complaints about costs and service provision with whoever does provide those services.
Knowing what the Landlord’s role is will help you understand the types of things you are likely to have to pay them for and what control they have over the provision of services and carrying out of repairs.
Most leases including an obligation for the Leaseholder to pay Ground Rent. This is an amount which is generally paid annually for rent of the ground upon which the building is located. Three things to note about Ground Rent:
1. It is virtually impossible to dispute: Leaseholders are legally obliged to pay the amount stated in the Lease and at the time stated in the Lease.
2. The amount can considerable: Ground Rent is sometimes thousands of pounds a year.
3. The amount can change: Many Leases state that at set intervals, the amount of Ground Rent due will increase.
Whether a Service Charge applies, how the amount is calculated, and what types of costs it covers, are all determined by the wording of the Lease. Knowing what it says in a lease about the Service Charge will help a prospective purchaser in a number of ways:
- Knowing what types of charges could potentially be levied is the starting point in making an estimate of exactly how much the service charge will be.
- Typically during the purchase process copies of Service Charge accounts from previous years will be made available. It would be wise to check that the method the Landlord has been using to calculate the Service Charge is the same way as the one described in the lease. If it is not, then there is a risk that this will create problems that may cost a purchaser money at a later date.
The key things to identify within a Lease in respect of Service Charges are:
1. Authority to Charge: Whether the Landlord is entitled to bill for Service Charges, and types of costs which can be included.
2. Fixed or Variable Charge: Whether the Service Charge is based on the amount a Landlord spends or what they do, or whether the amount is fixed or capped, or increases by a set formula.
3. Billing Cycle: When the bills are issued and how long you have to pay them.
4. Definition of the Block and Estate: This will tell you which building or part of a building ( the ‘block‘) the Leaseholder contributing towards, and what external areas (the ‘estate’) they may also be obliged to contribute towards.
5. Apportionment Method: The way the individual Leaseholder’s share of the overall Service Charge costs is calculated.
A sinking fund, or reserve fund as they are also known, is a pot of money collected from Leaseholders over a number of years normally for the purpose of funding major repairs.
Leaseholders are only obliged to contribute towards a sinking fund only if it says so in the lease.
Generally, sinking funds are considered a good thing as they help Leaseholders spread major costs over a number of years, and they ensure that necessary work gets done on time without needing wait until all the residents have made the necessary financial contribution to fund a building project
It is worth knowing whether the lease entitles a Landlord to collect contributions to a sinking fund, and whether the lease includes any restrictions on the way a Landlord administers the sinking fund, and whether it says how monies in the sinking fund should be spent.
There is a long list of things which, potentially, a Landlord could charge for in addition to the Service Charge itself.
The most notoriously expensive of these relate to the sale and purchase process for Leasehold Properties, amongst the associated things a Landlord might be able to charge for are:
- Pre-sales information packs
- A fee for registering a change of ownership with the Landlord
- An exit fee for selling a Leasehold Property, this can be thousands of pounds
Other charges are also often made for the provision of information, consent to alter the property or sub-let, and legal costs incurred by the Landlord in disputes with residents.
Which of these things a Landlord is entitled to charge for will be set out in the lease, as will any restrictions on the amount which can be charged.
Leases will normally contain a list of things which Leaseholders are not permitted to do. They will also normally contain a list of things a Leaseholder can only do with the consent of the Landlord (for which a charge will normally be made).
Purchasers should consider these restrictions carefully, as they may make it difficult to use the property for any purpose other than as a home for themselves. This is particular importantly to anyone looking to buy a property to rent it out, or use the property as a base for their business. Not all Leases will allow the property to be used in this way.
The types of restriction which appear most frequently in Leases are normally:
- Restrictions on letting the property.
- Restrictions on use of the property for other commercial activities.
- Restrictions on changing the internal layout of the property, sometimes even moving installations such as toilets and baths.
- Restrictions on making noise.
- Restrictions on disposing of rubbish.
- Restrictions on the age of residents.
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