Property Management L1 Flashcards
What documentation does the RICS provide for property managers?
RICS Professional Statement – Real Estate Management 2016 (3rd edition)
Aims of the RICS Professional Statement – Real Estate Management 2016
Outlines the principles that share the culture of fairness and transparency that underpin all activities undertaken by real estate managers.
12 Principles of the RICS Professional Statement – Real Estate Management 2016
- HONEST Conduct business in honest, fair, transparent and professional manner.
- CARE & DIL - Carry out business with skill, care and diligence and ensure staff have necessary SKILLS.
- TOE & CHP = Always provide clients with terms of engagement & complaints handling procedure
- COI = Avoid conflicts of interest. If arise deal with them openly and fairly.
- DISCRIMINATION- Do not discriminate unfairly in dealings
- COMMUNICATION - Ensure good communication (clear, timely, transparent)
- MARKETING/ AD -Be honest with Advertising/Marketing.
- CLIENTS MONEY - Ensure clients money is held separately to other monies and covered by adequate insurance.
- PII INSURANCE- Have PII so client does not suffer negligence.
- OBLIGATION- Make sure all parties are clear of your obligations.
- USE PROF JUD - Always use your best professional judgement to provide best selling/buying price
- INSPECTION- Make sure inspections, meetings and viewings are carried out as per your clients wishes and having regard for security and safety of all parties.
Advice for Property Managers - RICS Professional Statement – Real Estate Management 2016 (3rd edition)
- ETHICS - duty of care, Conflicts of Interest, corporate social responsibility
- TOE - Securing instruction - Terms of engagement
- HOT - New lettings and lease renewals - negotiating lease terms & agreeing HOT.
- RENT/ SC/ SUS - Managing real estate - collection of rent & service charge & Sustainability
- Portfolio and asset management - Performance measurement, principles of portfolio management.
- ENDING INSTRUCTIONS- Ending an instruction- written confirmation and handover
- H&S - Safety & Security - H&S, personal safety, Data Protection
- MONEY, PII & CHP - Business Management - PII, Holding Client’s money, complaints handling
RICS Guidance Note for best practice for PM
RICS Guidance Note on Commercial Property Management, England and Wales, 2011.
Aims/ Outline of RICS Guidance Note on Commercial Property Management, England and Wales, 2011.
- Best practice for commercial property managers
- How PMs can be efficient, effective and accountable to client and statute law.
- DUTY OF CARE - States duty of care is to landlord (the client)
- KEY INFO FOR PM - Information on key duties like rent collections, service charge and H&S
- MODEL TOE - Provides model terms of engagement
RICS Guidance Note on Commercial Property Management, England and Wales, 2011. KEY POINTS
- Energy Management - PM should be aware of any new regulations relating to environmental performance of buildings. Client Carbon Reduction Commitment (CRC). i.e. meter readings in a timely manner. EPC FOR BUILDINGS
. - Management Fees - Fixed fee annual review or indexation – should not be related to the value of money.
. - Service Charge - Clear and transparency – apportionment under the lease provisions, Keep SC money in separate account
. - Managing the building – ensuring you have all the relevant lease info, handover info. – EXAMPLE AWARD HOUSE
Conti.. Energy Management
Need to be aware of envi perf of building –> Crucial EPCs monitoring
What is a blue chip covenant?
- Considered as a FTSE 100 company
- Reputation for quality, reliability and the ability to operate profitably in good times and bad
What is the Occupiers Liability Act 1957/1984?
FOR OCCUPIERS WHO PUT IN PLACE PREVENTATIVES TO DETER INTRUDERS
(4) STEPS TO PREVENT INJURY
.
(3) DUTY DISCHARGED BY TAKING STEPS TO GIVE WARNING
The Occupiers Liability Act 1984 has implications for those occupiers of premises who want to implement preventive measures intended to deter intruders from unlawfully entering their premises.
Subsection (4) provides that it is their duty to take reasonable steps to ensure that the intruder does not suffer injury;
.
but subsection (3) provides that their duty may be discharged by taking reasonable steps to give warning of the danger or discourage persons from incurring the risk.
Occupiers Liability Act 1957 vs 1984
The 1957 act is mainly concerned with lawful visitors and provides that all lawful entrants are owed the same ‘common duty of care’.
As the 1957 act was not concerned with trespassers, the 1984 was enacted to govern the duty of occupier to trespassers.
Case Law for Occupiers Liability Act 1984?
Lowery v Walker [1911]. The Claimant was injured by a horse when using a short cut across the defendant’s field. The land had been habitually used as a short cut by members of the public for many years and the defendant had taken no steps to prevent people coming on to the land.
Corporate Manslaughter and Corporate Homicide Act 2007
Deals with the criminal liability of organizations for deaths resulting from serious management failures.
Corporate Liability: The Act establishes that organizations can be held criminally liable for deaths that result from serious failures in their management systems.
Gross Breach of Duty of Care: To establish corporate manslaughter or corporate homicide, it must be proven that there was a gross breach of the duty of care owed by the organization to the deceased person.
