Question 1

Complicated lease situation involving a 'variable estate rent charge'

Accepted Answer

I am the chair of our Resident Association and wanted to ask your advice about a couple of issues. I should point out that the properties on the site are mainly freehold and the communal land surrounding these properties are leased from the landlord, and it is in respect of the latter we write to you. We have been liaising with the managing agent regarding some major work on pavements and some subsidence (insurance claim) for over 12 months and my efforts (communications) to get any meaningful response has not been successful. At our last meeting the feeling was we should make a formal complaint. How would you view this action? Additionally we have been paying an extra amount annually charges into a reserve fund when I enquired I was told this was for major works but we have not had work completed for years (the above pavement would be classed as major works). Do we have a right to know how much this reserve fund is? We only see the annual accounts and not any account for the reserve fund. As you will detect from my queries above, we are generally dissatisfied with the managing agents (who also appear to be linked with the landlord). What would you advise us to do in this situation? The FPRA replies: I regret to have to say that, compared with most flat-owners, you are in quite a weak position here. The charge that a freeholder on your development pays is not a “service charge” as such but a “variable estate rentcharge”. None of the legislation that has been passed to protect those paying (leasehold) service charges – in particular, the right to be consulted, the right to accounts, and the overriding requirement that service charges be “reasonably incurred” -applies to estate rentcharges on freehold properties. The Transfer Deed which you have provided me with suggests that, in addition, it has been drafted in a way which is hardly even-handed. Clause 6 of the Sixth Schedule purports to make the former landlord’s Certificate of the amount payable under the estate rentcharge conclusive, and clause 10 of the main part of the Deed appears to require that disputes be referred to arbitration by a surveyor nominated by the former landlord. This could mean, for example, that if you were to sue your former landlord, in the hope of having the dispute resolved without the risk of costs under the “small claims” regime of the County Court, the former landlord could successfully ask the Court not to rule on it, but to require you to submit to the arbitration procedure. The disadvantage of this would be that the usual rule as to costs applicable to larger court cases and all arbitrations would apply i.e. the loser would have to pay the winner’s legal costs as well as his own. Provisions such as these are no longer enforceable in leasehold service charges: when they were, they put leaseholders at a disadvantage. It might be appropriate for me to spend some more time considering this Deed to come to a view on whether there is any way around these rather one-sided provisions. On the other hand, you say in your e-mail that “the 31 properties on the site are mainly freehold”. Does this mean that some of your members are still leaseholders, owning their houses under the original 1960s leases? (I do not, incidentally, follow your suggestion that the surrounding communal land is “leased” from the former landlord: on the limited documentation that I have seen it would appear that this is owned by the former landlord, and that the freehold owners have the right to use it. If it is leased, to whom is it leased?) Any of the leasehold owners are still paying what is, in law, a (leasehold) service charge, and if so, all the rights applicable to service charges apply to them. These rights are clearly set out in a booklet that is obtainable from LEASE and can be viewed on or downloaded from their website (I should perhaps mention that this booklet refers to “Estate Management Charges” as being governed by similar legislation to leasehold service charges. This legislation does not apply to you, as what you have is not an EMC: these rules apply only if an EMC scheme has been made under the Leasehold Reform Act 1967 or the Leasehold Reform, Housing and Urban Development Act 1993, and neither of these applies in your case). What I am therefore suggesting is that one of your members who is still a leaseholder should insist upon the Landlord (who would be their landlord, and not their former landlord) providing accounts. The way the relevant sections of the Landlord and Tenant Act 1985 are drafted seem more directed towards obtaining details of the annual charge, than in ascertaining the amount of any reserve fund, but if necessary two-thirds of the leaseholders could exercise the right to have a management audit carried out under s 76 of the Leasehold Reform, Housing and Urban Development Act 1993. Details of this are also to be found on the LEASE website at http://www.lease-advice.org/apsuframe.htm. It is also possible that, if the works to the pavements etc., would result in a payment of more than £250 from any one of the leaseholders, the landlord would be required to consult with them before incurring expenditure (see the LEASE booklet for this). It is, however, possible that the variable estate rentcharge applicable to the freehold properties and the service charge applicable to the leasehold properties are imposed, collected and retained entirely separately. I say this because there are quite elaborate provisions in the freehold estate rentcharge for a reserve fund to be accumulated. There is nothing of the kind in the provisions for the leasehold service charge (though in the copy lease that I have the Second Schedule finishes rather abruptly at clause 4: is there anything more?). If a lease does not contain a power to accumulate a reserve fund, one cannot do so, no matter how desirable it may be to have such a reserve. If the landlords are collecting for the reserve fund from the leaseholders they may be doing so without authority; but I cannot see how the service charge arrangements are working at all unless they are conveniently overlooking this. A leaseholder would also be entitled to challenge the service charge before a Leasehold Valuation Tribunal on the basis that the transfers to the reserve fund were not of reasonable amounts. Such an application would, inevitably, have to be met by the landlord supplying full details of the reserves and the basis upon which they were being accumulated. This could, however, be a risky strategy to adopt, as if the LVT pointed out that there was no authority in the lease to collect reserves at all, it could be a rather inconvenient decision. A further point which may require some further attention is why the copy lease that you have supplied me with is an Underlease. This would suggest that perhaps the whole development was leased in the 1960s to a management company of some sort, which then granted underleases to the individual house owners. I have not thought through the implications if this is the situation. On the other hand, the copy Underlease has stamped on it an endorsement by the Land Registry to the effect that the lease has been determined, and the (under)leasehold title closed. This is dated shortly after the date of the Transfer Deed of the freehold of No 31, which suggests to me that, once the owner of No 31 bought his freehold, the Underlease was merged in it. It would simply not be possible to do this if there were still a lease existing between the freehold and the Underlease. You may have gathered from this letter that I do not feel that the arrangements under which your estate is operated are particularly satisfactory. The basic problem is that your estate was set up as a leasehold estate before leaseholders got the right to buy the freehold of their individual properties under the Leasehold Reform Act 1967. That Act has made it difficult to deal satisfactorily with leasehold houses where there are shared facilities which require the imposition of a charge to maintain them. Estate rent charges usually deal with fairly minimal expenditure, and they are uncommon, so those who pay them have not received the same attention from successive Governments as those who pay leasehold service charges.

