Structuring Residential Leasehold Development Schemes - Part 1

There are a number of ways in which a developer can structure a leasehold development scheme. This is relevant where a freehold building is built or converted and comprises a number of residential units that will be leased on long leases.

A leasehold scheme is essential where there are common parts of the property which will need to be maintained, etc. centrally for the good of the whole development, with tenants contributing to the upkeep of those parts.

Generally, a developer can choose to retain its position as landlord and either have full responsibility for management or delegate this to a third party. Alternatively, the freehold reversion and the management responsibilities can be passed on.

In a series of blogs we will outline the different legal structures that can be adopted for a developer setting up a residential leasehold development scheme, which in all cases will depend on the developer’s objectives and the tenants’ requirements.

Retaining the freehold and management of the building

The first legal structure we will look at in this first of a series of blogs, is where the developer retains both the freehold and the management of the building. This is the most straightforward option and will mean:

• the developer landlord will own the exterior, structure and common parts of the building and will covenant to repair them.
• the leases granted will be for the internal parts of each unit only and the tenants will be granted appropriate rights of way over the common parts owned by the landlord.
• each tenant will pay the rents under its lease to the landlord.
• the landlord will insure the building.
• the tenants will covenant to pay for the cost of the services provided by the landlord, such as the cleaning and maintenance of the common parts.

Retaining the freehold may provide an income to the landlord the size of which will depend on the rents to be paid under the leases.  However, there are a number of disadvantages to retaining the freehold and managing the building from a developer’s perspective.

The developer will have to take on the responsibilities of a landlord and will be directly accountable to the tenants. Examples of its responsibilities include providing services, insuring the building, collecting ground rents and service charge, dealing with requests for approvals and consents from the tenants, dealing with disputes and complying with statutory requirements. Such management is time consuming and administratively burdensome and even if managing agents are appointed to act on the landlord’s behalf the landlord is still directly accountable to the tenants.

As such, developer’s will need to think carefully about the extent they would like to be involved in the management of the building and the responsibilities they are comfortable taking on.  

Our next blog in this series will focus on the situation where a developer wishes to retain the freehold interest but does not wish to retain management of the building. We will look at the options available in terms of contracting out the management and provision of services to a management company.  

If you are a developer entering into a leasehold development scheme and would like advice on the best structure to suit your needs, or if you would like us to set up a particular residential leasehold development scheme for you, our Commercial Property team can meet all of your legal needs. You can contact us by calling 0161 941 4000 or by emailing lawyers@myerson.co.uk.