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Section 5 Notices
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The Right of First Refusal
The Right of First Refusal (RFR) is provided by Part 1 of the Landlord and Tenant Act 1987 (the 1987 Act) as amended by the Housing Act 1996.
Where a landlord is proposing to sell his interest in a building containing flats in relation to which the RFR exists, he must, by law, first offer it to the tenants before offering it on the open market. He must serve formal notices on the tenants telling them what he is intending and must provide time for them to consider the offer; he cannot sell to another party during that time, nor offer the interest to anyone else at a price less than that proposed to the tenants or on different terms.
Breach of these legal obligations by the landlord is a criminal offence. If the landlord sells without providing the Right of First Refusal, the tenants can serve a notice on the new owner demanding details of the transaction, including the price paid; they can then take action to force the new owner to sell to them at the price he paid.
It is important to understand certain key principles of the RFR:
it is not a means of forcing a landlord to sell his freehold interest in a property (this is provided by the enfranchisement provisions of the Leasehold Reform, Housing and Urban Development Act 1993). It is an opportunity for the tenants to purchase that interest before it is offered on the open market or by auction.
*the right follows a landlord’s decision to sell and the tenants can only react to the landlord’s offer. He can withdraw the offer at any time before the contract is binding.
*the right is available both to leaseholders and regulated (fair rent) tenants but not to houses occupied as single dwellings.
*the price is set by the landlord, or by auction where the landlord decides to sell that way. There is no right for that price to be determined by a Leasehold Valuation Tribunal or anyone else. However the landlord cannot sell or offer the interest to another party on different terms or at a lower price than that originally offered within 12 months of his notice, unless he again offers the Right to the existing tenants on the new terms and/or at the lower figure.
*the price set may, in some circumstances, be lower than that which could be achieved through a collective enfranchisement. However, it could also be higher.
*the requirement to make the offer and the procedure involved is set out in the Act. If a landlord fails to comply with any of these statutory requirements he commits a criminal offence. The requirements also apply where the landlord’s interest is being sold by a Receiver, a Trustee in bankruptcy or an Executor following grant of probate.
*the right is not available to tenants of local authorities, housing associations, nor, in some cases, where the landlord lives in the building.
Right to Manage
The Commonhold and Leasehold Reform Act 2002 provides a right for leaseholders to force the transfer of the landlord’s management functions to a special company set up by them – the right to manage company. The right was introduced, not just as a means of wresting control from bad landlords, but also to empower leaseholders, who generally hold the majority of value in the property, to take responsibility for the management of their block.
The right to manage is available to leaseholders of flats, not of houses.
The process is relatively simple. The landlord’s consent is not required, nor is any order of court. There is no need for the lease-holders to prove mismanagement by the landlord. The right is available, whether the landlord’s management has been good, bad or indifferent.
The right is exercised by the service of a formal notice on the landlord. After a set period of time, the management transfers to the right to manage company (the RTM company) which has been set up by the leaseholders. Once the right to manage has been acquired, the landlord is also entitled to membership of the company.
However, there are important issues to consider and a substantial amount of work to be done before service of the notice, if the takeover of management is to be successful. This leaflet sets out the issues and the practical operation of the right, from first considerations to full management of the building.
What are service charges?
Service charges are levied by landlords to recover the costs they incur in providing services to a dwelling. The way in which the service charge is organised is set out in the tenant’s lease or tenancy agreement. The charge normally covers the cost of such matters as general maintenance and repairs, insurance of the building and, where the services are provided, central heating, lifts, porterage, lighting and cleaning of common areas etc. The charges may also include the costs of management by the landlord or by a professional managing agent and for contributions to a reserve fund.
Details of what can and cannot be charged by the landlord and the proportion of the charge to be paid by the individual leaseholder will be set out in the lease. The landlord, or, sometimes, a management company that is party to the lease, provides the services, while the leaseholders pay for them. The landlord will generally make no financial contribution for the services, but sometimes he has to pay for the services before he can recover their costs.
Some landlords levy charges for consents to make alterations or provide information when a property is being sold. These are administration charges and are dealt with separately.
Fixed or variable service charges?
