The current leasehold reform is changing the landscape of residential new build plot sales, both in terms of substance and policy. It is understandable therefore, that when property developers are readying their sites for plot sales there is an element of uncertainty as to what should or shouldn’t be included in the new leases.
Here is a brief rundown of the common questions we encounter when drafting new residential leases and our answers.
What level of ground rent should be charged?
Historically, this has usually been determined by the developer and is quite often linked to the property type. For example, a studio flat would yield a lower ground rent than a penthouse apartment in the same block. However, we would now advise that ground rents do not exceed £250 per year and in any event, should not exceed 0.1% of the purchase price. For more information on this, please refer to our article specifically discussing the leasehold reform.
Can I set the ground rent review to double on each review?
Not if you want your buyers to be able to obtain a mortgage. The majority of lenders now have a blanket refusal policy on doubling ground rent reviews. The most accepted method of ground rent review is to have the review linked to the Retails Price Index.
What term should I grant the leases for?
The majority of lenders now require that leases are granted with a minimum term of 125 years.
When the purchasers sell their flats on, how will I know who the new tenant is?
We include requirements in all our leases that the incoming tenant must provide notice to the Landlord and any management company informing them of their purchase and providing details of their lender (if they have a mortgage). The incoming tenant must also enter into a Deed of Covenant with the management company where they agree to perform all the tenant’s obligations under the lease.
How do I deal with the parking spaces on the development?
With regards to parking spaces which are to be used by the owners of the flats, there are two options:
- They can be included in the property to be sold to the tenant under the lease. This means the tenant would be the leasehold owner of the parking space and therefore responsible for the maintenance of it.
- The tenant can be given just a right to use the parking space. The tenant would therefore not own the space and would simply have the exclusive right to use it. In this circumstance, the management company would usually then be responsible for maintenance.
What happens if a tenant does not pay the sums due under the lease, such as ground rent or service charge?
Usually it is best to try and resolve this amicably with a tenant and find out why they have not paid such sums, in order to avoid the costs involved in enforcement action. However, technically under the lease, if any amounts are unpaid for more than 21 days, the Landlord has the right to re-enter the property and the lease would be forfeited.
Is the tenant allowed to sub-let the property?
The usual lease provisions stipulate that the tenant is not allowed to sub-let or assign part only of the property. This means that they are not permitted to rent out a room to someone else. The lease allows the whole of the property to be sub-let, but only if certain conditions are met.
If there is a problem with another part of the building or development, can I access the flat after it has been sold?
Yes. The lease should reserve rights to the Landlord and the Management Company allowing them to access the property under certain circumstances. In order to exercise such rights, the Landlord/Management Company would need to give the tenant reasonable written notice (unless in the case of an emergency).
Can I sell the freehold to the building once I have sold all of the flats?
Yes absolutely. However, there are strict rules and procedures in place which govern the sale of freehold reversions including the requirements surrounding giving the right of first refusal to the flat owners.