Management company restrictions: Are they necessary or desirable?
A brief look at management company restrictions on title, their use as a tool for developers, the Land Registry’s current stance and future consultation.
What is a management company restriction?
A contract for the sale, transfer or lease of a residential property will often contain positive obligations by the buyer or lessee given for the benefit of a management company responsible for the maintenance of the building and/or communal areas. These typically include:
- serving notice on the management company if the interest is sold or assigned, confirming who the purchaser or assignee is; and
- obliging a buyer or lessee to contribute towards the maintenance costs through the payment of a service or rent charge.
In order to protect these obligations, it is common practice for developers (on behalf of the management company) to ensure that a restriction is entered against the title of the property requiring any new owner to enter into a deed of covenant to comply with the positive obligations.
This restriction will prevent any transfer being registered by the Land Registry without the consent of the management company. The management company is likely to withhold consent if a notice has not been served or any rent/service charge is outstanding. This is a relatively simple and effective mechanism to protect the management company’s interests. It also protects the interests of those owners of units who have complied with their obligations.
Are the restrictions necessary or desirable?
For leasehold properties, section 3(2) of the Landlord and Tenant (Covenants) Act 1995 (LTCA) provides that on an assignment by a tenant of a new lease granted after 1995 the assignee (i.e. the incoming tenant), subject to certain exceptions, becomes bound by the tenant covenants in the lease. Therefore, any obligation e.g. relating to payment of service charge will pass onto the new leaseholder, negating the need for a deed of covenant.
However, the LTCA only applies to leasehold properties. It is therefore arguable that, for freehold properties, management company restrictions are necessary to oblige any successor to enter into a deed of covenant to comply as positive covenants do not run with the land.
There are benefits in having management company restrictions in place, even if there are other means of enforcement. The mechanism both ensures that management companies have direct recourse against any new owners for breach of a positive covenant and provides leverage to ensure payments are up to date before title is passed.
If restrictions are not in place, more claims by management companies would be required to recover sums owed – which can be costly and time consuming. On this basis, the use of a restriction is a powerful, non- litigious tool to help ensure compliance with positive covenants.
What is the Land Registry’s approach?
The Land Registry’s stance (as set out in paragraph 2.2.2 of Practice Guide 19A) is that restrictions in favour of management companies are rarely appropriate. However, in our view, that guidance is out of line with current practice.
In October 2017 the Land Registry consulted on the use of management company restrictions, highlighting their concern that the use of restrictions has become industry standard despite their guidance.
The Land Registry expressed the view that the restrictions are unnecessary and generally bad for the industry for the following reasons:
- they take too much time and cost to deal with;
- deeds of covenants are unnecessary as the LTCA adequately caters for positive covenants (in leasehold properties);
- they should not be used as a tool to prevent registrations: if someone has not complied with lease terms then the Courts are the correct tool for enforcement.
The Land Registry stated that, as things stood, its preferred approach is to abolish the use of management company restrictions, at least for leasehold properties.
In summary, whilst the LTCA ensures that there will be a chain of positive covenants for leasehold properties, it does not adequately provide the same for freehold properties nor does it give the certainty to management companies that properties will not be sold when obligations on the part of the seller have not been upheld. It is easy to see why the Land Registry is not in favour of them, as they give management companies scope to delay registrations and are an administrative burden.
Following the feedback from the October consultation the Land Registry has decided to consult further on the matter before taking any drastic action.
News & Insights
Real Estate and Construction Newsletter – December 2017
Welcome to our December newsletter, bringing you legal insight into issues facing the property industry.