- What are your duties under the Act?
Risk Assessment: Organizations are required to conduct risk assessments to identify potential hazards and risks associated with their activities.
Duty of Care: Organizations have a general duty of care to ensure the health and safety of their employees, customers, clients, and other individuals who may be affected by their activities.
Reporting and Investigation: Organizations should have mechanisms in place for reporting safety incidents and near misses.
What are the offences and penalties under the Act?
–> Corporate Manslaughter and Corporate Homicide Act 2007
- Penalties: If an organization is found guilty of corporate manslaughter or corporate homicide, it can face significant penalties, including an unlimited fine. The court may also order the organization to publicize the conviction.
- Crown Prosecution Service (CPS): The CPS is responsible for deciding whether to bring charges under the Act. It conducts investigations and, if appropriate, initiates legal proceedings against the organization.
What legal documentation do you require as a property manager?
- Title plan and register
- Leases - signed by LL & T
- Rent deposits
- Any licences
- Rent review memorandums
- Any deed of covenants and easements
Why is it important your property management database system is updated?
- This ensures we raise charges correctly
- We know if leases and inside or outside the act and don’t run the risk of creating a periodic tenancy
- We have key dates so can anticipate lease events.
What is Alienation
Alienation’ is the right granted in a lease for a tenant to assign, sublet, or share occupation of their property. –> I.E. Sublet the property or Assign the property
Alienation
Section 4 of L&T act 1988 - tenant can assign lease with L consent
Always read the lease!
The usual clause is that the landlord’’s consent is not to be unreasonably withheld or delayed.
Assignment vs Subletting
Upon ASSIGNMENT the new tenant (T2) has a direct relationship (used to be privity of contract) with the landlord
When SUBLETTING a new sub tenant (T2) has a direct relationship with the tenant (T1) and pays them the rent who then pays the landlord –> I.E. like UK Music at Savoy Hill - got profit rent
Alienation Clauses (x3)
Open covenant - Allowing alienation
Qualified covenant - Subject to some conditions
Absolute covenant - Not allowing a subletting or assignment
Why Sublet over assign?
- Its a requirement of the lease
- For part of the demise and the not the whole
- If the tenant wants to reoccupy in the future – take back occupation.
- The new party is of a lesser covenants strength
- If the market rent is higher that the passing rent (face rent) then there is a profit rent (E.G. Like UK Music, they got a £10K profit rent)
What to do when dealing with an assignment or a sublet
- Read the lease before advising client - are there any grounds for withholding consent
- Will the tenant undertake the surveyor’s and legal costs
- Obtain client approval to proceed
- Has a rent deposit been agreed and is there an authorised guarantee agreement
- Cov Strength of the proposed new tenant? Are there accounts and references to consider?
What Act relates to the Assignment of Leases?
The Landlord and Tenant Covenants Act (1995). Came into effect 1st Jan 1996
What does it do? –> The Landlord and Tenant Covenants Act (1995)
- It relates to the assignment of leases.
- It abolished privity of contract.
- Leases created after this act are known as “new” leases.
- It created Authorised Guarantee Agreements.
- Allowed for only one AGA to be in place at a time.
What is Section 17 Notice in the The Landlord and Tenant Covenants Act (1995)
A section 17 notice must have served upon a guarantor within 6 months of the tenant defaulting to require the former tenant who has entered an AGA to pay the arrears.
Section 17 - requires the landlord to act quickly when tenant falls into arrears - they must serve Section 17 notice on any former tenant and their guarantor within 6 months of the start of the arrears.
What is Privity of contract
“Privity of contract” refers to the legal relationship that exists between parties who have entered into a contract.
In the context of landlord and tenant law, it signifies the DIRECT contractual relationship between the landlord and the tenant.
The first (original) tenant can assign his interest in the tenancy but not his relationship with the landlord.
What is an Authorised Guarantee Agreement?
It is governed by the Landlord and Tenant (Covenants) Act 1995.
An AGA is an agreement which places an OBLIGATION on an OUTGOING tenant to guarantee the performance by the new tenant or “Assignee” of the tenant covenants contained in the lease.
The original tenant may still be liable for the lease obligations even after the assignment.
To address this, the landlord might require the outgoing tenant to provide an Authorised Guarantee Agreement.
If the new tenant (assignee) defaults on the lease, the landlord can pursue the original tenant (assignor) for any unpaid rent or breaches of the lease terms during the guarantee period.
It’s important for both parties involved (original tenant and new tenant) to review and understand the terms of the Authorised Guarantee Agreement .
There can only be one in place at any time
Steps of AGA
Steps:
1. Original Tenant (Assignor): assigns premises to new tenant
- Assignee: The new tenant (assignee) takes over the leasehold interest.
- Authorised Guarantee Agreement (AGA): The outgoing tenant (assignor) agrees to guarantee the performance of the lease obligations by the new tenant (assignee).
- Guarantee Period: The AGA typically covers a specific period, during which the original tenant remains liable for the lease covenants.