Originally, the costs of services were included in rental payments, but as costs and inflation escalated, landlords wanted to make sure they recovered all their costs every year. Some old leases still provide for a fixed charge to be levied. These charges cannot be varied, regardless of the actual costs to the landlord. However, most service charges are based on the actual or estimated cost of the services and thus vary from year to year. These are known as variable service charges.
Service charge structure
Generally, the landlord is under an obligation under the lease to provide certain services and in return has the ability to levy a service charge for doing so.
The lease will dictate the format of the charge. It will usually give the dates of the service charge period and how often payments are to be made. More often than not the service charge period is a year, but payments may be required on a half-yearly or a quarter-yearly basis, or in some cases in arrears.
The lease will usually set out the percentage or proportion of the service charge payable by the lessee, but sometimes the lease just stipulates a ‘fair’ or ‘just’ proportion. If different groups of occupiers benefit from different services, there may be provision for more than one percentage or proportion to be paid.
The lease will say whether advance payments are to be made and, if so, whether they are based on the previous year’s cost or an estimate of the cost in the year to come, for example. There will always be provision for a final charge at the year end when the actual costs are known. If interim payments have been made, and they exceed expenditure, the final ‘charge’ will be a credit.
If the leases in a block do not provide for interim payments, that can present a real difficulty for all concerned. Theoretically, the landlord has to buy all the services before he is reimbursed. If the lease allows him to recover interest, then at least he can afford to fund the costs, but if not, the landlord must finance the services, which may make him reluctant to fulfil his obligations.
Limits on service charges
Service charges can go up or down without any limit, but the landlord can only recover those costs which are reasonable. Leaseholders have rights to challenge service charges that they feel are unreasonable at the Leasehold Valuation Tribunal.
When considering the purchase of a leasehold flat, it is important to find out, for personal budgetary purposes, what the current and future service charges are likely to be.
What are reserve funds?
Many leases provide for the landlord to collect sums in advance to create one or more reserve or ‘sinking’ funds. The purpose of such funds is to build up a sum of money to cover the cost of irregular and expensive works such as external decorations, structural repairs or lift replacement.
There are usually two reasons for maintaining such a fund. The first is to ensure that all occupiers contribute to major works, not just those who are in occupation at the time they are carried out. The second is to even out the annual charges, avoiding large one-off bills, and to assist with leaseholders’ budgeting.
Leases sometimes say how much is to be contributed each year, but usually they do not and it is left to the landlord to determine the contributions. However, they must be reasonable and because these are just like any other service charges, leaseholders have the same rights to challenge these charges, if they believe they are unreasonable at the LVT.
Reserve funds should earn interest because they are generally held for a longer period than day-to-day service charges, which goes some way to meet increasing budget costs.
Contributions to the reserve fund are generally not repayable when a flat is sold, but may be if the lease so provides.
The power to recover service charges
It is important to understand that the landlord’s power to levy a service charge and a leaseholder’s obligation to pay it are governed by the provisions of the lease. The lease is a contract between the leaseholder and the landlord and there is no obligation to pay anything other than what is provided for in the lease.
The lease may contain specific terms obliging the landlord to carry out certain works or provide certain services and, if a service charge is to be payable, the lease must contain a power for the landlord to recover the cost of those works or services from the leaseholder. It must specify whether the charge is recoverable in advance or in arrears of the provision of works or services, and whether it is to be collected on a regular basis, perhaps annually or on a specified quarter-day, or whether it is to be levied as costs arise. The lease may be very specific in its wording, setting out quite precisely the works or services to be chargeable. Alternatively, the clauses may be very general, simply referring to costs of the repair and maintenance of the structure of building.
It can generally be assumed that a service charge will be payable and will cover the repair and maintenance of the fabric of the building and the fittings, the lift or the boilers etc, as well as cleaning, lighting and maintenance of common areas. Other obligations depend on the scope of services provided. In some cases this is done simply by referring to the landlord’s costs in meeting his obligations, as set out in one of the schedules to the lease.
