Long Term Agreements

Some things in life are simple and do not need much discussion, such as, does the light go off when the fridge door shuts? Long term agreements should fit into the same category when you look at the legislation governing them but you would be surprised how many people would debate this, especially lawyers who want to change black into white.

The Commonhold and Leasehold Reform Act 2002 made it illegal to establish any agreement longer than a year without consultation with purchasers and no longer than five years before the first leaseholder acquires their lease. In both cases the agreement value must be greater than £100 per unit per annum.

Simple, you would think, but lot of developers and homebuilders do not stay up to date with the latest legislation and no one thinks to tell them. Also, renting a door entry system for more than five years would be a huge cost to homeowners instead of a more modest level over 20 years. The trouble is the 20-year agreement gets very expensive, very quickly.

Some enter into the agreements innocently and genuinely think they are doing the best thing to save leaseholders money. However, the unscrupulous will do it for their own benefit. In reality, though, even this is too simplistic.

What is a developer to do if costs are running away on a site and they are staring down the barrel of a huge loss and possibly going bust? From their perspective, removing some costs is a sensible option but the impact this has on the building’s service charge is huge and will probably not have been accounted for in draft budget given to purchasers.

Equally there will be items dropped in the hope no one notices but will need to be installed at a later date. For example, a gate to stop pedestrians accessing a secure car park from a central podium even though a fortune has been spent securing the vehicle entrance!

The additional spice comes when someone argues that an agreement is not a long term agreement which is equally challenging when there is a Right to Manage (RTM) company involved. Right to Manage is the process whereby a majority of leaseholders can decide to take control of the running of the building.

On securing a RTM company, all agreements should come to an end and this is difficult when equipment is rented on a 15 or 20 year contract. At the end of that period the equipment will still belong to the leasing company and the RTM company has two dire choices; either negotiate some better terms or face having all the equipment ripped out. The second option would mean the leaseholders would have to become developers to get their systems back!

So whichever way you look at it, it is always easier to do things right and do things once than look for short cuts, stay ignorant of the law or try for the fast buck.

As an aside on this topic, one issue that is painfully obvious is how our legislators and successive Governments just do not understand property and development. The long term agreements had nothing to do with unfairness in maintenance and everything to do with developers avoiding cost on some equipment or machinery. If a developer can save money on security system, door entry or TV aerial by arranging a rental agreement that lessees will pay for, why wouldn’t they do it? The worst I have ever come across was apartment block lifts rented on a 30-year agreement that would not be owned by leaseholders at the end of the term. This meant the homeowners were actually paying for the lift installation cost and maintenance!