AGA Vs Privity of Contract
THE ACT ABOLISHED Privity of Contract meaning that under a lease granted after the Act came into effect, a tenant who assigns their lease to a new tenant is released from their direct contractual obligations to the landlord.
The Act introduces AGAs to ensure that the original tenant still has some responsibility for the performance of the lease by the new tenant.
What does an AGA allow the Landlord?
- If the Assignee/new tenant fails to perform the tenant covenants in the lease (which include payment of rents and repair obligations) the AGA allows the landlord to pursue the outgoing tenant under the terms of the AGA.
- An AGA also provides the landlord with the option to insist on the outgoing tenant taking on a new lease (on the same terms of the existing lease) if the new tenant defaults and the existing lease is disclaimed.
If a tenant makes an application to assign, is it reasonable to demand an AGA is put in place?
No as per the recommendations in the Code for Leasing Business Premises 2007.
The Codes Position on AGA
(The Code for Leasing Business Premises 2020)
The Code for Leasing Business Premises 2020 states that although AGA are common place exceptions by landlord, tenants should seek yo not enter into an AGA if for example the tenant tenant is financially strong enough, pay an app rent deposit and provides a suitable guarantor
When do you think it is reasonable to insist a AGA is put in place?
It would be reasonable to request for a AGA to be put in place if the assignee is a lower financial standard OR is resident registered overseas.
Assignment vs Sublet according to The Code for Leasing Business Premises 2020
Assign:
Leases should allow tenants to assign the whole of the premises with landlord consent which is not to be unreasonably withheld or delayed.
Landlord may set out circumstances for refusal but these should be reasonable and appropriate. A requirement for an AGA clause should be clearly stated in the lease.
Sublet:
Leases should allow tenants to sublet the whole of the premises and may allow subleases of part if appropriate without security of tenure.
- It states that new leases should permit a tenant to sub let the lease at market rent and not the passing rent, if the market rent is lower than the passing rent.
Subleases should be required to be on terms consistent with the tenant’s own lease.
What does the Code for Leasing Business Premises 2007 state about sub lettings?
It states that new leases should permit a tenant to sub let the lease at market rent and not the passing rent, if the market rent is lower than the passing rent.
If the market rent is lower than the passing rent, what risk could this pose to a Landlord?
- The Code for Leasing Business Premises states that new leases should permit a tenant to sub let the lease AT THE MARKET RENT and NOT the passing rent.
It could mean the tenant is making a loss on the rent and cannot afford the difference. They may then default on their rental payments. This could cause the landlord to incur costs to recover sums/take unit back.
What options are available to you if you find your tenant has illegally sublet/assigned?
- Effect forfeiture
- Claim damages
- Seek an injunction
As a landlord, what options are available to you if your tenant has sublet their lease but consistently misses rent payments?
- Look to surrender the current lease and agree a direct lease with the sub tenant.
- Serve a Section 81 notice under the Tribunals, Courts and Enforcement Acts 2007.
- From a tenant point of view you could request an overriding lease.
Can you CRAR a sub tenant?
You can only CRAR a sub tenant is a Section 81 notice under the Tribunals, Court and Enforcement Act 2007 has been served.
What does the Section 81 notice involve? (notice under the Tribunals, Court and Enforcement Act 2007)
It will be served to the sub tenant when the head tenant misses rent payment. It must state the amount of arrears owed to the superior landlord.
Another problem for the superior landlord is that the notice does not take effect immediately (unlike the current position), but instead the superior landlord has to wait for 14 clear days after the notice is served.
The problem with the 14 days’ delay is that if the superior landlord’s tenant recovers the rent from the sub-tenant during those 14 days, the notice will not catch the sub-tenant until it becomes liable for its next rent instalment, which can lead to significant delays if the rent is paid quarterly in advance. This 14 day delay undermines the effectiveness of this remedy for superior landlords.
Alterations
- Carried out by a tenant during their lease
- Must be approved in writing by the landlord prior to undertaking the works
- They are usually subject to reinstatement at the end of the lease
- Some works such as demountable partitioning or other non-structural works may not require landlord’s formal consent so Always Read the Lease.
Licence for Alteration
To be completed/ documented before the works commence
Obtain an undertaking for costs at the commencement of the instruction –> Legal and surveyor costs
Most licenses require the tenant to reinstate the work at the end of the lease
Why is it useful to document alterations?
x2 useful functions:
- To protect the parties at rent review
- To protect the parties at dilapidationd at the end of the lease
Why would a Landlord complete alterations on behalf of a tenant?
- They may do it as part of the agreed new lease terms
- May complete at rent review or lease re-gear
- Landlord can then rentalise these works.
What if the tenant completed improvements that added value, without the landlords consent which was required?
The landlord would have the right to rentalise these works.
RICS Guidance on LTA
RICS Guidance Note on Licence for Alteration 2013
RICS Guidance Note on Licence for Alteration 2013
Sets out advice to surveyors who are dealing with applications from tenants to make alterations to office & industrial premises
States the importance of dealing with the matter without unnecessary delay and ensuring the Licence is completed to protect both parties
Licence must clearly document the works agreed
How can a tenant apply to complete improvement?
