Kat Callo's blog - Transforming UK apartment ownership

Life After You Buy Your Freehold: the New 999-Year Lease

You've reached the finish line. You're tired. Buying the freehold of your building has required more work than you and your neighbours anticipated.

Time to rest, right?

Wrong!

It's time to starting reaping the benefits of having Collectively Enfranchised your block of flats by granting new 999-year leases to the leaseholders that participated in the freehold purchase.

Many owners of flats tell me that they bought their building freehold years ago -- sometimes it's 10 or 15 years ago -- but the resident-owned freeholder never granted new 999-year leases to participants.

The more time that passes after your freehold purchase and without the granting of new leases, the greater is the scope for confusion.

When you and your neighbours join forces to buy your building freehold, you should set up a company limited by shares to act as the entity acquiring the freehold, ie- the "Nominee Purchaser". You and the other participating flat owners become the shareholders, ie- the owners, of the company.

The new freeholder has a right to grant leases and it should get on with the task of creating 999-year leases for participating flats.

Any flat in the building that opted not to join the freehold purchase project does not get a new lease. This leaseholder carries out with his/her existing lease, which is still fully valid. It's just that now there's a new freeholder that owns the building.

So what should go into the new 999-year lease?

There's no reason to rewrite the lease if the wording of the old lease does the job. But buying one's freehold presents a valuable opportunity to eliminate any historic defects and to include clauses that address important issues not covered in many old leases.

Many blocks of flats that have no Reserve Fund (also known as a Sinking Fund) insert a clause into the new lease that says the freeholder has the right to create and maintain such a fund. Any sizable residential building should have a Reserve Fund.

If you look around London at the many beautiful 100-year-old red-brick mansion blocks, you will usually find that the best-maintained buildings are those with a Reserve Fund. Many of the buildings that are badly run and whose leaseholders experience panic and disarray when major works such as roof repairs are required are those blocks without a Reserve Fund.

Another clause to include in the new lease is about "mutual enforceability". This clause says that a leaseholder has a right to compel the freeholder to enforce on other leaseholders the obligations contained within the lease. Some mortgage lenders complain if this clause is missing.

I highly recommend that your new lease contain a clause on wooden floors. It should say that the leaseholder must get written approval from the freeholder before removing carpets and installing wood floors. The clause should also state that the leaseholder must install adequate sound-deadening underlay and must get prior written approval of the proposed underlay from the freeholder before work may begin. This is an important clause because of the many complaints about noise from people living in a flat beneath neighbours walking on wood floors.

Some blocks of flats use the creation of the new 999-year lease as an opportunity to improve the quality of life for residents by restricting the hours during which noisy renovation works may be carried out.

Some modern leases say, for instance, that no noisy works may be carried out on Saturday or Sunday and that weekday noisy works are restricted to the period from 8am until 6pm. Some leaseholders go even further by creating a new rule within the lease that there can be no noisy works during an identified lunch time break on every weekday. A word of caution on this last point - be sure to consult all leaseholders before creating such a "no-noisy-works-during-lunchtime" rule since decreasing the permissable period of time for noisy renovation works increases number of days the works will last. Increasing the number of days of a renovation project can end up causing even more distress to neighbours, many of whom are at work during the day anyway. Also, the greater the number of days of a renovation project, the larger is the expense to the leaseholder that is getting the work done. So there's balancing act to achieve here.

Another important clause to have in your new lease is one that enables the freeholder to recover from the service charge account any legal fees incurred as a result of service charge debt collection or other reasonable legal fees.

I have seen things get very messy in some beautiful old mansion blocks prior to an Collective Enfranchisement, because the old landlord failed to chase after non-payers of service charges, partly because the lease did not provide the freeholder with a right to recover legal fees from the service charge account. Any owner of a flat that runs up service charge arrears should be compelled to clear his/her account and also pay any legal fees incurred by the freeholder in pursing the debt collection action. But sometimes the freeholder cannot recover the legal fees in this way. In such a case, the legal fees should be refunded to the freeholder from the service charge account.

Creating a new 999-year lease is often the first big transitional task for most resident-owned freehold companies. It can often take six months, because you will want to consult first with leaseholders and compile a list of best-practice clauses that need to be inserted.

But don't spend forever on the creatio of the new template lease for your building. It's best to get on with it in the first year following the freehold purchase. You and your neighbours have other transitional work ahead of you. Your shiny new 999-year lease will help set the scene for improving management of your building.

