Transcript CQS - Leasehold CQS supporters 1/100 Welcome This online course supports the reaccreditation process of the Conveyancing Quality Scheme (CQS).

CQS - Leasehold
CQS supporters
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Welcome
This online course supports the reaccreditation process of the Conveyancing
Quality Scheme (CQS). In this course by
Andrew Crawford and Peter Reekie, training
is given on a selection of issues arising from
conveyancing transactions of leasehold
property.
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Leasehold issues
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Maintenance, repair and renewal
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Insurance
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Management companies
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Length of leases
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Absent landlords
The course presentation and assessment will take approximately two hours to complete.
Following completion of the course, you will need to complete an assessment
comprising 15 multiple-choice questions.
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About the authors
This training course has been devised and written by Andrew Crawford and Peter Reekie in
January 2014.
Click each name to find out more about the authors:
Andrew Crawford
Peter Reekie
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About the authors
This training course has been devised and written by Andrew Crawford and Peter Reekie in
January 2014.
Click each name to find out more about the authors:
Andrew Crawford
Peter Reekie
Andrew Crawford previously worked in private practice, most
recently as a partner with Thomas Eggar LLP where he was the
head of the residential property team. He is also a former
president of the Chichester and District Law Society.
Andrew is currently a full-time trainer and founder of AAC Law
Ltd, a company that provides CPD training to conveyancers. He
lectures on a wide variety of topics of interest to residential
conveyancers.
Andrew has devised and written a number of online training
courses to support the CQS.
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About the authors
This training course has been devised and written by Andrew Crawford and Peter Reekie in
January 2014.
Click each name to find out more about the authors:
Andrew Crawford
Peter Reekie
Professor Peter Reekie is property training consultant with
Penningtons Manches LLP and visiting professor at the University
of Law. He is the director of Peter Reekie Associates Ltd, which
provides in-house courses, legal training and related services to
lawyers and other professionals.
Peter is consultant materials editor for the University of Law’s
structured commercial property programme. He is consultant
editor of the Conveyancing Handbook, 20th edition (Law Society,
2013) and deputy editor of the Property Law UK Newsletter.
Peter has devised and written a number of online training
courses to support the CQS.
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1. Leasehold issues
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Introduction
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When a building is divided into flats, one key practical
necessity is to ensure that the main building will be
maintained, repaired and insured for the future, and that
these obligations can be enforced by whoever is the owner for
the time being of the flat and building.
It is also important to have rules and regulations that must be
observed by the flat owner in respect of the flat itself, e.g.
not to keep pets or to keep the floors carpeted. These may or
may not be required to be enforceable between the various
flat owners as well as between the landlord and the tenants.
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Enforceability
Residential long-leasehold letting schemes are often complicated by having a management
company to deal with the practical requirements of maintenance and repair, and
sometimes insurance. The landlord’s role in this situation may be very limited. But
sometimes he or she might have a role in enforcing covenants between the flat owners.
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A key aspect of the conveyancer’s role in drafting or checking a lease is to ensure that the
legal mechanism exists to provide for enforceability of important covenants, and that the
relevant party which is to carry out maintenance, repair and insurance obligations, is in
existence and active in its role.
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Positive obligations
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A lease is a contract and, as such, the obligations are binding between those original
contracting parties. In a freehold context, once ownership changes then positive
obligations, e.g. ‘to repair and insure the building’, would not be enforceable directly
between successors. For leasehold estates, in contrast, positive obligations entered into
between a landlord and a tenant would generally
be binding, notwithstanding a change in the
original parties to the lease, e.g. on an
assignment of the lease or transfer of
the freehold. (The Landlord and Tenant
(Covenants) Act 1995 made amendments
to the law in relation to leases granted
on or after 1 January 1996.)
This meant that the leasehold estate
has become the preferred mechanism
for the development of residential
properties, e.g. flats, where the
enforcement of positive covenants against
successors is important. Although an
attempt was made to create an alternative
mechanism for this in freehold land by
means of commonhold, this has not been
accepted in practice.
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Tenants’ management company
When a developer builds a block of flats, he often does not want to retain the freehold
once the flats have been sold. However, because of enforceability issues, a leasehold
estate is necessary rather than sales of freehold flats to
the flat purchasers.
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Various schemes have been used over
the years to attempt to allow the
developer to part with the freehold in
a commercially acceptable fashion to
the ‘tenants’. The modern solution lies
in the use of management companies
(of which the tenants are the
members), which hold the freehold so
that the tenants are, in a sense,
collectively their own landlord.
Section 4 considers the issues relating
to the use of management companies.
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Example of an alternative scheme
One example of a different approach, which is still encountered occasionally in old
estates, is known as the ‘criss-cross’ maisonette scheme (or Tyneside Scheme - from where
it first originated).
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This was normally used in maisonettes with just
two units: one on the ground floor and one on
the first floor. The scheme divided the freehold
horizontally, so that the ground floor
landlord could be different to the first floor
landlord. The freeholds were then held by
each tenant: the ground floor tenant was
thus the landlord of the upstairs, and
vice versa. This meant that all
covenants were enforceable because
the relationship of landlord and
tenant existed between each tenant. It was
important to make sure that if a maisonette was
sold, the freehold of the other part went to the
new tenant, and that if there was a mortgage
over the leasehold interest, the freehold of the
other part of the building was also charged as
security.
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Question 1
Is the following statement true or false?
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The following position is perfectly acceptable without any further documentation.
Your client is buying a freehold house, which has a first-floor room overflying the
neighbour’s ground floor sitting room. This is sometimes known as a ‘flying
freehold’. The deeds clearly state that the neighbour must repair or maintain the
ground floor to give support to your bedroom.
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Click to select your answer
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True
False
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Question 1
Is the following statement true or false?
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The following position is perfectly acceptable without any further documentation.
Your client is buying a freehold house, which has a first-floor room overflying the
neighbour’s ground floor sitting room. This is sometimes known as a ‘flying
freehold’. The deeds clearly state that the neighbour must repair or maintain the
ground floor to give support to your bedroom.
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True
False
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The correct answer is False.
In a freehold context, positive obligations are not enforceable
under law save between the original contracting parties and
therefore a successor would not have the right to sue the neighbour
to enforce a positive obligation to repair. Under a leasehold estate
the position is different. In a freehold situation, a deed of covenant
would be needed between the new owner and the neighbour to
refresh the privity of contract and to ensure the problem doesn’t
arise again in the future. A restriction should be placed against
both titles requiring a deed of covenant to be entered into on any
future disposition.
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Effective management: general practical concerns
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It is not enough for the lease to be clear on who is
responsible for the important maintenance, repair and
insurance issues. If that responsible party is not fulfilling
its role, the tenant and any lender may become affected
by a deterioration in the maintenance of the building
leading to a fall in market value
of the lease.
If the insurance has not been kept up to date and there is
a fire, the loss could be considerable.
For these reasons, conveyancers need to look at the
practical performance of the obligations under the lease
and if, for instance, a landlord is not in existence (as a
result
of death or dissolution or even just lack of interest), this
will need to be considered. See Section 6 on absent
landlords.
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Enforcement between tenants
Tenants who live in close proximity to each other (as in flats) are often concerned to
ensure that they can enforce covenants in a lease directly against each other.
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The difficulties of doing so in law can be circumvented in practice by a landlord’s covenant
to enforce tenant covenants where asked to do so by other tenants. This will normally be
stated to be at the tenant’s cost.