- Tenant services a notice of intention to the landlord
- Must include their proposed plans
- The landlord must respond within 3 months
- If no response, tenant is free to carry out the works.
- If landlord objects the tenant will have to apply to the court for a Certificate authorising the improvement as a proper improvement.
When doing an LTA
- Read the lease - do yo need landlord consent for changes?
- Always ask for full scope of works/RAMS/specification
- If wayleave could ask for proposed route - Obtain an undertaking for the surveyor’s and legal costs
- All alterations need to be documented in an LTA
- Consider if reinstatement is required at lease expiry
- Check with Equality Act 2010 compliance and there is a RAMS in place
- Report to client and obtain instruction
- Instruct client’s lawyer to prepare LTA
- Inspect the completed works to ensure that they are as agreed.
Can you provide me with an example of how you have dealt with an application for alterations?
E.G. KINGS HOUSE, 1ST FLOOR
- I dealt with an application for alterations from a tenant.
- Following my review of the information the works were external and structural. I checked the lease to see if the works were permitted and if they required landlord consent of which they did.
- I notified my client of the application.
- I sent an undertaking for fees to the tenants.
- Fees were to cover my surveyor, legal and building surveyor fees.
- The letter also requested scope of works, existing and proposed plans, risk assessments and method statements.
- This information would then be passed to the instructed building surveyor to review and approve.
- On agreement of the works I would instruct a solicitor to document the licence for alterations.
Landlord and Tenant Act 1927
The Landlord and Tenant Act 1927 addresses various aspects of landlord and tenant relationships, including alterations to leased premises.
How could a landlord avoid the implications of the Landlord and Tenant Act 1927?
They could ensure they install a clause in the lease stating improvements require landlord consent and ensure they have a clear reinstatement clause.
Landlord’s Consent for Alterations - Section 19
Section 19 of the Landlord and Tenant Act 1927 deals with alterations.
If a lease prohibits improvement being made to a property without Landlord’s consent , section 19 of the act imposes a proviso that such consent cannot be unreasonably withheld.
What does Section 19 of the Landlord and Tenant Act 1927 refer to?
A covenant against making “improvements” without consent is deemed to be subject to a proviso that consent is not to be unreasonably withheld: Landlord and Tenant Act 1927 s.19(2).
If the improvement does not add to the letting value of the holding, the landlord may also require as a condition of such licence or consent, where it would be reasonable to do so, an obligation to reinstate.
What does the Landlord and Tenant Act 1927 state in regard to alterations?
- If a lease bans improvements being made to a property without the landlords consent then Section 19 of the Act enforces a proviso that this consent cannot be unreasonably withheld.
- If the section 19 procedures have been followed the landlord may be obliged to pay compensation for alterations that may constitute improvement
Dilapidations
- Always read the lease
- These negotiations take place at the ease expiry to bring the property back to its condition at the start of the lease, assuming there is a repairing liability
- Check the lease terms to understand the repairing responsibilities of both parties and whether there is a schedule of conditions.
- Check for any LTAs which may have been granted
- The tenant is usually required to return the building to its original state, or otherwise as stated in the lease
What are dilapidations?
Dilapidations are to bring the property back to its condition at the start of the lease in line with the repair liability.
RICS Guidance Note - Dilapidations in England and Wales 7th edition, September 2016
Two Choices before lease expiry
- Tenant can do agreed works
OR - Tenant can agree a sum with the landlord to complete the works.
(BREACH + LOSS + EVIDENCE = RECOVERY)
How is this sum for dilapidations calculated?
BREACH + LOSS + EVIDENCE = RECOVERY
What notice must be served with interim schedule of dilapidations?
A section 146 notice in line with the LAW OF PROPERTY ACT 1925
Is a claim for dilapidations limited?
- Yes. Claim is limited to the costs of the works based on the diminution in value of the reversionary interest. i.e. the difference in value of the property upon possession had the covenants to repair and decorate not been undertaken.
- If the landlord plans to substantially refurbish or demolish the property then the value of the reversion could be nil.
- A landlord can only claim the amount lost because of a tenants breach of the lease.
What are the 3 different forms of dilapidations schedules?
- Interim schedule
- served by landlord or tenancy during the lease, with at least 3 years remaining
- Terminal schedule
- served normally in the last 3 years of the lease.
- Final schedule
- served at or after the lease expiry/break clause date when the tenant is out of occupation and the landlord wants to agree a claim for damages.
What would a dilapidations schedule contain i.e. form of schedule?
- Outline repairing obligation
- State the remedy and cost of the breach
- Fees and VAT for the claim for surveyors and lawyers
- Negotiations conducted on a without prejudice basis until final agreement
- If agreement is not reached, landlord’s surveyor may be required to prepare a Scott Schedule for the Court ADR (alternative dispute resolution), setting out a summary of the L&T position
Guidance on dilapidations
RICS Guidance Note on dilapidations 2016
Summary - RICS Guidance Note on dilapidations 2016
Aims to reduce claims between L&T
Key Points:
- Both parties keep to the agreed timescale
- Guidance on diminution valuations
- Parties in dispute are expected to act reasonably and make genuine endeavours to settle
Why may dilapidations not be agreed at the end of a lease?