If you'd like help in creating a new 999-year lease, feel free to contact me at www.rosettaconsulting.com.

Life After You Buy Your Freehold: Noisy Neighbours

Some blocks of flats are much better run after the leaseholders jointly buy the freehold. Other buildings are managed more badly after this big collective event, and the flat owners discover that they are an incompetent landlord.

Many buildings that have Collectively Enfranchised go through teething pains and a transitional stage. Things get bad for a while, but then the situation improves, as the new resident-owned freeholder gains knowledge, experience and confidence about how best to run the building.

Distress caused by noisy neighbours is a recurring theme when people are trying to improve building management after buying their freehold.

I get many complaints from leaseholders about loud noise. They say their quality of life is damaged because they are not able to relax and enjoy the quiet of their home.

Happily, the noise problem is one that can be solved. But addressing it properly requires focus, resolve and patience.

My blog posting on September 12 looked at one frequent source of noise complaints -- wood floors. Because that posting provides best-practice solutions for tackling the wood-floor-noise problem, I won't talk about that today.

I suggest we look at the other big source of noise disturbance -- loud music -- which presents a different kind of challenge.

A good place to start addressing a problem caused by a loud-music-playing resident is to look in the lease.

Does the lease say that loud music cannot be played after a certain time in the evening or before a certain time in the morning? It should. If the lease does not say this, then you should get this changed when you grant yourselves new 999-year leases or when you make some other change to the lease, say, in the next year or two.

Often the player of the offending music is a subletter. That should not pose an insurmountable problem. The lease -- if it's a good one -- should say that any leaseholder wishing to sublet must ensure that the renter abides by the rules in the lease that apply to owners of flats.

The trickiest issue here is one of organisation and communication.

Imagine the scenario: a young person is subletting a flat and playing loud music that is keeping the neighbours awake at night. The flat is owned by someone living on the other side of the world. A local estate agent manages the rental of the flat on behalf of the overseas flat owner.

The resident-owned freehold company and its managing agent can find this situation frustrating, because the decision-maker, the owner of the flat, is absent and might seem unconcerned with problems on the ground that are being created by the loud music.

The resident management company that owns the freehold needs to work closely with the managing agent to establish a zero-tolerance policy towards any breach of lease, including a breach caused by playing loud music. The managing agent needs to communicate in writing the zero-tolerance policy to all leaseholders, including to overseas flat owners by email.

Now you have a fighting chance to solve the problem.

Think about what matters most to the leaseholder based overseas? Because this is an investment flat, what matters most to the owner is the ability to rent out the flat and to do so profitably.

If the overseas leaseholder realises he or she might lose the right to sublet this flat altogether, unless care is taken to find a renter that is a good neighbour, then you can expect swift action to put the situation right.

The porter has a special and crucial role to play here.

If he or she carries out the caretaker job in a passive manner, looking the other way when there is anti-social behavior in the building by loud music players, then you can have a long-running disaster on your hands.

But if the porter takes a pro-active stance, your loud-music problems can disappear over night. Some porters sense they have a lot bosses, because they are hired by the freeholder, supervised by the managing agent and their salary is paid by leaseholders through the service charges.

However, as long as the porter is empowered to run the building well, including to spread the word to leaseholders and renters about a ban on late-night music, the block can quickly develop a sense of community and accountability.

One colleague said to me recently she did not understand why one had to be so many rules in a block of flats. The answer is simple: living in chaos is not fun.

Having a lease and, in some cases, a separate set of building regulations, that identify the responsibilities of the freeholder and leaseholders provides the best framework for ensuring a block of flats is kept in good repair, is well-managed and is a pleasant place to live.

Do you have a loud-music story that you'd like to share? Send it in!

Life After You Buy Your Freehold: Major Works

You are lucky if your block of flats is in good physical condition by the time you and your neighbours buy the building freehold.

 

Sadly, many owners of flats that Collectively Enfranchise do not have this experience.

 

In fact, many resident-owned freehold companies inherit a mess from the previous landlord, with a building that has been neglected and now urgently needs major repairs.

 

The older the building and the worse the mismanagement by the old landlord, the more extensive will be the "major works" that need to be carried out by the new freeholder and the more money that leaseholders will have to pay for one-off special service charges that go beyond the annual repair and maintenance of the building.