There are a number of issues to be considered if the landlord is to be able to recover the costs:
- works of improvement: as a general rule, leases in the private sector do not oblige leaseholders to contribute to costs of works of improvement to the building. However, leases from local authorities and housing associations often do contain such provision.
- management costs: the fact that the landlord manages the building, either himself or through a managing agent, does not automatically mean that he can recover management charges. This must be provided for in the lease.
- legal costs: as with management costs, these must be referred to in the lease. If recoverable, they can include the cost of recovering arrears or for repossession in case of another breach of the lease.
- caretaking and porterage: where these are recoverable, the lease should be clear as to what is included in the charge: a resident or non-resident service, and, if resident, whether accommodation must be provided rent-free or not. The cost of a resident caretaker or porter will normally be higher than for a non-resident.
- heating, cleaning, garden maintenance, alarm systems: again, the landlord’s obligation to provide such services and the leaseholder’s obligation to pay are usually referred to in the lease. In some cases this may be done simply by reference to the landlord’s obligations, as set out in one of the schedules to the lease.
What happens when the lease comes to an end?
Lease comes to an end
Unless either the tenant or the landlord takes specific steps to end the tenancy it will simply continue on exactly the same terms, the tenant need do nothing unless he or she receives a notice from the landlord. The fact that the lease has expired does not mean that the tenant has to leave the property. For the tenancy to actually come to an end either:
- the tenant formally surrenders the tenancy (which he or she need not do unless they choose to do so), or:
- the landlord serves a prescribed notice on the tenant to bring the tenancy to an end.
Should the tenant wish to terminate the tenancy he or she should serve a notice on the landlord giving at least one months notice. There is no prescribed form for this. The period of notice should expire on the last day of the tenancy (if served before then), or at a later date if the tenancy has continued past its original expiry date because the landlord has not served the tenant with a prescribed notice.
Where a tenant serves a notice of termination he or she loses the right to security of tenure and the right to acquire the freehold or extended lease and must leave the property on the date the notice expires.
Where the landlord wishes to terminate the tenancy he must serve his notice in the prescribed form
There are a limited number of grounds on which a landlord can regain possession and The tenant cannot be made to leave the property at the end of the tenancy except by court order for possession. Where the landlord wishes to end the tenancy by replacing it with an assured periodic tenancy, new terms, including the rent, will need to be settled by agreement between the landlord and the tenant or fixed by a Rent Assessment Committee.
It is of course possible for the tenant and the landlord to agree on a new tenancy to take the place of the lease without notices being served, at any time.
The Landlord’s proposal for an assured periodic tenancy
An assured periodic tenancy for these purposes is a monthly, secure tenancy at a market-level rent. The tenant will no longer have any rights of ownership, as in the lease, and will be subject to the terms of the new assured periodic tenancy. The new assured periodic tenancy must be for the same premises to which the lease applied. If there is any dispute on the extent of the premises the landlord can apply to the county court for a determination but must do this at least two months before the end of the lease.
The Landlord proposes the assured tenancy by serving a notice. This notice must be served not more than 12 months or less than six months before the date for termination set out in the notice, and this date must not be before the date of the end of the lease.
The notice can be served before or after the end of the lease. It must contain a warning that the leaseholder’s rights under the 1967 Act (to acquire the freehold of a house or an extended lease) or the 1993 Act (to renew the lease or take part in a joint purchase of the freehold) will be lost if they are not exercised within the time limits set out in the notice.
In the notice, the landlord must propose an assured periodic tenancy and the new terms which are proposed, including the rent. This will no longer be an annual ground rent similar to that which was paid under the lease. It will be a monthly rent high enough to qualify as an assured tenancy, which is more than £1,000 a year if the property is in Greater London or £250 elsewhere.
If the tenant agrees with the terms proposed by the landlord in his form 1 he does not need to do anything, and the new assured periodic tenancy proposed by the landlord will simply take effect once the lease comes to an end. However, if the tenant disagrees, he must respond in writing to the landlords notice within two months if he or she wishes to remain in the property, either
- proposing different terms from those proposed by the landlord and/or
- a different amount of rent.
Failure to respond to the landlord’s notice within two months has serious consequences:
- if you remain in occupation it will means that the terms and rent proposed by the landlord will apply.
