Expert Opinion: Leasehold Woes – Deeds of Covenant

Expert Opinion: Leasehold Woes – Deeds of Covenant

INTRODUCTION

I am sure that conveyancers do not need reminding that most modern flat leases will contain an obligation for a tenant to require any successor to enter into a deed of covenant with the management company. This is then enforced by a provision in the lease that a restriction is to be placed on the register of title to the flat to prevent registration of any disposition unless the management company has certified that the requirements in the lease for the buyer to enter into the deed of covenant has been complied with. And, of course, a fee is chargeable for the management company’s administrative costs in relation to all of this – often quite a substantial sum. These restrictions and deeds add to the time taken for a sale to complete – and also to the costs involved in buying a flat.

DO WE NEED DEEDS OF COVENANT?

But the question needs to be asked whether we actually need these deeds of covenant. The legal reason we have leasehold flats is that in freehold land positive obligations are not automatically binding upon a successor. And, of course, it is necessary for all those involved in a block of flats – flat owners, landlord and management company – to ensure that future flat owners are bound by a positive obligation to contribute to the cost of maintaining etc the block through payment of the service charge. But of course, as every lawyer knows, in leasehold, positive obligations are automatically binding upon successors to both landlords and tenants.

So far so good, but developers then adopt an arrangement for the management of the block that seemingly doesn’t make use of this advantage of leasehold law. Instead, we have the usual situation where a third party, a management company, joins in the leases to promise to carry out the maintenance obligations and the flat owners then covenant in the lease to pay the service charge to it.

In modern leases there is thus no landlord and tenant relationship between tenant and Management Company, so the advantage of leasehold disappears. Is this why a fresh deed of covenant is required from the buyer of a flat every time a flat changes?

NO! It is NOT the case. The Landlord & Tenant (Covenants) Act 1995 contains a provision (Section 12) expressly to deal with the situation of management company covenants. To quote from Emmett & Farrand on Title, section 12 ‘now provides, in effect, that in leases granted on or after January 1, 1996 liability to the third party under such covenants, and the right to enforce such covenants against the third party, shall be governed by the same principles as would apply if the covenants had been made between landlord and tenant’. On an assignment of the flat lease ‘the benefit and burden of covenants made by the tenant with the third party pass to the tenant’s assignee’. So covenants by and in favour of management companies in leases are enforceable in exactly the same circumstances as if they had been between landlord and tenant.

So they are NOT legally necessary. But don’t waste your time trying to get a developer’s conveyancer to remove them from their leases – or the Restrictions that go with them!

LAND REGISTRY

But help is at hand from Land Registry for some common problems that arise with the Restrictions that enforce the deed of covenant. Just as conveyancers have problems complying with these restrictions, so does Land Registry have problems in dealing with conveyancers struggling to register purchases.

One of the main problems – apart from time and cost of compliance – is where the restriction requires certification by a named landlord or management company. Problems arise when a named landlord no longer owns the freehold or the named management company is no longer managing the block or, indeed, has ceased to exist. Land Registry Practice Guide 19A contains much helpful information with regard to these problems.

Cancellation of Restriction

The Practice Guide states:

4.3Management company has changed or been dissolved

… Where either a new management company has been appointed or the existing management company has been dissolved, then the tenant or landlord may apply for cancellation of the restriction using form RX3. Evidence of dissolution of the management company must be submitted (if relevant), along with a conveyancer’s certificate that the restriction relates to covenants contained in the lease. The applicant will need to provide some evidence that the named management company is no longer acting, which could be a letter from the landlord or the new management company.

As far as the ‘evidence of dissolution’ of the company is concerned, Land Registry will accept a printout of the relevant Companies House web page stating the company is dissolved.

Cancellation will also be possible if a named landlord is required to give a certificate and that landlord has now disposed of its interest in the reversion. Again, a conveyancer must certify that the restriction does relate to covenants in the lease.

Conveyancers should note that where the Law Society Protocol is being adopted it will be the responsibility of the seller to update the register e.g. by obtaining the cancellation of obsolete restrictions – see Step 24.

Right to manage company

Flat tenants have an absolute right to take over the management of the block themselves by setting up a Right to Manage company. This company then takes over all the management obligations under the lease. It is not always appreciated that these will include the right to give consent etc as required under restrictions on the register of title in favour of either the landlord or a previous management company.

Disapplication of Restriction

If cancellation is not possible, a restriction can be disapplied in relation to a specific application for registration. This means that the restriction remains on the register but that you don’t need to comply with it in order to get his transaction registered. You will need to apply using Form RX2 (and pay the appropriate fee!). Disapplication might be possible if the person with the benefit of the restriction cannot be traced or is unreasonably withholding giving the certificate. Obviously appropriate evidence will be needed to support such an application.

CONCLUSION

Further help may be forthcoming from Land Registry. Practice Guide 19A already states that ‘Restrictions in favour of management companies are rarely appropriate’ – because of section 12. But at a panel session at the Conveyancing Association Conference in December 2016, Graham Farrant Chief Executive of Land Registry when considering the problems of leasehold flats, was reported as saying that perhaps ‘limiting the use of restrictions’ might help.  Dare we hope that Land Registry might find some way of preventing their use altogether in favour of management companies?

Paul Butt

Paul Butt is a retired consultant at Rowlinsons Solicitors.

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