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Use of management companies
One general concern in relation to the use of a management company as part of a letting
scheme is that this company might get struck off the Companies House register, perhaps
due to failure by the directors/members to deal with company formalities.
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If the company were the responsible party in
the lease for repairing, maintaining and
insuring the building, this event would be a
crisis for practical management and its legal
aspects under the leases.
As is considered in Section 4 on management
companies, if there is a separate landlord,
sometimes there is a covenant that this
landlord will step into the shoes of the
management company and honour those
obligations in the event of the management
company failing to fulfil its obligations, e.g.
repair, maintenance and insurance.
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Service charge
Only the cost of those services specified in the lease can be recovered from the tenant and
therefore this clause is usually drawn very widely.
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Normally the lease will provide for the service charge to be demanded in advance, but
occasions will arise when demands are issued after completion of the works or provision of
the service.
In these cases a statutory time limit
applies: the landlord must issue the
demand within 18 months of his incurring
the cost (Landlord and Tenant Act 1985,
s.20B(1)). If the demand is provided later
than this, the landlord cannot recover the
costs at all, unless a notice is served during
the 18 months stating that costs have been
incurred and that the tenant will be
required to contribute to them by payment
of a service charge (Landlord and Tenant
Act 1985, s.20B(2)).
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Ground rent
Ground rent is only required to be paid after a valid demand in writing. This is
notwithstanding what the lease might say. You often see wording in a lease stating that
the ground rent is due and payable ‘whether demanded or not’, but this has no legal
effect.
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Furthermore, liability to pay arrears of ground rent (once validly demanded) is limited to
the last six years’ rent (Limitation Act 1980, s.19).
There may however be other issues that need to be considered where a landlord has not
demanded rent.
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Forfeiture
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A lease is a contract, and therefore if a leaseholder breaches the terms of their lease, the
landlord could take legal action against them. Forfeiture of the lease is the ultimate
sanction a landlord could pursue in such situation. In order to gain possession of the
property by forfeiting the lease, a court order is necessary. The process is commenced,
generally, by the service of a valid notice under the Law of Property Act 1925, s.146, the
Notice of Seeking Possession.
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Broadly, a valid s.146 notice cannot be served unless the leaseholder has:
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agreed the arrears or that the breach has occurred; or
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the breach, or amounts due, has been finally determined by a court.
If the breach relates to arrears, a valid s.146 notice cannot be served where the amount of
service charges, administration charges or ground rent owed (or a combination of all of
these) total less than £350, or have been outstanding for less than three years. It is not
necessary to serve a s.146 notice if the breach is for ground rent arrears.
A leaseholder can apply to the court to seek relief from forfeiture. This means having the
forfeiture set aside and the lease restored. The court has a wide discretion to grant or
refuse relief, which is more likely to be exercised in favour of the leaseholder if he or she
reacts swiftly, pays any arrears, remedies any breaches of covenant and pays the
landlord’s costs.
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Question 2
Is the following statement true or false?
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The basic reason conveyancers should check that the lease cannot be forfeited by
the landlord should the tenant be made bankrupt is to stop the lease suddenly
becoming worthless and the landlord gaining a ‘windfall’ at the expense of the
lender and other creditors.
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Click to select your answer
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True
False
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Question 2
Is the following statement true or false?
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The basic reason conveyancers should check that the lease cannot be forfeited by
the landlord should the tenant be made bankrupt is to stop the lease suddenly
becoming worthless and the landlord gaining a ‘windfall’ at the expense of the
lender and other creditors.
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True
False
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The correct answer is True.
A tenant and his or her lender will want to be satisfied that the
security of the lease cannot be forfeited in favour of the landlord
on certain events such as the insolvency of the tenant.
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2. Maintenance,
repair and renewal
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Responsibility for repair
The lease needs to allocate responsibility for repair of the various parts of the premises.
Typically, with a flat lease the tenant is liable for internal and non-structural parts and the
landlord is responsible for the exterior, structural and common parts, subject to
reimbursement by the tenant under the service charge provisions of the lease.
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The conveyancer should ensure that there are
no gaps, where neither party is liable for
repair of a part of the property, nor
overlapping obligations, where both parties
are liable to repair the same item.
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Mind the gap
If a gap arises, there is no guarantee that the court will ‘fill the gap’.
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So, for example, a requirement on a landlord to maintain and repair the property so as to
provide ‘support and shelter’ for the demised premises was held in Jacey Property Co Ltd
v. de Sousa [2003] EWCA Civ 510 not to extend to repairing the drains of the building. The
court acknowledged that this left a gap in the repairing provisions of the lease in respect
of the drains, but the court had no power to fill that gap and rewrite the terms of the
lease.
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The court will seek to avoid overlapping obligations, but only if it is possible to do so. In
the absence of an express covenant, the parties are under no obligation to repair.
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If the lease does not clearly specify the works
that are to be done, costs incurred for items not
mentioned cannot be recovered by the landlord.
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Lease covenants
A tenant’s conveyancer should ensure that the lease provides a
covenant for the landlord, management company or a tenant to
maintain and repair those parts of the building that are not let or
that are not intended to be let.
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The Council of Mortgage Lenders (CML) Lenders’ Handbook
specifies the lender’s requirements where a management
company has been set up to manage the block or where one or
more of the tenants are liable for repair and maintenance of the
common services (see Section 4 on management companies).
Where the tenant has to repair the demised flat, it is essential that the lease makes
clear which parts of the flat are included within the repairing obligation. The best way
of achieving this objective is for the lease to clearly identify the extent of the demised
premises and to make the tenant liable for repair of those premises as defined.
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Question 3
Is the following statement true or false?
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If the lease is unclear as to whether the landlord or tenant should repair and
maintain a part of the building not mentioned in the lease, the law will
automatically impose the obligation on the landlord.
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True
False
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Question 3
Is the following statement true or false?
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If the lease is unclear as to whether the landlord or tenant should repair and
maintain a part of the building not mentioned in the lease, the law will
automatically impose the obligation on the landlord.
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True
False
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The correct answer is False.
There is no ‘automatic’ default position imposing the liability on
the landlord. An absence of clarity could lead to a dispute as to
who should be responsible which might only be resolved by court
proceedings.
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Definition of demised premises
This is important when checking a lease. If the definition is
unclear or too concise, it might lead to disputes in the future.
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The definition of demised premises will often include the
internal finishes on the walls, floors and ceilings; any nonload-bearing walls located entirely within the flat; the service
media exclusively serving the flat; one-half severed vertically
of non load-bearing walls dividing the flat from other parts of
the building; and doors, door frames, windows and window
frames.
It is common to exclude from the demised premises the roofs,
foundations, external and load-bearing walls, supporting
columns, joists, beams and cross members, service media not
exclusively serving the flat and the structural elements of the
building.
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Definition of the main structure
It is equally important that the lease should define all the other parts of the building,
excluding the demised premises, so that maintenance and repair obligations can be made
clear and there are no ‘missing’ parts.
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You might often see words such as:
‘Structural Parts’ means all structural parts of the Building including (without
limitation) any parts of the main structure, all load-bearing and exterior walls,
foundations and roofs of the Building but excluding the Premises and any other part of
the Building let or intended to be let or constructed or adapted for letting.
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Repair and rebuilding
Repair should be distinguished from renewal (see, for example, Lurcott
v. Wakely [1911] 1 KB 905). An obligation to renew goes further than
repair and therefore a renewal obligation is often qualified, for
example:
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‘To maintain repair and where the Landlord/Management
Company acting reasonably considers it necessary to
renew or replace…’
Rebuilding may also be required if the building was destroyed by fire but it is
acceptable for leases to be qualified in this respect.
