If you’re buying or selling a property with a management company or any service charges in place, there are a few things you should know about beforehand. Unfortunately, dealing with management companies and service charges can impact the timings of the transaction. However, if you’re prepared and ensure you’ve got everything in place, you can reduce the chance of these delays happening.
So, here are some pointers for both buyers and sellers to know:
Management companies: what buyers and sellers need to know
Whether the property is freehold or leasehold, if there is a management company, the seller is required to provide the buyer with a pack from the management company (and the landlord if the property is leasehold). If the property has multiple management companies, packs must be obtained from both. The solicitor acting for the seller will organise this on behalf of the seller using a Law Society standard form. The cost is often between £200 and £500, payable to each landlord/management company. The seller will pay for these upfront.
Management companies often take around 21 days to provide their pack. This can have an impact on the timings of the transaction. The seller’s solicitor can obtain this pack whilst the seller is marketing their property. However, often, a seller will not instruct a solicitor until they have found a buyer. Furthermore, if the seller obtains the pack too early, they may find that it goes out of date before they find a buyer, and the management company may ask for a second fee to provide fresh information. Many sellers, therefore, opt to request the pack once they have found a buyer.
Please note that where we are instructed on a purchase, we will request a pack from the seller as soon as we know a management company exists. This often doesn’t happen until we receive the seller’s contract papers and raise our enquiries.
As a seller or buyer, if you are aware that there is a management company, it is useful to point this out to your solicitor when instructing them so that they can request the pack in their initial communications.
Service charges: what sellers and buyers need to know
Recent case law has meant that Rent Charges (which also cover service charges) are now heavily scrutinised, particularly by lenders. This is because S121 Law of Property Act 1926 provides, amongst other things, that a Rent Charge owner can exercise a draconian right to obtain a lease on the property for non-payment of rent charge. This would effectively make the property unmortgageable.
To circumvent this, conveyancers now insist that parts of the statute in S121 are excluded or modified to allow for mortgage approval. Lenders also require that notice is served to them if a Rent Charge owner intends to exercise a remedy for default.
Often, a seller will not know about this until an enquiry is raised by the buyer’s solicitor. The buyer’s solicitor will likely ask the seller to arrange for the management company to enter into a Deed of Variation to exclude the provisions. Some management companies are relatively quick at doing this. However, others can take some time to deal with these, and then the process of arranging for the Deed to be signed can also be protracted. This can cause slight delays in a chain.
The potential delay can be frustrating, and often, a buyer may feel that the management company may be difficult to deal with throughout their ownership, which could put them off purchasing the property. However, these variations are to rectify a defect. They are, therefore, a one-off problem, and once completed, the same issue would not be encountered if you came to sell or mortgage the property in the future.
As a seller, if you pay a service charge, it is recommended that you instruct a solicitor when marketing your property so that they can review the provisions of the title deeds. If S121 is already excluded, there is nothing further they need to do. If S121 has not been excluded, it is likely that your buyer’s solicitor will ask the management company to enter into a Deed of Variation to exclude the provisions. Some management companies are relatively quick at doing this, but others can take some time to agree. Then, the process of arranging for the Deed to be signed can also be protracted, potentially causing delays in a chain.
The variation can be dealt with before a seller has a buyer. If you have a mortgage on your property, to avoid having to obtain lender consent, we would recommend that the variation is drafted and signed by the management company and yourself and then dated on the date of completion to your buyer. This means that the buyer can register the same at the Land Registry without having to obtain lender consent.
Post by Maria Richards
Maria is a Fellow of the Chartered Institute of Legal Executives and has over 20 years of experience practising in the largest firms in the Southwest.