Question 2

Complicated lease situation involving a 'variable estate rent charge'

Accepted Answer

I am the chair of our Resident Association and wanted to ask your advice about a couple of issues. I should point out that the properties on the site are mainly freehold and the communal land surrounding these properties are leased from the landlord, and it is in respect of the latter we write to you. We have been liaising with the managing agent regarding some major work on pavements and some subsidence (insurance claim) for over 12 months and my efforts (communications) to get any meaningful response has not been successful. At our last meeting the feeling was we should make a formal complaint. How would you view this action? Additionally we have been paying an extra amount annually charges into a reserve fund when I enquired I was told this was for major works but we have not had work completed for years (the above pavement would be classed as major works). Do we have a right to know how much this reserve fund is? We only see the annual accounts and not any account for the reserve fund. As you will detect from my queries above, we are generally dissatisfied with the managing agents (who also appear to be linked with the landlord). What would you advise us to do in this situation? The FPRA replies: I regret to have to say that, compared with most flat-owners, you are in quite a weak position here. The charge that a freeholder on your development pays is not a “service charge” as such but a “variable estate rentcharge”. None of the legislation that has been passed to protect those paying (leasehold) service charges – in particular, the right to be consulted, the right to accounts, and the overriding requirement that service charges be “reasonably incurred” -applies to estate rentcharges on freehold properties. The Transfer Deed which you have provided me with suggests that, in addition, it has been drafted in a way which is hardly even-handed. Clause 6 of the Sixth Schedule purports to make the former landlord’s Certificate of the amount payable under the estate rentcharge conclusive, and clause 10 of the main part of the Deed appears to require that disputes be referred to arbitration by a surveyor nominated by the former landlord. This could mean, for example, that if you were to sue your former landlord, in the hope of having the dispute resolved without the risk of costs under the “small claims” regime of the County Court, the former landlord could successfully ask the Court not to rule on it, but to require you to submit to the arbitration procedure. The disadvantage of this would be that the usual rule as to costs applicable to larger court cases and all arbitrations would apply i.e. the loser would have to pay the winner’s legal costs as well as his own. Provisions such as these are no longer enforceable in leasehold service charges: when they were, they put leaseholders at a disadvantage. It might be appropriate for me to spend some more time considering this Deed to come to a view on whether there is any way around these rather one-sided provisions. On the other hand, you say in your e-mail that “the 31 properties on the site are mainly freehold”. Does this mean that some of your members are still leaseholders, owning their houses under the original 1960s leases? (I do not, incidentally, follow your suggestion that the surrounding communal land is “leased” from the former landlord: on the limited documentation that I have seen it would appear that this is owned by the former landlord, and that the freehold owners have the right to use it. If it is leased, to whom is it leased?) Any of the leasehold owners are still paying what is, in law, a (leasehold) service charge, and if so, all the rights applicable to service charges apply to them. These rights are clearly set out in a booklet that is obtainable from LEASE and can be viewed on or downloaded from their website (I should perhaps mention that this booklet refers to “Estate Management Charges” as being governed by similar legislation to leasehold service charges. This legislation does not apply to you, as what you have is not an EMC: these rules apply only if an EMC scheme has been made under the Leasehold Reform