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Wording that is often seen and which is acceptable is:
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‘To keep the building in good and substantial repair and condition and when
necessary to rebuild, reconstruct or replace the same in such repair and
condition…’
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Service charges
These are the mechanism whereby whoever is responsible for the management of the
building can recover the costs incurred or anticipated.
Click on each box to find out more.
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What are service
charges?
Service charge
structure
Interim
payments
What are
reserve funds?
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Service charges
These are the mechanism whereby whoever is responsible for the management of the
building can recover the costs incurred or anticipated.
Click on each box to find out more.
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What are service
charges?
Service charge
structure
Interim
payments
What are
reserve funds?
Service charges are levied by landlords to recover the costs they incur in
providing services to a dwelling. The way in which the service charge is organised
is set out in the lease. The charge normally covers the cost of matters such as
general maintenance and repairs, insurance of the building and, where the
services are provided, central heating, lifts, porterage, lighting and cleaning of
common areas, etc. The charges may also include the costs of management by
the landlord or by a professional managing agent, and for contributions to a
reserve fund.
Details of what can and cannot be charged by the landlord and the proportion of
the charge to be paid by the individual leaseholder will be set out in the lease.
The landlord, or sometimes a management company that is party to the lease,
provides the services while the leaseholders pay for them. The landlord will
generally make no financial contribution for the services, but sometimes he has
to pay for the services before he can recover their costs.
Some landlords levy charges for consents to make alterations or provide
information when a property is being sold. These are administration charges.
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Service charges
These are the mechanism whereby whoever is responsible for the management of the
building can recover the costs incurred or anticipated.
Click on each box to find out more.
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What are service
charges?
Service charge
structure
Interim
payments
What are
reserve funds?
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Generally, the landlord is obliged under the lease to provide certain services, and
in return can levy a service charge for doing so.
The lease will state the format of the charge. It will usually give the dates of the
service charge period and how often payments are to be made. More often than
not the service charge period is a year, but payments may be required on a halfyearly or a quarter-yearly basis, or in some cases in arrears.
The lease will usually set out the percentage or proportion of the service charge
payable by the tenant, but sometimes the lease just stipulates a ‘fair’ or ‘just’
proportion. If different groups of occupiers benefit from different services, there
may be provision for more than one percentage or proportion to be paid.
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Service charges
These are the mechanism whereby whoever is responsible for the management of the
building can recover the costs incurred or anticipated.
Click on each box to find out more.
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What are service
charges?
Service charge
structure
Interim
payments
What are
reserve funds?
The lease will state whether advance payments are to be made and, if so,
whether they are based on the previous year’s cost or an estimate of the cost to
come. There will always be provision for a final charge at the year end when the
actual costs are known. If interim payments have been made, and they exceed
expenditure, the final ‘charge’ will be a credit.
If the lease does not provide for interim payments, it can present a problem. This
would mean that the landlord would have to buy all the services before he is
reimbursed. If the lease allows him to recover interest, then at least he can
afford to fund the costs, but if not, the landlord must finance the services, which
may make him reluctant to fulfil his obligations.
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Service charges
These are the mechanism whereby whoever is responsible for the management of the
building can recover the costs incurred or anticipated.
Click on each box to find out more.
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What are service
charges?
Service charge
structure
Interim
payments
What are
reserve funds?
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Many leases provide for the landlord to collect sums in advance to create one or
more reserve or ‘sinking’ funds. The purpose of such funds is to build up a sum of
money to cover the cost of irregular and expensive works such as external
decorations, structural repairs or lift replacement.
There are usually two reasons for maintaining such a fund. The first is to ensure
that all tenants contribute to major works, not just those who are in occupation
at the time they are carried out. The second is to even out the annual charges,
avoiding large one-off bills, and to assist with tenants’ budgeting.
Leases sometimes say how much is to be contributed each year, but usually they
do not and it is left to the landlord to determine the contributions. However,
they must be reasonable and, because these are just like any other service
charges, leaseholders have the same rights to challenge these charges, if they
believe they are unreasonable, at the Residential Property Tribunal (Landlord and
Tenant Act 1985, s.19).
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Question 4
Is the following statement true or false?
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A landlord can only collect monies for a reserve (or sinking) fund if the lease
specifically gives the right to do so.
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Click to select your answer
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True
False
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Question 4
Is the following statement true or false?
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A landlord can only collect monies for a reserve (or sinking) fund if the lease
specifically gives the right to do so.
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True
False
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The correct answer is True.
A lease is a contract and its terms are specific. There are no
implied rights that allow a landlord to collect payments for a
reserve fund and a tenant is under no duty to pay if not provided
for in the lease.
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3. Insurance
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Introduction
Buildings insurance is required in order to protect the capital value of a home. Where a
property is let and is subject to a mortgage, there are a number of interests to protect:
the tenant, the landlord and the lender.
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In addition, there are other matters that may be insured such as loss of rent and public
liability. Ancillary considerations include the amount of cover, the risks to be covered, and
what might happen should the property be totally destroyed and cannot be rebuilt.
Sometimes the tenant insures, but it is not
uncommon for the landlord to take out insurance
and the tenant covenants to pay the cost of the
premiums, making the payment under the terms of
the lease either as a specified sum when demanded
or as part of a service charge.
The provisions in the lease will differ
depending on who insures. More
provisions are required to protect the
tenant’s position where the landlord is
insuring, which is the most common
position encountered in practice.
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Deciding who is to insure
Where there is a long lease of a house, say 99 years, then normally the tenant will want to
insure and the lease covenants will protect the landlord’s interest. However, some
landlords may insist on insuring even in this type of situation to ensure that a policy has
been taken out properly.
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One compromise may lie in joint insurance (see ‘Insurance in joint names’), which is
generally required by landlords where the tenant insures.
Some landlords may be under an existing obligation to insure. So, for example, the
landlord may be under such an obligation in a superior lease and this may mean that the
landlord may have no choice but to insure.
Where part of a building is let, e.g. a flat, the landlord usually covenants to insure all the
flats and the common parts of the building under one policy. Some leases may make
provision for each tenant to insure his or her flat and for the landlord to insure the
common parts. This arrangement is not very satisfactory since all tenants may not be
insured for the same amount or against the same risks, leading to difficulties in enforcing
claims where it has become necessary for one tenant to claim against another.
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Question 5
Is the following statement true or false?
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In the case of a lease of a flat in a building, it is quite satisfactory and normal
to provide for each tenant to insure his own flat and for the landlord to insure
the common parts.
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Click to select your answer
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True
False
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Question 5
Is the following statement true or false?
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In the case of a lease of a flat in a building, it is quite satisfactory and normal
to provide for each tenant to insure his own flat and for the landlord to insure
the common parts.
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True
False
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The correct answer is False.
This arrangement is not normal or generally satisfactory. Normally the
landlord covenants to insure the whole building - the flats and the
common parts.
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Protecting the other party
The party which does not take out the insurance will require its
interests to be protected by the covenants in the lease. For
ease of reference, here this is assumed to be the tenant.
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The tenant should seek to obtain a covenant that the landlord
will take reasonable steps to ensure that his or her interests
(and that of the lender) are protected by having these noted on
the policy. The effect of this is, broadly, that that party is
notified by the insurer if, for example, a claim is made or the
policy lapses. Many policies expressly state that they cover
tenants and their mortgagees without individual notification.