- Lease is not FRI
- Reinstatement not required by the landlord
- Schedule of condition limits liability
- Building is going to be demolished or majorly refurbished after lease expiry (if the value of the reversion is nil)
- Use of the diminution in value cap
- Tenant is no longer solvent/ gone into administration
- Landlord and tenant may agree to roll over the dilapidations liability until the end of the next lease granted.
Can you tell me what you would ensure you had in place for a empty/vacant building?
- Building insurance - tell them it’s empty
- Asbestos survey - maintain register
- Landscape/gardening
- Fixed wire test
- Obtain EPC and maintain MEES
- Tape up letter box - secure property and prevent arson (criminal act of deliberately setting fire to property)
- Agreement of a disposal strategy and marketing initiatives
- Turn off services - drain down property
- Arrange and record regular inspections (for insurance purposes)
- Inform local authority for rates
- Any caretaking services needed for M&E services, undertake H&S and FRA for building (remove combustible materials)
What should you insure for?
- Fire
- Storm
- Flood
- Subsidence
- Loss of rent and service charge
- Theft
- Terrorism
- Public liability
Insurance
- Responsibility of landlord to arrange and re-charge the tenants
- Insurance Act 2016 - introduced more accountability for insurers, responsibilities to the policy holder to provide rel information and aim to reduce claims
Rent Collection - x2 principles of rent collection
x2 principles of rent collection
- Accuracy of information
- Timing
How can you promote rent collection?
- Ensuring information and invoice is accurate
- Ensuring tenants are being provided there invoices in sufficient time -
-> e.g. At Tandem invoice is issued 6 weeks before quarter day to allow tenant sufficient time to pay. We have credit controllers who issue invoices and chase outstanding payments
Rent Collection summary
Usually paid on quarterly in advance using English quarter days
Remember it’s client’s money
Check terms of the lease for timing of payment and interest on arrears - usually % of bank base rate
Client accounting procedures must comply with current RICS regulations
For CRAR what is it taht the enforcement agent is permitted to seize
Serve 7 day warning, make inventory for items. What can they take
Enforcement agent can take stock. Non perishable item i.e. can’t take sweets but can take tv
Items that belong to the tenant that have a value on their balance sheet but depend on the type of stock
Can you reduce taht 7 day warning with CRAR
Yes - could go to court and get a court order to reduce 7 days to an app time scale.
Demonstrate to court to reduce 7 day warning
Can you talk me through the CRAR process?
- Commercial Rent Arrears Recovery
- This was introduced by the Enforcement, Courts and Tribunal Act 2007 in 2014
- Replaced the law of distress
- Arrears must be at least seven days worth
- CAN ONLY BE USED FOR RENT plus VAT and interest payable
- ONLY FOR COMMERCIAL
- Must provide 7 days notice
- If still not paid enforcement agent will visit.
- Following this if still not paid the enforcement agents will seize goods.
- If still not paid after 7 days enforcement agents can sell the goods
- Fees must be specified on the entry notice.
CRAR Summary & Main points
The Tribunals, Court and Enforcement Act 2007 replaced the the old with a new regime called Commercial rent arrears recover April 2014.
Main Points:
- The scheme is to be available only to commercial landlords where a min level of went is due under commercial lease (Only for commercial!)
- There is no min amount of arrears
- Can only be used for basic rent demand plus VAT and interest payment and NOT service charge.
- See timeline.
CRAR Timeline
CRAR set of conditions which will need to be met before a landlord can exercise CRAR
Timeline:
- Min of 7 days unpaid rent
- Min of 7 days clear days warning notice
- Enforcement agents visit
- 2 clear days to follow
- Re-entry by enforcement agents to seize goods
- Allow 7 clear days before sale of goods
- Fee must be specified on the entry notice
Can CRAR be used on inclusive rents?
Where a landlord has an inclusive rent they must identify the amount payable for the use and occupation of the property in order to be able to exercise CRAR.
Can CRAR be used on an expired lease?
- This is dealt with in section 79 of the 2007 Act.
- CRAR ceases to be exercisable when the lease ends.
- Can CRAR when tenant is holding over
What are Rent Arrears
If your rent is not paid, the money owed is called ‘rent arrears’
Warning signs of potential rent arrears
- Bounced cheques
- Persistent late payments
- Arrival of post dated cheques
- Unable to contact the tenant
Rent Arrears
- Read the lease
- see what’s in place for landlord to recover arrears
i.e. Check whether there are any previous tenants who have privity of contract of an old lease is granted prior to 1996, guarantors or an AGA.
- See if there is a rent deposit
- Commercial leases typically allow for interest to be paid at 2-4% above the bank base rate 7-14 days following the rent payment date.
- If allowed in lease, charge interest for all late payments.