 

Buying your freehold is almost always a smarter option than not Enfranchising. But receiving one or more whopping big invoices for “extraordinary” service charges reminds residents that Collective Enfranchisement is not Nirvana. With ownership of the freehold comes responsibility, including the task of getting the building in good shape.

 

Depending on how urgently the major works are needed, the board of directors of the new freehold company should address this issue in the first, second or third year after the freehold has been bought. This is a moment for the directors and all leaseholders in the building to take a deep breath and to work together to plan the best way forward, to carry out maintenance and repairs that will make the bock safe and enjoyable.

 

This is a big transitional task for the new freeholder. It usually takes several years after the Collective Enfranchisement to get a programme of major works underway.

 

Be ready to deal with conflict.

 

While leaseholders will often say they want their building to be safe and aesthetically pleasing, it is unusual to achieve unanimity regarding which major works need to be done, which should be carried out first and how quickly the works should be undertaken.

 

I know of many apartment buildings in central London in which leaseholders get unnecessarily bogged down after buying their freehold in the issue of planning major works. For instance, some flat owners will say they want to upgrade the porterage from an existing eights hours a day to 24/7, while others lobby for service charges to be lessening by cutting back on the existing porterage service. When the new resident-owned freehold company is renovating the internal common parts, some flat owners will say they want expensive wood panelling installed to replace tired old wallpaper, while others say they don't want to spend money on any renovation of the common parts .

 

Remember that it is the freeholder’s responsibility to comply with requirements in the lease to keep the building in a state of good repair. So, if the lease says that the freeholder has to, for example, get the outside of the building redecorated every seven years, no leaseholder has the authority to prevent such work being done. Nor do protests from leaseholders that don't want to pay decrease in any way the freeholder's responsibility within the lease.

 

So, where to begin?

 

The roof is leaking, the lift keeps breaking down, the carpet in the lobby is frayed and wallpaper in the common-parts corridors is stained and torn.

 

Start at the beginning.

 

First, ensure that you have a good managing agent in place, since it is the managing agent that will advise your resident-owned freehold company on the major works that need most urgently to be carried out and that will organise and supervise the works.

 

Have the managing agent carry out an initial investigation of works that appear to require the most urgent action. If yours is a large century-old mansion in London, your managing agent will most likely need to call in a surveyor and other building experts to check on structural issues. Get the managing agent to prepare an Excel spreadsheet with estimated costs and expected duration of each major works project.

 

Then organise a meeting for all leaseholders to attend with the managing agent. The managing agent and the board of directors should brief leaseholders on the works that need to be carried out in order to comply with the lease and keep the building safe. Get input from leaseholders on which works they would like to see carried out, say, in the following three-to-five-year period.

 

While this type of residents’ meeting almost never produces 100% support by leaseholders for a proposed plan of action, it is important to consult flat owners and to inform them about significant extraordinary service charge costs that are coming up in the next few years. The freehold company also needs to gauge how quickly or how slowly most leaseholders want to see the building fixed up and to rally support amongst residents for the major works programme ahead.

 

The managing agent and the board of directors of the freehold company should make it clear that proper consultation for each major works project will be pursued, but, that the final decision on which works to get done and in which timeframe will be taken by the freehold company, on advice from the managing agent.

 

Some people think that a block of flats becomes a commune when leaseholders buy their building freehold, with every flat owner having an equal vote in how the building gets run. This represents badly mistaken thinking. The building does not become a commune.

 

All leases remain in effect after you buy your building freehold. The responsibilities of the leaseholder and of the freeholder, as enshrined in the lease, remain unchanged.

 

The big change created by Collective Enfranchisement is that participating leaseholders now wear two hats – one hat as leaseholder of a flat and another hat as shareholder (ie- part owner) of the freehold company.

 

Even if there is strong consensus amongst leaseholders about major works projects that need to get done, the freeholder still has to follow a legally-required consultation process for each project. This includes a requirement for the freeholder to serve a "Section 20 Notice" on all leaseholders, advising them of a planned major work project and inviting their input. It is the managing agent, on behalf of the freeholder, that sends the Section 20 Notice (in letter form) to each flat owner. The Section 20 Notice begins a staged consultation process that usually takes a few months. The proposed work must be put out to tender and the leaseholders must be consulted before a contractor is instructed.

