01 Nov 2016

Mixed use: "The resi service charge is not my problem…"…or is it?

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Commercial investor

You're a commercial property investor. It's been hard to find yield over the last few years – classic investment stock is hungrily devoured often before it comes to market or is priced at an eye wateringly low yield. You adapt to the market and diversify your search criteria. You spot a good investment that is part of a mixed use development, but…

You don't want to deal with the resi element.

Don't worry says the developer – we'll grant a long lease of the residential element and sell that lease off to a ground-rent investor. Then we'll sell you the freehold so, in practice, you only need to deal with the office and retail parts.

That sounds good. Your expertise is in commercial property and you've heard that dealing with service charges in the resi arena is a costly and administrative nightmare; you have to go through a painful consultation process with tenants before incurring any substantial expenditure.

So it's all OK then?

A common view was that this structure, selling off a long lease of the residential part, simplified dealing with the service charge as the freeholder owning the commercial parts would then only need to "consult" with the block owner rather than the individual flat owners.

Not OK

The recent case of Foundling Court and O'Donnell Court v The Mayor and Burgesses of the London Borough of Camden tells us that that view is wrong. The freeholder itself must consult each of the individual flat owners as well as the landlord of the residential element. This is a significant burden. To cap it all, as freeholder you may not even know the correct contact details of the tenants that you're supposed to consult with.

Does this make it a deal breaker?

No. The fact that you'll need to consult with the residential tenants shouldn't kill the deal as it doesn't mean that you won't be able to recover the service charge. But you will need to factor in the costs of dealing with the extra admin and make sure that you appoint well organised managing agents, to ensure that any required works are identified at an early stage, because the lead in time will be significant.

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