Ideally, tenants should also seek to obtain a similar covenant in
relation to a waiver of rights of subrogation against them. This
right potentially enables the insurer to recoup all or some of
the money paid out from the person who caused or contributed
to the loss. Further, tenants should also seek to obtain a similar
covenant in relation to a non-invalidation clause in the policy in
respect of any of their acts or defaults.
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Insurance in joint names
Where the insurance is taken out in joint names, this has the advantage that both parties
are informed before the policy lapses, any policy money will be paid to both and there is
no risk of the insurance company seeking to be subrogated to the rights of their insured so
as to claim against the other party for any fault.
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However, joint insurance is often resisted by landlords where they are insuring, because
there may be practical problems when a claim is made, and because the policy may be
avoided by the insurance company for reasons such as non-disclosure by the tenant. It may
also be impractical where the landlord has a block policy of insurance.
An alternative solution is sometimes
reached where a composite insurance policy
is taken out. This type of policy specifically
provides for the protection of others so
that, for example, where the landlord takes
out such a policy, it provides that the
tenant and his lender are specifically
protected.
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Payment by tenant of cost of premium
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Where the landlord insures a house, invariably the tenant will covenant to reimburse the
landlord for the cost of the insurance premium. Where the let premises are part of a
building, e.g. a flat, the share that the tenant pays may be a specified part of this cost.
Alternatively, it may be provided that the proportionate cost is payable as an expense
under a service charge clause.
There may be some concern that the landlord
might act unreasonably in relation to the
insurance he obtains. Provisions can be expressly
included in the lease obliging the landlord to act
reasonably and properly. There are also statutory
controls on landlords in this respect.
Commission is sometimes paid to a landlord by an
insurer for placing its business with the insurer. A
tenant should seek to ensure that this sum is
taken into account when calculating the actual
amount to be reimbursed.
45/100
Loss of rent insurance
Where the landlord is insuring, if the premises are damaged by an insured risk, a tenant
will want to ensure that his or her liability for rent (and sometimes service charge
payments) would be suspended.
1
2
3
4
5
6
In the same way, where the landlord is insuring, the tenant will want to ensure that his or
her repairing obligations in respect of the insured damage are excluded.
Sometimes there is a maximum period of rent suspension, which may be linked to the
period of insurance, so if the loss of rent insurance is limited to three years, then the
maximum period of rent suspension will sometimes also be three years.
Where the tenant is insuring, the lease may,
or may not, provide for any change to his or
her liability for repairs and rental payments.
This is generally a matter of negotiation.
This liability might be insured by the
tenant.
46/100
Amount, excess and information
Amount
The party not insuring should check for a covenant that the premises are to be insured for
a sum sufficient to allow for reinstatement of the premises.
1
2
3
Where the landlord is insuring and recouping the costs of this from the tenant, it will
normally seek to include ancillary costs, such as complying with statutory requirements
and the cost of fees, as well as the costs of periodic valuation.
Excess
4
Where the landlord is insuring, it will usually seek to recover any excess payment from the
tenant, which may be required under an insurance policy should a claim be made in
certain circumstances.
5
Information relating to insurance
6
The party not insuring should ensure that he or she is entitled to be provided with details
of the insurance policy taken out, including evidence of payment of the current premium
by the party insuring.
47/100
Insured risks
1
2
3
4
5
The lease should set out the details of the risks to be insured against. It is usual to specify
a long list of these risks rather than rely only on a phrase such as ‘comprehensive risks
normally covered by a buildings insurance policy’, which is imprecise and is open to
interpretation. A provision may sometimes be included to allow for the policy risks to be
extended at the option of either party acting reasonably. The CML Lenders’ Handbook
specifies the risks that a lender expects to be covered.
The insuring party will want to insert a provision that its obligation to effect insurance is
subject to this being available on reasonable terms; and that it may be subject to any
conditions and excesses that may be required by the insurer.
The non-insuring party would covenant not to insure if this insurance might mean that the
insuring party’s insurance is avoided or reduced because of this cover. The non-insuring
party would also covenant not to do anything which would cause the insurance to be
avoided, and not to do anything which might increase the cost of premiums.
6
48/100
Question 6
Is the following statement true or false?
1
2
Where the landlord is insuring, it is acceptable for it to agree to insure only
against ‘comprehensive risks normally covered by a buildings insurance policy’.
3
4
Click to select your answer
5
True
False
6
49/100
Question 6
Is the following statement true or false?
1
2
Where the landlord is insuring, it is acceptable for it to agree to insure only
against ‘comprehensive risks normally covered by a buildings insurance policy’.
3
4
5
True
False
6
The correct answer is False.
This is not acceptable. The provision is imprecise and is open to
interpretation. It is usual to specify a list of the risks to be covered
by insurance.
50/100
Reinstatement of damaged property
The lease should provide that the insuring party will take steps to
use the insurance proceeds from any claim to reinstate the
premises following damage or destruction.
1
2
3
4
5
6
A landlord’s covenant is often limited to using only the money that has been
received from the insurer to reinstate the premises. This is not as
comprehensive as a requirement ‘to reinstate’ and would not cover the position
where there is a shortfall in the sum required for reinstatement.
In these circumstances, the tenant should attempt to ensure that there is a
provision in the lease requiring the landlord to make up any shortfall. This is
likely to be resisted by landlords, particularly in situations where actions by
other tenants may have caused the insurer to refuse full payment.
Exceptions to the obligation to reinstate are usually included to deal with the
situation where planning consents or other permissions are not forthcoming.
Sometimes a landlord may seek to further limit his obligation to reinstate to
cover a situation where he is prevented by circumstances beyond his control.
This can cause uncertainty and tenants should seek to resist this.
51/100
Entitlement to money where no reinstatement
Consideration should be given to the position where the property might become very badly
damaged or destroyed completely, and reinstatement is not possible. This might arise due
to difficulties in obtaining planning or other consents to rebuilding.
1
2
3
4
5
6
Provisions should be considered that give either party a right to terminate on terms where
reinstatement is not possible within a certain timeframe.
In this situation the lease could include
a provision dealing with the proceeds of
insurance as well as any sale proceeds
of the destroyed premises, requiring
that they are shared between the
parties. The division of the proceeds
could be on the basis of the value of
the parties’ respective interests in the
premises at that time.
Although such provisions are strongly
advisable, in practice these clauses are
not often found in residential leases.
52/100
Rent suspension
1
2
3
4
5
6
Where the landlord is insuring, in order to deal with the situation where the premises are
unusable during a period of damage, the tenant should ensure that the lease provides for
rent suspension during this time. Suspension should also be considered where access to the
premises is prohibited. There may or may not be an overall limit on this suspension. (Cover
in respect of the rent lost was referred to earlier.)
Tenants may need to consider whether this suspension should also extend to other
payments such as insurance costs and service charge costs. So, for example, a fire or flood
may only affect part of the building or premises. It is arguable that a tenant should be
relieved of a service charge payment where his premises are uninhabitable, even where
services are being provided to the remainder of the building. In these circumstances the
landlord may wish to provide for recovery of the cost of insuring for non-payment of the
service charge.
In any event, tenants should seek
to ensure that the period of
suspension of rent (and service
charge, etc.) only ends once the
premises are useable and
accessible.
