Freehold management - the strategies

With the influx of new Landlords prior to the Stamp Duty Land Tax (“SDLT”) rate increase on 1^st April 2016, these Landlords will now need to consider the strategies of managing their properties and establish which method suits them best.

Usually, leases and tenancy agreements will set out obligations on the landlord to maintain certain parts of the property, including the structure and any common areas which are used by all tenants (for example, stairwells). The landlord may also be obliged under the terms of the lease or tenancy agreement to provide other services, such as security, cleaning or lighting of the common areas. The cost of this is usually recovered through a service charge which the tenant will be obliged to pay.

Landlord

Some landlords will be happy to directly manage the provision these services. They can therefore ensure that their obligations are complied with, but for a number of landlords, this will be too burdensome and time-consuming.

Managing agent

Most landlords will therefore outsource their obligations to a managing agent. The landlord remains primarily liable to provide the services, but he will contract with the managing agents to deal with the day-to-day management of the property. Should the managing agents fail to do so, he will be able to pursue them under the contract. This can be very attractive to a landlord, as it substantially reduces the burden on them regarding managing the property, the finances and any troublesome tenants, while leaving the investment to merely provide profits. This strategy can be very effective where parts of the property are let on short-term tenancies or sold on long leases, but some investors won’t be happy losing out on a cut of their profits to employ a managing agent.

Management company

Another strategy, which should be considered when all of the flats are sold or to be sold on long leases, is for the tenants to form a management company. The management company would take on the same responsibilities regarding the day-to-day management of the property as a managing agent would, whilst giving the tenants a say in what services are prioritised and which parts of the building need updating. However, someone will still need to carry out all the administrative work involved in running a company – the tenants may be unwilling to carry out the task or may just not be very good at it! Should the landlord require a management company, consideration should be given to exactly what role the management company will have in relation to the property.

The freehold of the property could be sold to the management company subject to the leases. The management company will then step into the landlord’s shoes, taking it off his hands entirely. Although the landlord will now lose his investment long term, in the majority of cases a great deal of the profits will have been received already through sale of the flats.

The landlord could grant a lease over the whole property, subject to the flat leases already granted. This will again take the management off the landlord’s hands, but under this lease he would still receive rent, and be able to enforce any repairing obligations under the leases.

The management company could become party to the leases to make promises to provide the services subject to receiving the service charges. Careful drafting of this lease will be needed, as the management company will need to be given the necessary rights to access the building and carry out works in order to provide these services. This strategy will also be dangerous if the lease was granted before 1 January 1996, as any promises made between the managing company and the tenants may not be enforceable.

Whichever strategy is chosen, it must be approved by the mortgage lender. Some lenders may consider certain strategies to be unacceptable.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.