“It would be impracticable to devise guidance notes that could be relied upon when taking account of the common parts of converted or purpose-built flats or maisonettes, but it should be borne in mind that the management and maintenance arrangements for the building(s) of which the flat or maisonette forms part are relevant factors for valuation purposes.”
Please would you explain this passage from the “Mortgage Valuation Guidance Notes for Valuers” recently published jointly by the RICS and the ISVA?
The magnitude of the valuation and survey problems encountered in advising all parties connected with the buying and selling of flats is such that we must agree with the sentiments expressed in the above passage, particularly when the object of the exercise was to produce a short set of guidance notes. However, it is possible to expand on these points in order to illustrate the difficulties faced by the surveyor of residential properties other than conventional houses.
Our concern here is solely with the problems surrounding the buying of flats/maisonettes where the title being conveyed is a leasehold interest granted originally for a term exceeding 21 years at a ground rent.
It is common knowledge among surveyors that the terms and conditions of a lease can have a material effect on the market value of a leasehold interest; also that unless brought carefully to the attention of the buying client they could materially affect the relationship between surveyor and client when the client eventually discovers precisely what he or she has purchased. It is also understood by most surveyors that the purchaser of part only of a building must have careful regard to the remainder of the building: they must not adopt a blinkered approach and concentrate solely on the specific flat or maisonette. Both these points pose problems for the buyer, the buyer’s mortgage and the buyer’s professional advisers, because under the present system of contract and conveyance it is very difficult to gather all the data together at the right time.
The lease
The lease should indicate precisely what is physically contained within a specific demise for the sole benefit of the lessee, and over which parts the lessee has rights in common with the other lessees, and what contribution the lessee is required to make towards the cost of shared services and towards the cost of maintenance, repair and renewal of the whole and/or parts of the whole property. The lease will also indicate in most cases that the holder of the freehold has a right of forfeiture if a tenant fails to comply with the terms of the lease — a point buyers of such properties find difficult to accept. Thus a disgruntled tenant might decide to withhold payment of a service charge only to find the freeholder instigating an action for forfeiture which, if successful, could deprive the tenant of his occupation and ownership right.
A lease also indicates who is responsible for the management and, subject to legislative control under the Housing Act, who will be the arbitrator in the event of disagreement over any items in the maintenance/service charge.
In the case of some developments a management company will have been created to hold the freehold and each “flat/unit owner as defined” will own a share. This gives every tenant an interest in the freehold and a right to be involved in the management of the property(ies).
In such cases the company and management documents should be read in conjunction with the lease in order to understand fully the legal rights and obligations of the “flat owner”.
On occasions the surveyor, whether undertaking a market valuation, a survey for the buyer or an inspection for a mortgage report, will not have access to any of these documents. He or she will have to rely on information provided by the vendors or the vendors’ agent. Through necessity the valuer will tend to assume that each unit owner in a scheme will have to share a proportionate part of all the costs incurred in servicing, maintaining, repairing and renewing all common parts, plant and machinery. In practice this may not be the case, and weak drafting of the documents may cause management problems which could affect a buyer’s enjoyment of ownership and in time affect the value and marketability of individual units.
In the case of maisonettes, constructed in the style of large pairs of semi-detached houses, the lease can impose a sharing of obligations for common elements such as roof, foundations, rainwater goods, boundary fences etc between the owners of the ground- and first-floor units; in other cases responsibility might be divided, eg the roof would be the responsibility of the first-floor owner and the foundations and boundaries the responsibility of the ground-floor owner. An additional problem with this type of maisonette is caused by the reluctance of the ground landlord to be involved in enforcing the lease terms. At worst it may be necessary for one party to instigate court proceedings against the other in order to get a leaking gutter repaired. Similarly unnecessary but infuriating problems may arise if one party refuses to maintain its share of the gardens. Legal action is costly, landlords rarely wish to be involved and neighbourly relationships deteriorate rapidly.
A point sometimes missed is that these leases can include provision for ground rent reviews. A number of 99-year leases do include a 50-year rent review — not an excessive increase but it could be costly to resolve precisely what a 1980s rental should be for a flat in a 50-unit block. A £5,000 flat with a ground rent of £20 in the 1950s could be a £50,000 flat today, suggesting a ground rental of £200-£300. Certainly those due for review in the 21st century will have substantial increases to contend with.
Service charges
Disquiet among purchasers frequently arises over the question of service and maintenance charges. Most surveyors and solicitors do their best to check the current level of charge, but this is rarely sufficient information. It is essential to check what the charge covers and whether sinking funds or reserves are being held to meet the more expensive items such as external redecoration. The popular press enjoys publicising the fact that, six weeks after moving into a flat, young Mr and Mrs X were shocked to receive a bill for £350 to cover their share of the external redecoration. The shock is greater because they may have only four windows and a door to decorate, which to the average handyman is a few pounds’ worth of paint. It is difficult for people to appreciate the on-costs needed to cover scaffolding and extras associated with repainting a 10-storey block of flats.
Whether the surveyor or the buyer’s solicitors should draw this to the attention of the buyer is not certain, but it is clear that buyers will continue to be upset if, a few months after moving in, they are advised of substantial increases in service charges or receive a demand for a substantial and unexpected payment.
Surveying
The second, and related, problem is that when advising a buyer of a unit some account must be taken of the whole building, its grounds and all shared facilities. For the surveyor it is a question of how much of the whole building it is reasonable to include in an inspection, whether for flat buyer’s report, mortgage or full private survey and valuation. Many of the parts will be inaccessible and few surveyors have a knowledge of plant and machinery such as lifts. At the top end of the market the surveyor of a flat may be confronted with underground car parks, roof-top swimming pools, service staff, service lifts, refuse shoots and porters’ accommodation, all of which in some way may influence “value”, “annual ownership costs” and “marketability”.
In practice experienced surveyors will know the various blocks of flats and maisonettes in their area, and they will know the managing agents. They will know the original developers, the local average cost of servicing and, with luck, their practice will be handling or will recently have handled sales of similar units.
Thus many of the difficulties will not arise as fresh issues to be solved on a one-off basis. Nevertheless, whatever the difficulties and issues, the surveyor should have evidence of market comparables for valuation purposes. The major problems are therefore more likely to be incurred when asked to provide a full survey.
In addition to these issues there are all the other problems associated with any survey or valuation, especially when the instructions are received today and the report was needed yesterday.
Finally there is the continuing debate about the right of tenants to have a louder say in the management of the property they occupy and the possible extension of the right to buy to long-leaseholders of flats and maisonettes.
If the idea of strata title is adopted, or the Government extends enfranchisement to this class of tenant in some other way, then there will be a significant movement in values as well as added issues to be considered in order adequately to advise clients whatever their instructions.