53/100
Tenant’s statutory rights
1
2
3
4
5
6
Residential tenants’ statutory rights in relation to insurance policies are contained in
Landlord and Tenant Act (LTA) 1985, s.30A and Schedule. (There are some minor
exceptions to this, so tenants under some types of leases do not have these rights - see
LTA 1985, s.26.) Tenants’ rights include a right to a summary of cover, a right to a copy of
the policy, a right to notify insurers of claims, a right to extend the claim period, and a
right to challenge the choice of insurer.
If a long lease of a dwelling fails to make satisfactory provision for insurance of the
property, generally any party to that lease may make an application to a tribunal to seek a
variation of the lease (LTA 1987, s.40).
In the case of any tenancy of a
separate dwelling, amounts paid by
a tenant in respect of insurance are
subject to the general statutory
controls on service charges (LTA
1985, s.18). This means, broadly,
that they can be challenged if not
reasonably incurred (LTA 1985, s.19).
54/100
Council of Mortgage Lenders: insurance requirements
The CML Lenders’ Handbook contains requirements in respect of the provisions in a
residential lease dealing with insurance. The Building Societies Association (BSA) Mortgage
Instructions make similar provisions, but to avoid unnecessary repetition, reference is only
made here to the provisions of the CML Lenders’ Handbook.
1
2
3
4
Paragraph 6.14 of Part 1 of the Lenders’ Handbook contains the details relating to general
insurance requirements. There are specific requirements where insurance is not taken out
by the lender, including, in broad terms, certain cases where the interest of the lender is
required to be noted on the policy, and various provisions relating to the amount of cover
(see Lenders’ Handbook, 6.14.1).
Risks to be covered are set out at 6.14.2. Confirmation may be required by some lenders
that the insurer will notify the lender if the policy is not renewed or is cancelled, and
copies of the policy and premium receipt may be required.
5
6
55/100
Council of Mortgage Lenders: leasehold properties
1
2
There are specific requirements in relation to leasehold properties. Reasonable steps must
be taken to check that there are adequate arrangements in respect of buildings insurance –
see CML Lenders’ Handbook, 5.14.4 and 5.14.5. It is also necessary to ensure that the
responsibility for the insurance rests with the landlord, one or more of the tenants in the
building, or the management company.
Where the tenants are responsible for the insurance, the lease must contain provisions for
the enforcement of these obligations by the landlord or management company at the
request of the tenant (5.14.6).
3
4
5
6
Paragraph 5.14.14 states that leases are acceptable
where they require that the insurance proceeds and
the proceeds of sale are shared between the
landlord and tenant in proportion to their
respective interests, if reinstatement is frustrated.
Many leases do not contain such provisions but
where they do, compliance with this is necessary.
56/100
4. Management
companies
57/100
Introduction
Where the let premises form part of an estate or a building owned by a landlord, the
common parts are often maintained by a management company.
1
2
Here we consider the main arrangements that relate to letting schemes involving
management companies, although in practice there can be a number of variations.
Management companies are also encountered in other situations that are not covered here
as they call for little legal explanation. So, for example, the landlord might employ a
commercial management company as its agent.
3
4
5
For ease of reference in this section we assume
that a landlord currently owns the freehold of a
building, which contains a number of flats, and
wishes to create a scheme whereby the services
to the building and flats will be provided by a
management company.
6
58/100
Management company is party to the lease but has no legal estate
Framework
1
This type of scheme requires an arrangement where the management company has a legal
obligation to provide services in exchange for a service charge paid for by the tenants.
Under this scheme, the landlord retains the freehold of the building, and the management
company has no legal estate in the building at all.
2
The management company may be a professional management company; or a company
where the members are the tenants of the flats.
3
Here, the management company will be a party to the leases and there will be covenants
entered into by it and the tenants. Thus the management company will covenant, inter
alia, to provide the services, keep the building in repair and insure.
4
5
Each tenant will covenant to pay the service charge to the management company.
6
59/100
Management company is party to the lease but has no legal estate
Enforcement of covenants
1
2
3
4
5
Under the scheme, as the management company is not the landlord, there is a problem
relating to the enforcement of the covenants entered into between the tenants and the
management company. It is necessary to ensure that the benefit and burden of these
covenants in the lease pass to successors of the tenants by some means. In practice, the
lease usually requires, on an assignment of the lease, that each transferee must enter into
a deed of covenant with the management company containing similar covenants.
To ensure this takes place a restriction will be registered on the title to the lease
prohibiting the registration of the transfer until (usually) a certificate has been given that
this has been done.
If the tenants are not the members of the management company, the landlord should
covenant in the lease to perform the management company covenants if it defaults. This
is, broadly, a requirement of the Lenders’ Handbook, 5.15.1. Please refer to the paragraph
for the detailed provisions.
6
60/100
Question 7
Is the following statement true or false?
1
2
3
A building is divided into flats and the landlord proposes a letting scheme where
the management covenants in the lease will be entered into by a management
company, which will be a subsidiary company of the landlord. This company is not
to be the landlord, but as it is controlled by the landlord it is not necessary for
the landlord to covenant to perform these covenants if the company defaults.
4
Click to select your answer
5
True
False
6
61/100
Question 7
Is the following statement true or false?
1
2
3
A building is divided into flats and the landlord proposes a letting scheme where
the management covenants in the lease will be entered into by a management
company, which will be a subsidiary company of the landlord. This company is not
to be the landlord, but as it is controlled by the landlord it is not necessary for
the landlord to covenant to perform these covenants if the company defaults.
4
5
True
False
6
The correct answer is False.
If the tenants are not the members of the management company,
then the landlord should covenant in the lease to perform the
management company covenants if it defaults. This provides a
simpler means of enforcement for the tenants, and is a requirement
of the Lenders’ Handbook, 5.15.1.
62/100
Management company to have legal estate
Framework
1
2
3
4
5
This is becoming the preferred scheme now for legal and commercial reasons. Under this
scheme the landlord passes the reversion to the management company once the flats are
let, thus ensuring that there is a landlord and tenant relationship between the two.
Occasionally, where the landlord wants to continue to receive a rent it may grant an
overriding lease (sometimes called a concurrent lease) to the management company,
rather than transfer the reversion. The effect is similar to a transfer in that the
management company becomes the landlord of the tenants, but under a leasehold interest
granted by the landlord. For ease of reference we assume here that a transfer is to take
place.
Care must be taken to address problems stemming from the tenant’s statutory right of first
refusal contained in the Landlord and Tenant Act 1987 that might arise on such a transfer.
In practice, this is commonly done by entering into a contract to transfer the freehold
before the exchange of contracts for the flat leases.
6
63/100
Management company to have legal estate
Structure of the management company
1
2
3
4
5
6
In this scheme the landlord, tenant and management company are
all parties to the lease. The landlord covenants with the tenant
that it will transfer the reversion to the management company.
The landlord must therefore set up the management company in
advance and transfer membership of this to the tenants as part of
the conveyancing process relating to the granting of the leases.
The structure of the management company is commonly a
company limited by guarantee, otherwise it may be limited by
shares.
Each tenant is required to become a member and, where relevant,
to transfer his share on assignment of the flat. The Lenders’
Handbook requires tenants to become members on completion in
the case of companies limited by guarantee; and some lenders
may require a blank stock transfer form where appropriate
(5.15.2)
64/100
Management company to have legal estate
Lease covenants
The lease covenants are drafted on the basis that the management company will
undertake responsibility for managing the building.
1
2
3
4
Therefore the management company will covenant with the landlord and the tenant, inter
alia to insure, repair and provide the services.