- Consider payment plan to keep tenant in occupation and avoid empty rates
- Seek legal advice as to options available and seek client’s instruction
- Act promptly to try and recover outstanding monies
Remedies for rent default
Options to consider if no payment has been received
- Court proceedings
- Pursue former tenant and guarantor
- Use rent deposit
- Serve a stat demand
- CRAR Scheme
- Forfeit the lease
- Negotiate a payment plan
Remedies/options for rent default explained
- Court proceedings
- Slow and costly. The threat of court may make tenant pay - Pursue former tenants and guarantors
- Check to see if there is an AGA in place or any former tenant of the lease was granted before 1st Jan 1996.
- Section 17 of L&T Cov Act 1995 sets out strict timetable for the recovery of rent arrears from an assignor within 6 months
- Use rent deposits - draw down to settle arrears. Notify tenant of intention in line with rent deposit deed
Remedies/options for rent default explained
–> Statutory Demand
- Serve a statutory demand
- Step to pursuing bankruptcy or winding up proceedings. Put pressure on the tenant to pay.
- Advisable only when there is no dispute about the level of arrears
- Tenant has 21 days to pay the arrears, after this the landlord can present a bankruptcy or winding up petition to the court if the arrears are over £750
- Serving a statutory demand gives the debtor 21 days to pay the debt.
- If not paid after then, the landlord can present a bankruptcy (must be over £5k) or winding up (must be over £750) petition to the court
Remedies/options for rent default explained
CRAR, Forfeit and payment plan
- CRAR scheme
- Statutory procedure that allows landlords of commercial premises to recover rent arrears by taking control of the tenant’s goods and selling them.
- In order to use CRAR, a landlord must provide 7 days’ notice of enforcement. Once this period has expired, Certificated Enforcement Agents may enter the property - Forfeit the lease
- Ending of a commercial lease. This is achieved by the landlord exercising their contractual right to end the lease by gaining peaceable possession. It can only be done after a qualifying event has occurred.
There will be a forfeit clause in the lease and then permitted to forfeit the lease
- Negotiate a payment plan
- An arrangement between a landlord and a tenant to structure the payment of certain financial obligations over a specified period of time. This is often done to accommodate the financial circumstances of the tenant or to address outstanding payments.
Lease Forfeiture - summary
A forfeiture clause in the lease allows the landlord to re-entry the property and gain possession for a breach if the lease.
They’ll be a clause in the lease
Special procedures apply for a tenant in administration or receivership
There must be a forfeiture clause in the lease
Rent must have been properly demanded
Tenant has the right of relief from forfeiture from the court within 6 months. The tenant does not have to be warned that the lease is to be forfeited.
How do you effect forfeiture?
- Either by peaceable re-entry or by court action
- Must be a forfeiture clause in the lease.
- Rent must have been properly demanded
- By accepting rent after the breach you waive forfeiture
- If you want to effect forfeiture you must put stop guards in place
- You forfeit the lease by the landlord re-entering the property EITHER by physical peaceable re entry (when you get the enforcement agents to go in and change the locks) or by commencing county court proceedings.
- This process terminates the lease.
Can you re let the unit immediately after effecting forfeiture?
- You can however the tenant is able to apply for relief within 6 months from the court.
- If effecting forfeiture for any other covenant compared to rent then Section 146 notice (from Law of Property Act 1925) must be served.
What do you believe to be common disputes in property management?
- Arrears
- Service charge
- Repairs
As a property manager, what are the most important lease terms to you?
- Definitions of rent
- Service charge provisions
- Inside or outside the act
- Repair liability clauses
- Responsibilities to insure
- Alienation
Why is it important your property management database system is updated?
- This ensures we raise charges correctly
- We know if leases and inside or outside the act and don’t run the risk of creating a periodic tenancy
- We have key dates so can anticipate lease events. - i.e. if a reversionary lease is coming up must ensure that is on the system to allow smooth transition i.e. Ascot Lloyd
What would you do if you found out a tenant went into administration?
- Inform my client
- See what you can do from legal view
- Read the lease
- Make contact with administrators as soon as possible
- Review what’s owed
- Complete proof of debt
- Tell insurers
- Consider dilpas
- See if administrators still trading and charge for rent
What types of liquidation are there?
- Credits voluntary –credits vote
- Compulsory – cannot pay so apply to court to liquidate
- Members – you can pay but you want to close it
Restructuring leases / lease engineeringF
Many landlords consider lease engineering to maintain value in their investment or retain a tenant:
For example:
- granting a longer lease in return for a lower rent or rent free period
- Agreeing to a Company Voluntary Arrangement (CVA) or a pre-pack administration with a tenant
- Agree to the monthly payment of rent
- Insertions or removal of break clause subject to the payment of a premium
Why would a schedule of condition be agreed?
- Limit tenants repair obligation
- Agreed before commencement of the lease
- Reinstatement at expiry will be limited by the terms of the schedule
- Must include photographic record
- Must be referenced in the lease
Effective FRI vs FRI Lease
Effective FRI means that the tenant is not directly responsible for all repairs. When the landlord is responsible for repairs and recharges via the service charge.