- if you are not in occupation you will lose the right to security at the end of the lease.
Where the tenant and landlord cannot agree terms by negotiation the landlord may request that they be determined by the Rent Assessment Committee. The landlord must make the application within two months of the date of the tenant’s proposals in his or her notice, otherwise the terms proposed by the tenant will be the terms of the new assured periodic tenancy, which will commence immediately the comes to an end.
Landlord’s notice proposing an interim monthly rent
The landlord may, in addition to his proposal for an assured periodic tenancy serve a notice proposing an interim monthly rent, to begin at least 2 months after the date of the notice. If the proposed rent is acceptable the tenant need do nothing, this will be the rent applied to the tenancy.
Where the leaseholder disagrees with the proposed rent he or she must make an application to the Rent Assessment Committee within two months of the date of the notice. Failure to do so will mean the landlord’s interim rent will apply. This is done by referring the landlord’s Rent Assessment Committee, together with the reasons why the rent is not acceptable, details of the property (house, flat, number of rooms etc), and a copy of the lease.
If a matter is referred to a Rent Assessment Committee, they can seek extra information from the tenant or the landlord. Failure to comply without reasonable excuse with the Committee’s request will result in a summary offence being committed, which is liable to a fine.
In cases where a rent is set by the Rent Assessment Committee the assured periodic tenancy will begin either:
- on the date originally set in the landlord’s notice, or
- three months after the date of determination, whichever is the later.
The Rent Assessment Committee’s determination will be based on local market evidence and may be higher, lower or the same as that proposed. It will be set according to the property, not the situation of the tenant, and will be the rent considered to be reasonable on the open market under a monthly periodic tenancy. Where a tenant is unable to afford the determined (or agreed) new rent, he or she will need to make application to the local Council for housing benefit or other assistance, or seek advice from the Citizens’ Advice Bureau.
It is possible to negotiate the proposed terms of the tenancy and come to an agreement in writing at any time, even if the deadlines have not been met, though the landlord is under no obligation to grant an assured periodic tenancy where this is the case as there would be no right to such a tenancy.
Also, even if the Rent Assessment Committee has been asked to determine the rent, it is still possible to reach agreement on the rent (or any other disputed terms) in the meantime, so long as the Committee is sent notification of the agreed terms and can take them into account. Where this is the case the Committee cannot change the terms agreed on.
Once the new tenancy is in place, if the landlord seeks to increase the rent payable the tenant can ask a Rent Assessment Committee to determine the rent if it is believed that the proposed rent is higher than other similar rents in the area. However, the Committee can raise, as well as lower the rent depending on what it believes is appropriate in the circumstances.
The Landlord’s proposal for possession
Rather than proposing an assured periodic tenancy the landlord may seek to gain possession of the property. Whatever his grounds, or whether the tenant responds, the landlord will not be able to obtain possession without a court order.
The landlord must serve a notice, not more than 12 months or less than six months before the date for termination set out in the Form, which must not be before the date the lease ends, setting out in full the grounds which he or she consider justify possession.
If the tenant wishes to stay in the property they must respond to the landlord in writing, within two months from the date of the landlord’s notice. There is no special form for this. If the tenant does not respond they may lose their rights to remain in the property, or any rights they may have to buy the freehold or extend the lease.
- where the tenant has stated a wish to remain in the property, the landlord must apply to the court within two months of the date of the tenant’s response if he wishes to try and gain possession.
- where the tenant has not responded to the notice, the landlord must apply to the court within four months of the date of the landlord’s notice.
If these time limits are not met, the landlord will not be able to proceed to obtain possession, though the landlord can begin the process again by serving another notice.
There are a limited number of grounds on which the landlord may seek possession and these are specified in Schedule 2 to the Housing Act 1988. The landlord may only proceed on these grounds, must establish the facts and must also satisfy the court that it is reasonable to grant possession.
Briefly, the grounds are:
Ground 6: That the landlord who is seeking possession (or, if that landlord is a registered housing association or charitable trust, a superior landlord) intends to demolish or reconstruct the whole or a substantial part of the dwelling, or to carry out substantial works to any of it, and that the intended work cannot reasonably be carried out without the tenant giving up possession.