The tenant will covenant with both the management company and the landlord to pay the
service charge to the management company.
So far as the rent is concerned, the tenant will covenant to pay this to the landlord, which
will become the management company following the transfer of the reversion to it.
5
6
65/100
Issues on transfer of lease
The Standard Conditions of Sale, condition 4.7 provides that where the seller is or is
required to be a member of a management company, he or she will produce the
documents on completion that will enable the buyer to become a member of the company,
without cost to the buyer.
1
2
3
4
5
Click on each to
find out more.
Management company
limited by shares
Management company
limited by guarantee
6
66/100
Issues on transfer of lease
The Standard Conditions of Sale, condition 4.7 provides that where the seller is or is
required to be a member of a management company, he or she will produce the
documents on completion that will enable the buyer to become a member of the company,
without cost to the buyer.
1
2
3
4
5
Where the management company is created so that
it is limited by shares, once a flat is sold the seller’s
solicitor should prepare a stock transfer form of the
seller’s share in the management company to be
signed by the seller before completion. This will
then be given to the buyer’s solicitor on completion
so that this can be used to transfer the share to the
buyer.
Click on each to
find out more.
Management company
limited by shares
Management company
limited by guarantee
6
67/100
Issues on transfer of lease
The Standard Conditions of Sale, condition 4.7 provides that where the seller is or is
required to be a member of a management company, he or she will produce the
documents on completion that will enable the buyer to become a member of the company,
without cost to the buyer.
1
2
3
4
5
If the management company is limited by
guarantee, the buyer should write to the company
after completion and apply for membership.
Click on each to
find out more.
Management company
limited by shares
Management company
limited by guarantee
6
68/100
5. Length of leases
69/100
Introduction
Leases granted for a fixed period are a wasting asset, so care must be taken to ensure that
the period is sufficient to justify paying the premium. For the same reason, when taking
the assignment of an existing lease, the buyer needs to consider the remaining term of the
lease.
1
2
3
4
5
6
A lender will normally require that a sufficient length of
term remains unexpired to provide adequate security for
the loan. So a common period is a minimum of 55 years
unexpired from completion and 30 years unexpired at
the end of the mortgage. Notification may be required
where the minimum period is less than 70 years. Where
the remaining period is very short, say 20 years,
consideration needs to be given to the possibility of
extending the term.
Statutory rights enable eligible tenants, broadly, to
obtain an extension to their lease or to force the
landlord to sell the freehold (thus providing a more
permanent, if expensive, solution). Only a very short
introduction to these rights is given here.
70/100
Extended lease of a flat
The Leasehold Reform, Housing and Urban Development Act 1993 gives a tenant of a flat
the right to be granted a new lease. This new lease will take effect, in substitution for the
existing lease, for a term equal to the unexpired residue of the existing lease plus 90
years.
1
A premium is payable for the grant, but the rent under the new lease will be a peppercorn.
2
The right can be exercised more than once, unlike the right under the Leasehold Reform
Act 1967, and is available irrespective of the rights to collective enfranchisement.
3
There is a statutory procedure which must be followed to claim the right, which is started
by the tenant serving a notice on the landlord. Once this has been done, the tenant can
sell the flat with the benefit of the right to the lease extension. The notice is registrable
against the landlord.
4
5
6
71/100
Qualifying tenants
The tenant must have owned the lease for at least two years before serving the notice
requesting a lease extension. The right applies to a qualifying tenant (Leasehold Reform,
Housing and Urban Development Act 1993, s.5). This is defined as a ‘tenant’ of a ‘flat’
under a ‘long lease’. These terms are defined by the Act:
1
•
A ‘tenant’ includes a person holding a lease or tenancy, or an agreement for a
lease or tenancy, and includes sub-leases. Joint leaseholders are treated as one
tenant.
•
A ‘flat’ includes a separate set of premises but which need not necessarily be all on
the same floor level. The premises must form part of a building and be constructed
or adapted for use as a dwelling. Additionally, either the whole or some material
part of the premises must lie above or below some other part of the building (see
s.101(1) and s.62(2)).
•
A ‘long lease’ is one which is granted ‘for a term of years certain’ exceeding 21
years (s.7). There are further detailed provisions relating to these provisions in the
legislation and a number of exclusions from the right.
2
3
4
5
6
72/100
Question 8
Is the following statement true or false?
1
2
A tenant may apply for an extended lease of a flat on one occasion only. He or
she must be the tenant of a flat under a long lease (as defined by the
legislation). A long lease is broadly one that is for more than 21 years.
3
4
Click to select your answer
5
True
False
6
73/100
Question 8
Is the following statement true or false?
1
2
A tenant may apply for an extended lease of a flat on one occasion only. He or
she must be the tenant of a flat under a long lease (as defined by the
legislation). A long lease is broadly one that is for more than 21 years.
3
4
5
True
False
6
The correct answer is False.
The tenant’s right to an extended long lease can be exercised
repeatedly and is available irrespective of the rights to collective
enfranchisement. This is contrary to the position in relation to the
right to an extended lease of a house under the Leasehold Reform
Act 1967, which can be exercised only once.
74/100
Terms of lease
The terms of the new lease will be broadly the same as the existing lease. Service charge
provisions may be included. The new lease will also contain a statement that the lease has
been granted under the Leasehold Reform, Housing and Urban Development Act 1993.
Options which were included in the original lease will not be included in the new lease.
1
2
3
Some modifications to the lease may be made: so, for example, there may be changes to
reflect certain defects in the existing lease.
The new lease will also include the landlord’s right to apply to the court for possession for
redevelopment purposes during the last 12 months of the original term or the last five
years of the extension, subject to compensation being payable to the tenant.
4
5
6
75/100
Opposition
The landlord can oppose the tenant’s request, broadly, where the tenant’s existing lease is
due to expire within five years and the landlord intends to demolish or reconstruct the
property and would be unable to do so without being given possession of the premises.
1
2
3
4
5
6
76/100
Price
The amount of the premium payable by the tenant is the aggregate of:
a)
the diminution in the value of the landlord’s interest;
b)
50% of the marriage value, where the unexpired term of the tenant’s existing lease
does not exceed 80 years;
c)
compensation to landlord (e.g. if the grant of the extended lease lowers the value of
other property belonging to the landlord, the tenant has to pay compensation for
this).
1
2
3
Expert specialist valuation advice should always be sought in relation to this.
4
5
6
77/100
Extended lease of a house
The Leasehold Reform Act 1967 gives certain tenants of houses the right to buy one
extended lease of the house for an additional 50 years. The right to enfranchise can still
be exercised after the grant of an extended lease. Broadly, for the tenant to qualify:
1
2
3
4
5
6
•
the tenancy must have been granted for a term of more than 21 years;
•
the tenancy must be of a ‘house’ (defined in s.2(1));
•
the tenant must have held the lease for the last two years; and
•
the rent and the value of the property must be within certain limits.
There are a number of excluded tenancies, and there are special residency requirements
in certain limited circumstances. The benefit of a notice served by a tenant under a lease
within the Act can be assigned with the lease.
The rent under the extended lease represents a ground rent for the property and may be
subject to upwards revision after 25 years of the extension. There are limited grounds on
which the claim may be defeated, subject to the payment of compensation, e.g. the
landlord has redevelopment plans for the premises.