FRI lease where the tenant has responsibility for all external and internal maintenance, decorations and repairs as well as the liability for insuring the building. Under an FRI lease the landlord has no repairing or insuring liability.
Repairs: Landlord’s remedies for breach of repairs
–> 4 remedies
What are the 4 main remedies open to a landlord to deal with a tenant who is not repairing its property
- Serve a repairing notice
- Forfeit the lease
- Serve interim dilapidation schedule
- Landlord’s entry to do the works (Do the works and charge the tenant)
- Serve a repairing notice
- How would you complete a Notice to Repair?
- A Notice to Repair is served under Section 146 of the Law of Property Act 1925. Served by the landlord during the lease
- Such Notices are usually served to remedy one specific repairing or decorating breach
- Notice must be in writing and Must comply with lease terms
- Serve a repairing notice
- What must be on the notice to repair?
- Details of the repairing/decorating breach
- Timescale to remedy the breach
- Actions if the tenant fails to remedy the breach
- Forfeit the lease
- Must be a forfeiture clause in the lease
- A landlord wishing to forfeit the lease for disrepair will have to serve a Section 146 notice form Law of Property Act 1925 on the tenant
- This should state why the tenant is in breach of the repair covenant and outline what must be done to remedy the breach
- Must give tenant reasonable time to remedy the breach
- How would you instruct for a interim schedule of dilaps to be done?
I would instruct a building surveyor to prepare a draft or formal schedule to serve upon the tenant
- Landlord’s entry to do the works (Do the works and charge the tenant)
Jervis and Harris clauses (1996) is the leading case for landlord’s right to re-entry to undertake repairs then claim to recover the cos from the tenant f tenant does not complete the repairs.
The clause requiring the tenant to reimburse the landlord for the cost of undertaking repairs was a debt and not damages
This gives the landlord a right to pursue an effective remedy against defaulting tenants, to ensure the premises are kept in good repair for the duration of the lease term.
How would you exercise landlords right to re-entry?
- Known as Jervis and Harris clauses (1996)
- Must review lease first
- Landlord re-enters the property
- Completes the repair
- Then claim to recover the cost of the repair from the tenant as a debt
When is it best to use a Jervis and Harris clauses (1996)
Should be used in the following instances:
- Tenant is solvent (tenant has money to pay the rent in full and on time)
- Landlord wants lease and rent to continue
- Landlord wants control of repair
- Where the threat of re-entry may compel the tenant to do the work
–> Leasehold Property Repairs Act 1938
Leasehold Property Repairs Act (1938) applies to leases granted for a term of 7 plus years and has at least 3 year until lease expiry.
Aims to protect the tenants against onerous interim schedules of diliaps.
The Act requires notice landlords to serve a Section 146 notice on the tenant.
What needs to be proved for a court to enforce a repair?
Leasehold Property Repairs Act 1938
The court is only to permit enforcement of the repairing covenant if the landlord can prove ONE of the four following points:
- Immediate repair needed to prevent substantial diminution in value
- Immediate remedy to comply with legislation
- Immediate remedy is required in the interests of other occupiers in the property
- Fixing now would be small cost compared to if it was left
(The Act requires notice landlords to serve a Section 146 notice on the tenant.)
Planned Maintenance Programme
Includes 3 stages:
- Cyclical Maintenance: regular activities that are completed irrespective of the condition i.e. H&S maintenance, redecoration and servicing the plant
- Preventative Maintenance (PPM): completed by building surveyor. Forecasts future repairs needed and plans timetable for undertaking works i.e. single to double glazed windows.
–> (PPM is the maintenance that is performed purposely and regularly to keep the structure and fabric, facilities, plant and equipment of a building in satisfactory operating condition.)
- Responsive maintenance - by building occupiers such as repairing a leak, unblocking a drain
Schedule of conditions
Limits the tenant repairing obligation in respect of agreed items of disrepair for the duration of the lease.
Agreed by negotiation between L&T prior to commencement of lease
Reinstatement at the end of the lease by the tenant will be limited by the terms of the sch of conditions
Must be record - using photos and plans
Service Charges
Charges to tenants or landlord to maintain and manage a property
Common for new tenants to negotiate service charge caps to limit their future liability
Landlord liable for void space.
Service charge
Budget should be agreed with the tenant prior to the commencement of the SC year
Quarterly billings are based on this estimate
Annual accounts are prepared at the year end
Balancing payment made that the end of the year upon the presentation of audited accounts .E.G We use Cooper Parry. third party auditors
PM should keep monies in separate SC accounts with transparent records for income and expenditure
RICS Professional Statement - Service Charge in Commercial Property 2018
Aims and Objectives of Prof Statement
- Improve the general standards and promote basis practice, uniformity, fairness and transparency in the management and administration of service charge budgets in commercial property.