Act 1967 or the Leasehold Reform, Housing and Urban Development Act 1993, and neither of these applies in your case). What I am therefore suggesting is that one of your members who is still a leaseholder should insist upon the Landlord (who would be their landlord, and not their former landlord) providing accounts. The way the relevant sections of the Landlord and Tenant Act 1985 are drafted seem more directed towards obtaining details of the annual charge, than in ascertaining the amount of any reserve fund, but if necessary two-thirds of the leaseholders could exercise the right to have a management audit carried out under s 76 of the Leasehold Reform, Housing and Urban Development Act 1993. Details of this are also to be found on the LEASE website at http://www.lease-advice.org/apsuframe.htm. It is also possible that, if the works to the pavements etc., would result in a payment of more than £250 from any one of the leaseholders, the landlord would be required to consult with them before incurring expenditure (see the LEASE booklet for this). It is, however, possible that the variable estate rentcharge applicable to the freehold properties and the service charge applicable to the leasehold properties are imposed, collected and retained entirely separately. I say this because there are quite elaborate provisions in the freehold estate rentcharge for a reserve fund to be accumulated. There is nothing of the kind in the provisions for the leasehold service charge (though in the copy lease that I have the Second Schedule finishes rather abruptly at clause 4: is there anything more?). If a lease does not contain a power to accumulate a reserve fund, one cannot do so, no matter how desirable it may be to have such a reserve. If the landlords are collecting for the reserve fund from the leaseholders they may be doing so without authority; but I cannot see how the service charge arrangements are working at all unless they are conveniently overlooking this. A leaseholder would also be entitled to challenge the service charge before a Leasehold Valuation Tribunal on the basis that the transfers to the reserve fund were not of reasonable amounts. Such an application would, inevitably, have to be met by the landlord supplying full details of the reserves and the basis upon which they were being accumulated. This could, however, be a risky strategy to adopt, as if the LVT pointed out that there was no authority in the lease to collect reserves at all, it could be a rather inconvenient decision. A further point which may require some further attention is why the copy lease that you have supplied me with is an Underlease. This would suggest that perhaps the whole development was leased in the 1960s to a management company of some sort, which then granted underleases to the individual house owners. I have not thought through the implications if this is the situation. On the other hand, the copy Underlease has stamped on it an endorsement by the Land Registry to the effect that the lease has been determined, and the (under)leasehold title closed. This is dated shortly after the date of the Transfer Deed of the freehold of No 31, which suggests to me that, once the owner of No 31 bought his freehold, the Underlease was merged in it. It would simply not be possible to do this if there were still a lease existing between the freehold and the Underlease. You may have gathered from this letter that I do not feel that the arrangements under which your estate is operated are particularly satisfactory. The basic problem is that your estate was set up as a leasehold estate before leaseholders got the right to buy the freehold of their individual properties under the Leasehold Reform Act 1967. That Act has made it difficult to deal satisfactorily with leasehold houses where there are shared facilities which require the imposition of a charge to maintain them. Estate rent charges usually deal with fairly minimal expenditure, and they are uncommon, so those who pay them have not received the same attention from successive Governments as those who pay leasehold service charges.

Complicated lease situation involving a ‘variable estate rent charge’

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