78/100
Enfranchisement
1
2
3
4
5
As an alternative to an extended lease, tenants of houses held on long leases may decide
to force the sale of the freehold of the house to them (enfranchise). Similar criteria as
above apply, except that the value of the house and the amount of rent are generally not
relevant when making an enfranchisement claim (save for the purposes of calculating the
price), but there are some minor exceptions.
The price payable on enfranchisement is the subject of one of two formulae, depending on
the rent and value of the property. Failing agreement between the parties, the price is
settled by a tribunal. This area is complex and expert specialist valuation advice should
always be sought.
However, where the rent satisfies a low rent test and low value test, the basic premise of
the valuation is that the tenant should pay the price of the site without the house. Where
this test is not satisfied, the price will be on a higher basic premise that the tenant pays
the value of the freehold, subject to the lease of the site plus the house.
6
79/100
6. Absent landlords
80/100
Introduction
The phrase ‘an absent landlord’ may apply to numerous different situations. However, it
commonly refers to an individual landlord who might simply not be taking any interest in
its responsibilities under the lease and does not respond to any enquiries, but so far as
anyone knows is alive and not bankrupt.
1
2
3
Alternatively, if the landlord is a company then the company might have been dissolved
and no longer be a legal entity.
Where there is a situation of an absent landlord, the conveyancer buying a leasehold
property needs to consider whether the absence of a landlord will create a problem for the
flat owner or the lender.
4
5
6
81/100
Impact on the lease
1
2
3
The impact of an absent landlord will be dictated by what the lease states to be the
landlord’s responsibilities. It could be that the landlord has no duties to perform under the
lease, in which case the landlord’s absence may not be material to the legal well-being of
the building. Where, however, a landlord has duties to maintain, repair or insure the
building, or indeed to enforce covenants against other flat owners, then the lease itself
may be deficient and not compliant with the CML Lenders’ Handbook (5.14.4 and 5.14.6).
If an absent landlord has a right to collect ground rent there will be issues to be made
clear to the buyer with regard to arrears of ground rent and potential breach of the lease
that should be explored.
4
5
6
82/100
The missing individual landlord
In the simplest form of lease where there are only two parties (landlord and tenant) and
where the landlord is responsible for maintenance, repair and insurance of the building,
the absence of the landlord creates a major problem.
1
2
3
4
5
6
This is because if the landlord is not available or willing to carry out his duties, there is no
effective legal management of the building to ensure the fundamentals are dealt with.
Very often tenants group together and voluntarily take on the responsibilities of insurance,
maintenance, etc. This, however, has no legal framework: therefore unenforceable, it
makes the lease non-compliant with the CML Lenders’ Handbook (5.14.4).
Wherever such a situation exists, caution should be exercised in advising clients how to
proceed. The best solution is to locate the landlord and, if the landlord is not prepared to
fulfil their obligations under the lease, then attempt to purchase the freehold from the
landlord. If necessary, statutory powers can be used to force a sale to a majority of the
residents (enfranchise), or to exercise their right to manage or appoint a manager. This
solution of acquiring the freehold is likely to be impracticable due to the timescale for
most conveyancing transactions.
83/100
Right to manage
The right to manage under the Commonhold and Leasehold Reform Act 2002 can provide
an effective legal remedy if the majority of the qualifying tenants of a building choose to
exercise it (s.85 deals with absent landlords).
1
2
3
A resident's right to manage company will allow the residents to insure, maintain and
repair the building in accordance with the terms of the lease in an entirely effective and
enforceable fashion. However, in order to go through the statutory process of exercising
the right to manage there will be an elapsed time of approximately four months from
service of notice to the completion of the process, which again may be unsatisfactory in a
conveyancing context.
4
5
6
84/100
Defective title insurance
1
2
3
4
Defective title insurance is frequently purchased and, if this is acceptable to the buyer and
lender, it can provide a pragmatic way forward. Conveyancers do need to be clear as to
whether the insurance covers the legal risks exposed by the absent landlord and in relation
to the financial benefits of the insurance. See ‘Example terms’ below to see if you would
be satisfied with the terms of such a policy. Clients should be advised that the
fundamental issue will not be solved by the taking of insurance. It cannot force the
landlord to perform the terms in the lease but it can provide financial recompense if loss
occurs in certain circumstances.
Click on each box to find out more.
CML requirements
Example terms
Death of a landlord
5
6
85/100
Defective title insurance
1
2
3
4
Defective title insurance is frequently purchased and, if this is acceptable to the buyer and
lender, it can provide a pragmatic way forward. Conveyancers do need to be clear as to
whether the insurance covers the legal risks exposed by the absent landlord and in relation
to the financial benefits of the insurance. See ‘Example terms’ below to see if you would
be satisfied with the terms of such a policy. Clients should be advised that the
fundamental issue will not be solved by the taking of insurance. It cannot force the
landlord to perform the terms in the lease but it can provide financial recompense if loss
occurs in certain circumstances.
Click on each box to find out more.
CML requirements
Example terms
Death of a landlord
5
6
The CML Lenders’ Handbook includes this requirement when a landlord is
absent or insolvent:
‘5.14.15 You must report to us (see part 2) if it becomes apparent that the
landlord is either absent or insolvent. If we are to lend, we may require
indemnity insurance (see section 9). See part 2 for our requirements.’
If indemnity insurance is required, see Lenders’ Handbook at paragraph 9.2 in
relation to CML requirements on the policy, indemnity limit and advising the
borrower.
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Defective title insurance
1
2
3
4
5
6
Defective title insurance is frequently purchased and, if this is acceptable to the buyer and
lender, it can provide a pragmatic way forward. Conveyancers do need to be clear as to
whether the insurance covers the legal risks exposed by the absent landlord and in relation
to the financial benefits of the insurance. See ‘Example terms’ below to see if you would
be satisfied with the terms of such a policy. Clients should be advised that the
fundamental issue will not be solved by the taking of insurance. It cannot force the
landlord to perform the terms in the lease but it can provide financial recompense if loss
occurs in certain circumstances.
Click on each box to find out more.
CML requirements
Example terms
Death of a landlord
‘This policy provides protection to the insured from actual financial loss that
might arise due to a landlord not being able to be traced at the date hereof
and who:
• fails to respond to correspondence; or
• is in receivership;
and reappears and takes action in respect of
• breaches of covenants in the lease;
• failure to comply with any provisions in the lease;
• arrears of ground rent and/or service charge payments due under the
lease;
and any financial loss that might arise should the landlord exercise its right of
re-entry.’
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Defective title insurance
1
2
3
4
5
6
Defective title insurance is frequently purchased and, if this is acceptable to the buyer and
lender, it can provide a pragmatic way forward. Conveyancers do need to be clear as to
whether the insurance covers the legal risks exposed by the absent landlord and in relation
to the financial benefits of the insurance. See ‘Example terms’ below to see if you would
be satisfied with the terms of such a policy. Clients should be advised that the
fundamental issue will not be solved by the taking of insurance. It cannot force the
landlord to perform the terms in the lease but it can provide financial recompense if loss
occurs in certain circumstances.
Click on each box to find out more.
CML requirements
Example terms
Death of a landlord
If a landlord has died then the legal position is that the any freehold property
will have passed to the deceased’s estate. The personal representatives will
therefore have the benefit and responsibilities as landlord arising from
ownership of a freehold subject to a lease. Thus, if a landlord has died the
legal responsibilities are not extinguished but will be transferred to successors.
It might therefore be necessary to establish first if the landlord has died and, if
so, who are the personal representatives. It is possible to search on the
Register of Deaths, if enough information is available about the deceased, but
the employment of a genealogy detective may well be the expeditious
approach from a conveyancing standpoint.