. - Ensure timely issue of budgets and year end certificates
. - Reduce the causes of disputes and to provide guidance on resolution
. - Provide guidance to solicitors, clients and managers of SC in the negotiations, drafting , interpretation and operation of leases
PRINCIPLES
Professionals involved in SC accounts must act in accordance with these principles,
- LEASE - Expenditure we are looking to recover must be in accordance with the terms of the lease
- Must seek to recover no more than 100% of the proper and actual cost of the provision or supply of the services
- Appropriate explanatory commentary must be provided.
- SC accounts showing accurate expenditure constituting the SC are provided to tenants annually
- Must ensure that a SC apportionment matrix for property is provided to all tenants annually
Apportionment of SC
4 methods of apportionment:
- Floor areas
- Fixed percentages
- Rateable value ( an estimate of what it would cost to rent a property for a year, on a set valuation date - difficult if RV changes or are appealed)
- Weighted floor area - e.g. a department store in a shopping centre
Handover arrangements
- The RICS Information Paper on Commercial Property Handover Procedures (2015) provides information on how to handle a change of managing agent or client.
E.G. AWARD HOUSE taking over management
Bench marking of service charge
Bench marking ensures that operational performance standards are checked against an industry used index to ensure best practice and high levels of performance
- e.g. Global Estate Management Code for occupiers for commercial property occupiers
Sinking Funds & Reserve funds
RICS Information Paper - Sinking Funds, reserve funds and depreciation charges (2014)
–> provides advice on legal advice and achieving full transparency
–> Maintain full communication between L&T with clear accounting
Sinking Funds - periodically setting aside money for the replacement of a wasting asset e.g. roof / chiller (plant), lift
Reserve fund - fund formed to meet the anticipated future cost of maintenance to avoid large SC increases each year
User Clauses
Relates to the planning use of the property and or how the property can be used
Two Types of clauses:
- Planning use
- Specific use
Original use classes
OLD Class A – retail, food and drink, financial and professional services
OLD Class B – offices, industry and places of work
Use classes changes take effect from 1 September 2020 –> ‘Class E’ is a broad category of commercial, business and service uses. It was introduced by the Business and Planning Act 2020.
Class E effectively amalgamates the former Class
New Use Class (E)
Class E effectively amalgamates the former Class i.e. A1 Retail, A3 Restaurants, B 1 Office
Insolvency - Forms of insolvency
(Options if tenant cant pay debt. Is state of financial distress company)
- Administration
- Receivership
- Company Voluntary Arrangement
Administration - Forms of insolvency
Administration - administrator appointed by creditors (Enterprise Act 2002) to rescue an insolvent company
The Act provided fr more streamlined and simplistic out of court procedures.
Commonly known as the ‘Rescue Route’. Processed commenced by either company, lenders or creditors
Purpose is to create a period of protection for the company fr the administrator to deal with the assets of the company in an appropriate way.
The period of protection is called moratorium and it restricts the actions which can be taken against the company while it is in place. - Tricky for landlord
Administrator must send proposals to the creditors within 8 weeks and then with their agreement will implement a strategy.
The most common scenarios are:
- Pre-pack business sale
- Administration trading
- Close down and wind up
While the tenant is i administration, the options to the landlord are limited due to the moratorium.
Receivership - (Form of insolvency)
Used when a company defaults in payment to a lender who is secured by a fixed charge
An administrative Receiver or Law of Property Act Receiver is appointed by creditor to realise assets to repay debts.
The receiver takes control of the company and realises its assets often by selling the business as a going concern with a view to repay the lender.
Company Voluntary Arrangement (CVA)
(Like a court payment plan)
A contract between a company ad its creditors appropriate for when a company is insolvent but the directors believe it has a viable future.
The company appoints an insolvency practitioner as a nominee to supervise and oversee the implementation of the proposed strategy.
Under this statutory scheme the company agrees terms for the repayment of debt.
- Voluntary arrangement with creditor as to how the debt with be settled
- Voluntary liquidation
- Winding up of company
- Bankruptcy
- Court procedure for an individual
Pre-Packed Administration
This allows the directors of a company to buy out and retain elements of the business which are trading well and placing the remainder of the company into administration.
What to do if a tenant becomes insolvent
Insolvent tenant - where they consistently fail to pay their rent on time.
- Tell your client
- Consider taking legal action before a temporary or permanent moratorium is in place
- Make early contact with Administrator or Receiver
- Check the amount of monies owing in rent, service charge and insurance
- Ensure the Property is insured and tell the insurers it is vacant
- Submit a claim for arrears and if still occupied, make a application for rent
- Consider preparing schedule for dlipas
- Consider the position regarding empty rates
- Think about re-letting the property.
Repair - section 146
Section 146 will allow the tenant 6 months to remedy the breach
Payment plan
Solution to recover some arrears
Want to check the cov strength of the tenant before making recommendation of this?
- if recommended payment plan for a poor tenant cov, 18 month payment plan. They may not be able to honour that as they be out of business
Look at audited and management accounts:
Audit accounts may be a year out of date as they are submitted 9 months after year end
Management give a better clearer view on how the business is doing on a monthly or quarterly basis
Management fee
Set on a fixed price basis rather % of expenditure (not appropriate)
Subject to annual review or indexation
