If you were embarking on a development scheme with sales of apartments via long leases, what terms would you want in these leases to ensure that the building delivers the best return on investment and is easy to manage from both a managing agent and freeholder perspective? Julie Carr, Head of Real Estate Development at
Brady Solicitors, sets out some key points for both developers and property managers.
“As the developer, you have the opportunity to create residential leases that will make the building easy to manage whilst supporting good leaseholder / managing agent / freeholder relationships - all of which are key to the short and longer term profitability of the development.
“The lease is a long-term commitment between the landlord, perhaps the managing agent, and the leaseholder, whereby the leaseholder is entitled (subject to the payment of ground rent, services and insurance and complying with other covenants) to enjoy the property for a fixed period of time ranging between 99 and 999 years. Once created, a lease is difficult to vary without consent from all parties so it makes sense to consider important aspects at the outset.
“Whilst it may be tempting in the short term to just ‘recycle’ an old lease and try to make it fit for a new development, old leases often lack the key terms that support effective property management and certainty for all stakeholders.
“Any managing agent appointed to manage the property will want to take a close look at the lease, as will the original leasehold purchasers and their successors. So what are some key considerations when drafting a ‘perfect’ residential lease? The lease should:
- Be fit for purpose and factor in all bespoke aspects of the estate, the operation of the service charge, large cost items (lifts, biomass, etc) and the developer’s exit strategy;
- Set out the ground rent increases for certainty of investment value (ideally either fixed incremental increases or the higher of fixed percentage increases and the periodic movement in the Retail Price Index);
- Allow for full recovery of legal costs in relation to notices, enforcement action and breaches of covenants;
- Allow for full recovery of legal and other professional advice costs in relation to the operation of the service charge;
- Require the parties to follow a dispute resolution procedure prior to leaseholders instigating Right to Manage procedures, ensuring open dialogue on the importance of the supply of services, the real costs associated with managing blocks and the role of the managing agent;
- Ensure tenants are specifically aware of their obligations and contain clear enforcement provisions, for instance, in relation to allowing water from their apartment to affect other parts of the block.
Provide rights for managing agents to trigger forfeiture proceedings if a leaseholder fails to pay the service charge.
“Not all residential leases are created equal but, taking the time to draft a relevant and carefully considered lease in the early development stage can provide long-term certainty for leaseholders and support effective block management for managing agents and freeholders alike.”