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Question 9
Is the following statement true or false?
1
2
3
You act for a buyer. The lease provides that the landlord shall insure, repair and
maintain the building but the landlord has long since disappeared. Now that the
residents have voluntarily taken on the management of the building, including
taking out a comprehensive insurance policy for full reinstatement value, this
means that there is no problem in accepting the lease and advising the client to
proceed.
4
Click to select your answer
5
True
False
6
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Question 9
Is the following statement true or false?
1
2
3
You act for a buyer. The lease provides that the landlord shall insure, repair and
maintain the building but the landlord has long since disappeared. Now that the
residents have voluntarily taken on the management of the building, including
taking out a comprehensive insurance policy for full reinstatement value, this
means that there is no problem in accepting the lease and advising the client to
proceed.
4
5
True
False
6
The correct answer is False.
There absent landlord creates a problem from a legal perspective.
The residents have taken on the practical matters but without any
commitment to do so under the lease. They are not standing in the
shoes of the landlord in any legal sense, and therefore if the
residents stopped doing the maintenance repair and insurance,
because the landlord is absent there would be no effective
insurance or management. For this reason this lease would be
defective.
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The missing corporate landlord
This may arise where the registered proprietor of the freehold is a company and, despite
the lease requiring the landlord to deal with the management of the building, the company
has not taken any recent interest and the company has now been dissolved.
1
2
3
4
5
In practice this can sometimes happen to a residents’ owned company where perhaps
annual returns are not submitted and, after notice, the company is struck off the register.
It is possible to establish whether a company has been dissolved by a free search on the
Companies House website.
Where a landlord company has been dissolved, the lease is defective because the
responsible entity for fulfilling the landlord’s obligations no longer exists. There are then
four options for a conveyancer acting for a prospective buyer of the lease:
1.
Require the company to be restored to the Company Register.
2.
The residents create a new company and then purchase the freehold from the
Treasury Solicitor who may be holding the freehold land for the Crown as bona
vacantia.
3.
The residents exercise their ‘right to manage’.
4.
Take out indemnity insurance, subject to its terms being appropriate and acceptable
to the buyer and lender clients. (The CML Lenders’ Handbook at paragraph 5.14.15
requires reporting of an absent or dissolved landlord.)
6
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Bona vacantia
Property, cash and any other assets owned by a company when it is dissolved automatically
pass to the Crown. You can find the main provisions of this law in the Companies Act 2006.
1
2
Liabilities of a company do not pass to the Crown on dissolution: they are normally
extinguished.
A company is dissolved in two ways. The Registrar of Companies can strike off a company
for failure to comply with its legal obligations. Alternatively, a company can be dissolved
after a formal liquidation by its members or creditors.
3
4
5
6
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Treasury solicitor
The Treasury Solicitor collects some bona vacantia assets for the Crown.
Scottish land and that within the Duchies of Lancaster and Cornwall are administered by
others (not the Treasury Solicitor.)
1
2
3
4
5
The Treasury Solicitor will not manage a freehold, e.g. insure or enforce covenants in the
capacity of a landlord, and in some cases it can disclaim any responsibility.
If not disclaimed, then residents can group together and purchase the freehold for market
value. This is usually assessed by multiplying the total annual ground rents by a factor of
10. The Treasury Solicitor’s legal costs are published on its website and must be paid by
the residents. In the case of a simple freehold, the transfer of the land from the Treasury
Solicitor to the residents can be achieved in a matter of weeks. Once the freehold is with
the residents then all the responsibilities and obligations incumbent on the landlord will be
fully enforceable and effective and the lease defect has been remedied.
6
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Right to manage
This is a statutory right for a majority of residents holding a long lease to be able to take
over the management of their building from the landlord and management company
without demonstrating any fault or mismanagement.
1
2
3
4
5
A ‘right to manage company’ has to be created with a prescribed memorandum and
articles, but this can be bought off the shelf from company formation agents.
A period of notice is given to the landlord and provided that the residents have complied
with the basic constitutional requirements then the right to manage will take automatic
effect.
The balance of service charge that might be held by the landlord must be transferred to
the newly formed right to manage company which can then carry out all the functions of
management that would otherwise rest with the landlord or management company within
the lease.
6
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Right to manage
1
2
3
The landlord retains ownership of the freehold and is still entitled to collect ground rent.
If the lease provides for landlord’s licence to be obtained, e.g. on assignment or for
alterations, then the landlord must still be involved. Otherwise the tenants are able to run
their management; they can change insurers; change managing agent; and operate as
though under the lease they had the obligations and responsibilities previously with the
landlord or management company.
It is good practice and helpful for the future to register a notice against the freehold title
stating that a right to manage has been exercised (see Right to Manage: Statutory
Guidance issued by the Department for Communities and Local Government).
4
5
6
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Restoration to Companies House register
Any company which is restored to the register is deemed to have
continued in existence as if it had not been struck off and
dissolved.
1
Generally, any of the following may make an application for
restoration:
2
•
any former director, member, creditor or liquidator;
•
any person who had a contractual relationship with the
company or who had a potential legal claim against the
company;
•
any person who had an interest in land or property in which
the company also had an interest, right or obligation;
•
any manager or trustee of the company’s former employees’
pension fund;
•
any other person who appears to the Court to have an
interest in the matter.
3
4
5
6
As a general rule restoration by court order can be applied for up
to six years from the date of dissolution.
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Question 10
Is the following statement true or false?
1
2
If an individual dies intestate, and if no next of kin seeks to apply for letters of
administration, any assets of the deceased estate will pass bona vacantia to
the Crown and will be held and administered by the Treasury Solicitor.
3
4
Click to select your answer
5
True
False
6
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Question 10
Is the following statement true or false?
1
2
If an individual dies intestate, and if no next of kin seeks to apply for letters of
administration, any assets of the deceased estate will pass bona vacantia to
the Crown and will be held and administered by the Treasury Solicitor.
3
4
5
True
False
6
The correct answer is True.
Unadministered assets will pass to the Crown under the law of bona
vacantia and will then be capable of being sold at market value by
the Treasury Solicitor. Therefore, if a freehold subject to leasehold
interests is owned by an individual who has died and if their estate
has not been administered, it may well be possible to acquire the
freehold from the Treasury Solicitor by paying the market value for
the freehold. This could provide a satisfactory long-term solution to
resolve the situation of a missing individual landlord.
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Resources
•
CML Lenders’ Handbook for England and Wales
•
BSA Mortgage Instructions
•
Law Society Find a Solicitor web pages
•
Companies House
•
Commonhold and Leasehold Reform Act 2002
•
Landlord and Tenant (Covenants) Act 1995
•
Landlord and Tenant Act 1985
•
Landlord and Tenant Act 1987
•
Leasehold Reform Act 1967
•
Leasehold Reform, Housing and Urban Development Act 1993
•
Right to Manage guidance, Department for Communities and Local Government
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Next steps
This concludes the Leasehold course presentation.
Assessment
Qualified and unqualified conveyancers in CQS member firms that have applied for
re-accreditation must also take an assessment on the subject of this course presentation.
This assessment comprises 15 multiple choice questions.
To begin the assessment, close this window and return to the Course Activity screen in the
CPD Centre. From there, you can launch the assessment by clicking the link shown on the
right of that screen.
CPD hours
Completion of this course and assessment qualifies for two CPD hours.
Close this window and return to the Course Activity screen.
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