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Our first blog in this series of blogs on ways to structure a residential leasehold development scheme focused on a developer retaining both the reversion and the management of the building. The blog can be found using the following link: https://www.myerson.co.uk/news-insights-and-events/structuring-residential-leasehold-development-schemes-2.
In this second blog the focus will be on the developer who wishes to retain the reversion but wants to contract out the management and provision of services to a management company.
A developer may want to collect the ground rents reserved under the leases, particularly if they are more than nominal sums, and will therefore retain the freehold interest in the building. However, the developer may not also want to be responsible for the ongoing management obligations and can contract out these obligations to either a tenant’s management company, a professional management company, or via an associated company under the control of the developer.
Tenant’s management company
This arrangement is suitable for smaller developments as a deed of covenant needs to be entered into each time a tenant sells its property. This will involve the incoming tenant having to covenant with each of the existing tenants and each having to execute the deed which can be problematic if there are a large number of existing tenants.
Professional management company
With this arrangement the developer will have three choices:
The clear advantage of using this arrangement is that the management function will lie with a professional management company that will have experience in managing developments.
There are, however, a number of disadvantages, including the enforceability of covenants issue mentioned above by and with the floating management company. In addition, the landlord will remain liable to the tenants under the covenant in the lease to carry out the management company obligations should the management company fail to do so, and if the developer landlord is not satisfied with the performance of the management company and the management company is joined as a party to the lease, it will be difficult to change the management company.
Associated company under the control of the developer
With this arrangement the developer can either:
As such, a developer will need to think carefully about the type of management company it wants to contract out to and the type of arrangement which is most suitable for it and also for the tenants.
Our next blog in this series will focus on the situation where a developer wishes to dispose of the freehold interest and the management, both to a tenants’ management company. We will set out what happens when the landlord transfers the freehold or grants a lease of the reversion to the management company, and the advantages and disadvantages of this arrangement.
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 firstname.lastname@example.org.