Ground 9: That suitable alternative accommodation is available for the tenant or will be available when the order for possession takes effect. Certain proof is required and conditions need to be satisfied, as required by law, where this ground is used.
Ground 10: That rent lawfully due from the tenant is unpaid on the date on which the proceedings for possession are begun, and was in arrears at the date of the service of the landlord’s notice to resume possession
Ground 11: Whether or not any rent is in arrears on the date on which proceedings for possession are begun, the tenant has persistently delayed paying rent which has become lawfully due.
Ground 12: Where any obligation of the tenancy (other than the payment of rent) has been broken or not performed.
Ground 13: That the condition of the property or any of the common parts has deteriorated owing to the neglect or default of the tenant or any other person residing in the property, and where caused by the person lodging with the tenant or a subtenant, the tenant has not taken such steps as they ought reasonably to have taken for the removal of the lodger or subtenant.
Ground 14: That the tenant or any other person residing in or visiting the property has been guilty of conduct causing or likely to cause a nuisance or annoyance to others, or has been convicted of using the property (or allowing the property to be used) for immoral or illegal purposes, or of an arrestable offence committed in, or in the locality of, the property.
Ground 14A: The property was occupied by a married couple or a couple living together as husband and wife and one or both are the tenant, the landlord is a registered social landlord or a charitable housing trust, and one partner has left because of violence or threats of violence towards them or a family member living with the partner at the time of leaving, and the court is satisfied that the partner who has left is unlikely to return.
Ground 15: That the condition of any furniture provided for use under the tenancy has, in the opinion of the court, deteriorated owing to the ill-treatment by the tenant or any other person residing in the property, and in the case of a person lodging with the tenant or subtenant of his, the tenant has not taken such steps as he ought reasonably to have taken for the removal of the lodger or subtenant.
The following are additional grounds for possession contained in Schedule 10 to the local Government and Housing 1989:
Paragraph 5 (1)(b): The landlord is a public body and, for the purpose of redevelopment after the termination of the tenancy, proposes to demolish or reconstruct the whole of or a substantial part of the property relevant to the landlord’s function; and
Paragraph 5 (1)(c): That the premises, or part or part of them, are reasonably required by the landlord for occupation as a residence for themselves or any son or daughter over 18 years of age, or their own or their spouse’s farther or mother and, if the landlord is not the immediate landlord, that they will be at the specified date of termination.
The court cannot make an order for possession on the last ground where the landlord’s interest was purchased or created after 18 February 1966, or where the court is satisfied that, having regard to all the circumstances of the case, including the question of whether other accommodation is available for the landlord or the tenant, greater hardship would be caused by making the order than by refusing to make it.
Where the court refuses to grant possession the landlord’s notice lapses and the lease continues until such time as further action is taken. The landlord may then serve a notice, proposing an assured tenancy.
Similarly, the landlord may abandon his attempt to obtain possession and can withdraw his notice at any time by writing to the tenant and subsequently serve a notice proposing an assured periodic tenancy. In this case there is also nothing to prevent the landlord from serving another notice at a later date.
Whether the court refuses possession or the landlord withdraws his notice, there is a difference to the possible date for the termination of the lease.
If the landlord serves his notice, proposing the assured periodic tenancy, within one month of the final determination of the court, the earliest date he can propose as a date of termination is a date four months and one day from the date of his notice.
If the landlord serves a notice proposing the assured periodic tenancy, within one month of withdrawing his notice for possession, the earliest date he can propose as a date of termination is a date four months and one day from the date of the notice, or six months and one day after the date of his notice of withdrawal, whichever is the later. The assured periodic tenancy would then take effect.
Where the issue has been through the court process it is most likely that the lease will already have come to an end and this is not likely to make any difference to the termination date in the notice, and consequently the date the assured periodic tenancy starts. However, where the landlord has properly sought, but subsequently, withdrawn an attempt at possession, this could lead to a termination date (and the start of the assured periodic tenancy) earlier than the last day of the lease if the notice is then served within one month of the withdrawal notice.
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