Town & City speaking at PropCon 2018Tue 30 Oct 18
Frequently asked questions
Leasehold properties are most commonly apartments and can be purpose-built blocks, converted buildings or part of a ‘mixed use’ development along with commercial or retail premises. Leasehold ownership is simply a long-term tenancy of a property with the right to occupation for a period in excess of 21 years. The term of the lease is often 99,125 or 999 years and diminishes over time.
The ownership of the property usually relates to everything within the four walls including floorboards and plaster to the walls and ceilings, but does not usually include the external walls. Responsibility for doors and windows varies and you should consult the lease for confirmation. The structural and communal parts of the building and the land it stands on are owned by the freeholder, sometimes referred to as ‘the landlord’.
In simple terms a freeholder (lessor) owns the land on which a development is built and in most cases owns the structure and external fabric of the building. A leaseholder (lessee) is granted the right to possess a property within the building by the freeholder with a fixed term of occupancy that is set out in the lease. In law, the freeholder is referred to as ‘landlord’ and leaseholder as ‘tenant’.
A Management Company is a legal entity, registered at Companies House and referred to within a lease. It is created to provide ongoing management of a development. In most cases the Management Company is made up of leaseholders as members and Directors and they in turn will choose to employ a professional Managing Agent such as Town & City Management Limited to provide services and management on its behalf. Where a Management Company does not exist, the Managing Agent will be directly instructed by the landlord/freeholder.
The lease is the starting point for understanding the operation of leasehold property. It is a legal written contract between the landlord and the tenant reflecting their agreed relationship (and in some cases the management company). It explains the rights and responsibilities that both you and your landlord have. When an apartment is sold, the seller assigns all the rights and responsibilities of the lease to the purchaser. Unfortunately not all leases are well written documents or easy to understand. The lease will often cover such clauses as:
- Structure of ownership
- Definition of the share of costs
- TV aerials/satellite dishes
- Keeping of pets
- Loud music/noise
- Ownership of windows and frames and the maintenance of them
As the apartment/flat is part of a development built on land owned by the freeholder, the lessee (leaseholder) often also has to pay ground rent to the freeholder to compensate the freeholder for the use of the land. It is a specific requirement of the lease and must be paid on the due date, subject to the issue of a statutory demand by the landlord or their agent.
The ground rent is usually a fixed amount and it may be payable annually, half yearly or quarterly. The amount may be reviewed after a number of years, specified within the lease. Ground rent should not be confused with the service charge.
Service charges cover your share of the cost of maintaining the building and development in which your property is situated. Service charges are normally paid as per the terms of the lease, but can sometimes be monthly or annually depending on the terms of the lease.
As a guide, service charges usually cover all the costs associated with looking after the common parts of a building and development, e.g. maintenance, electricity, cleaning, gardening and servicing equipment such as the lift. A figure for buildings insurance is often also collected as a part of the service charge. Ideally the service charge includes a contribution towards a ‘sinking fund/reserve fund’, which allows for periodic upgrading of the building, e.g. decorating of common areas. However, not all service charge budgets allow for this.
The ‘management fee’ within your service charge is payable to Town & City Management Limited for arranging and managing all of these services.
Service charge amounts can vary from year to year and can go up or down without any limit, based on predicted expenditure. Details of what can and cannot be charged by the landlord and the proportion of your charge will be set out in the lease. The management company/freeholder arranges the provision of services and the leaseholders pay for them. All costs must be met by the leaseholder; the freeholder will generally not contribute. Most leases allow for the service charges to be collected in advance, repaying any surplus or collecting any shortfall to the leaseholders at the end of the financial year.
Service charge monies are collected and held in a trust account for the for the individual Management Company to allow contractors, utilities and services for that management company to be paid. Although not members of the RICS we do adhere to their code of practice for service charge monies which requires Town & City Management Limited to hold all client monies in designated accounts.
At the start of the financial year, a budget or ‘statement of anticipated expenditure’ is prepared for the costs likely to be incurred during the service charge period. The service charge budget is primarily designed to cover expenditure anticipated for the day to day costs of managing the communal areas of the development. As this is an estimate there could be a balancing charge to adjust to the level of costs incurred. At Town & City Management Limited, our job is to provide all services required in the most efficient and cost effective way possible. To this end, our maintenance team continually negotiates with suppliers and contractors on behalf of the freeholder or Management Company.
Every building must have insurance. It is a requirment of the lease. Buildings insurance should be based on the cost of rebuilding. The freeholder/Management Company or the Managing Agent on their behalf arrange the buildings insurance for leasehold properties. Leaseholders should arrange their own contents insurance. In relation to freehold properties, the freeholder must arrange both buildings and contents insurance.
A sinking fund is also known as a reserve fund. A contribution towards a sinking fund is usually built into the budget each year. This money is retained in an individual trust account to build up a fund for future major repairs, renewals or replacements, for example internal redecoration, roof repairs or lift replacement.
At the end of a service charge period, a reconciliation of actual expenditure supported by valid invoices is compared to the amount of service charge requested in advance (as per the budget).
Any variation between budgeted expenditure and actual expenditure being either a surplus or shortfall is then apportioned to each leaseholder.
If there is a ‘balancing charge’ then this will be invoiced to each leaseholder. If there is a ‘balancing credit’ this will usually be reflected on your service charge statement or in some instances, dependant on your lease, the directors of your Management Company will decide if this is to be returned to each leaseholder in the correct apportionment or if the surplus amount will be placed into a sinking fund for future works.