 

Keep in mind, when preparing to fix up your building after years of neglect by the old landlord, that projects often take longer and cost more than anticipated. This is true of a residential block of flats, an office building, an airport, a home renovation or any other building project. Sometimes cost overruns in a major work programme in a block of flats occur because contractors have initially quoted unrealistically low fees in hopes of winning the tender.

 

Because of the known probability of time and cost overruns in many big projects, it is best practice for the managing agent, when estimating the cost of each project, to add a reasonable “contingency fee”. This might be 10% of the total expected cost, or more or less. The freehold company needs to agree with the managing agent on the amount of the contingency fee.

 

When the managing collects extraordinary service charges from leaseholders for a planned major works project, the managing agent needs to ringfence these monies for the specific project. This is to ensure that money collected, for instance, to install a new lift is not spent on something else, like repairing the roof.

 

No major works project should be started until all the money has been collected from leaseholders or, at least, until enough money has been collected to pay for the works. Keep in mind that leaseholders pay all the service charges, but it is the freeholder company that instructs the contractor and that is responsible for paying the contractor’s bill at the end. Carrying out major works before sufficient funds have been collected can result in a real mess for the freehold company and its directors.

 

A word about improvements to a building. Some leaseholders feel so happy after they have bought their freehold that they want to start investing money in improving the building by creating new features or services. I know of one group of leaseholders that wanted to install a gym in the basement, with weights, for use by all residents.

 

Be careful. You need to identify first whether the lease says the freeholder can collect service charges for “improvements” to the building. In some leases, the freeholder does not have a right to do so. The landlord only has authority, within the lease, to collect service charges to maintain and repair the existing structure and services in building.

 

When leaseholders have Enfranchised their building and are drawing up new 999-year leases for participating flats, it is a good idea to include a clause or part of a clause stating that the freeholder can indeed carry out “improvements” to the building and collect service charges to pay for these.

 

One of the biggest obstacles to carrying out a major works programme after you have Enfranchised is the failure of one or more leaseholders to pay the extraordinary service charges for these works. It is important for the new freeholder not to allow one or more non-payers to delay planned major works.

 

This boils down to issues of governance and compliance in a resident-owned building. One of the most important transitional tasks for the board of directors, after leaseholders have purchased the freehold, is to put in place processes and procedures to help ensure that owners of flats pay their service charges fully and on time.

 

There’s advice about this in my blog posting of September 4, 2009, including tips on best-practice methods to create a culture of service-charge-payment compliance in a block of flats and the most effective ways to address non-payment.

 

If your building has a Reserve Fund (also known as a Sinking Fund), this can alleviate any cash-flow problem caused by one or more non-payers of service charges. My blog posting of September 27, 2009 examines setting up and running a Reserve Fund.

 

Brace yourself for one unpleasant aspect of the major works, if the building was badly neglected by the previous freeholder – it is going to cost you and others in the building to put things right.

 

While it’s a great feeling for leaseholders to bid farewell to a terrible landlord and to secure full ownership of their homes by jointly purchasing their freehold, the big bills that come with fixing up the building can feel like a hangover after the celebration party.

 

But do not despair.

 

Look at what happened to many run-down apartment buildings in New York City in the 1970s, when renters took advantage of a change in the tax system to form co-operatives and jointly to buy their buildings. This important consumer trend became known as “taking one’s building co-op”. If you know someone that owns a "co-op" apartment in Manhattan, this is in a building that was originally owned by a third-party landlord and that was later bought by apartment renters that became owners of the units and, collectively, of the building.

 

Manhattan's co-op movement transformed many tired tenement buildings into some of New York City's most sought-after property, after apartment owners invested in renovating the lobby and other common parts, and improving porterage and other services.

 

Similarly, in London we see flats increasing in value after leaseholders buy their building freehold. In fact, it happens in three stages.

 

First, there is an immediate uplift in sales values of apartments, because buyers prefer "share-of-freehold" flats to the old-style model in which the freehold is owned by an absentee corporate entity.

 

The second increase in value occurs when participants are granted their 999-year leases, since longer-lease flats are more valuable than shorter-lease flats.

 

Finally, in the three to five years after the freehold purchase – the time during which many Enfranchised buildings proceed with initial major works and improvements – the values of flats go up again. This continues, as the building becomes a more and more desirable place to live.

 

I hope your major works go smoothly.