Leasehold can be a complicated concept and can be confusing. It may come as a surprise to some people to find that the flat they ‘bought’ does not belong to them at all.
Many people would like to see leasehold home ownership abolished altogether: after all we’ve had the means to set up multi-dwelling buildings as Commonholds since the 2002 Commonhold and Leasehold Reform Act.
Commonhold should cater for the common interests of all occupants. For now, however, nearly one in five of all properties in England are leasehold and new builds continue to be established with leasehold tenure.
As a leaseholder, you have really only bought the lease, not the property. So you have the right to occupy the flat for the length of the lease, which is an agreement that binds both you and the owner of the freehold (the real owner of the building) to certain rights and obligations (covenants). Even then, you can be made to hand the flat back and walk away with nothing if you break the terms of the lease (although forfeiture, as it is known, can be far more difficult for freeholders to achieve than it used to be).
Perhaps, confusingly, freeholders are also often referred to as landlords. There are key differences between being a leaseholder and someone who rents a property. Most notably probably, the term (length of lease compared to a tenancy) and the fact that you can usually sell your leasehold interest on the open market, just as you would a freehold house.
You will also usually have a greater say in the way the building is run, and everyone living there will probably have a vested interest in keeping the building in good condition. In addition, there is an array of legislation and regulation affording rights to long leaseholders of residential property that can be different to that in relation to shorter term leases, i.e. let property.
In law, a lease is a tenancy and the leaseholder is a tenant. The tenancy will continue on exactly the same terms unless you or the landlord decides to end it. However, the less time left on a lease, generally speaking, the lower the market price of the flat will be – and the more the freeholder may be able to charge you for a lease extension.
Commonly 999 year leases are entered into and, in such circumstances, the issue of lease length does not arise. But in some older blocks leases are running perilously short. If your lease is under 90-100 years, it’s probably time to start talking to a solicitor about your options.
In theory, the leasehold system ensures that the building is kept up to standard, with costs shared fairly between occupants of the flats, and that all leaseholders enjoy living there without neighbours having wild parties, not taking responsibility for tenants when they sub-let, leaving bikes and prams in corridors and the like. Here’s the government’s guide to leasehold.
But it can go wrong! Some of the issues that can arise are:
- Quality of management and maintenance and the level of service charges
- Ground rents
- Having to pay administration fees
Maintenance standards and costs
The lease will say what the freeholder/landlord has to do, and the share of the costs that you, as a leaseholder, have to pay for. Sometimes bigger flats pay bigger proportions. The lease may also require that you contribute to a sinking fund to ‘save up’ for major works like roof repairs and external painting. Sometimes it will specify how often jobs such as outside redecoration must be done so there can be no arguments among leaseholders if some people don’t want the expense.
Leaseholders do have the right to challenge service charges that they think are unreasonable. You also have a say in major works, so big bills should not come as a shock and freeholders cannot just hire their ‘mates’. You can find plenty of information and advice on how to manage issues at the Leasehold Advisory Service website.
In principle, as leaseholders, you can club together and take over the management of the building. There is no requirement to have to prove that the current management is bad. If the circumstances fit, there is an absolute right to manage. It should be noted a right to manage does come with responsibilities and a workload.
A common concern among many leaseholders is that freeholders and landlords pocket ground rent. This appears to be becoming more of a problem. The more freeholds are seen as an investment opportunity, ground rents can be much higher. Some leases on new properties are written so the ground rent will increase substantially over the years.
There has been a particular scandal over new builds, especially where even houses have been sold as leasehold rather than freehold, with ground rent doubling every five or 10 years. If you remember your school maths, you’ll see why these leaseholders are worried. The matter has now reached Parliament, and we wish the leaseholders concerned well. The outcome and any resulting changes in the law may, of course, affect all leaseholders.
Should a landlord wish to sell their interest, leaseholders have some protection because they must be offered first refusal to buy the freehold. In fact, leaseholders can act together and try and buy the freehold at any time. Similarly to the right to manage, there is an absolute right to buy the freehold, commonly known as enfranchisement. Again, there’s lots of free information available from the Leasehold Advisory Service.
Please note there is no right of first refusal in relation to leasehold houses. This is, however, currently being considered by the government as part of an intended review of leasehold and commonhold law.
It can come as a shock when the freeholder or the managing agent sends you a bill for granting permission to update your own bathroom or kitchen. In theory, this is to ensure the integrity of the building and the well-being of all occupants.
Worst case scenarios might include a resident knocking down load bearing walls, breaching fire walls or hanging heavy cabinets on walls that cannot take the weight leading to big insurance claims. So the freeholder or managing agent’s administration fees might include the cost of hiring structural engineers or surveyors to check your plans. In addition, the freeholder or managing agent may insist on you entering a license, regulating the proposed works, and be responsible for the costs associated with the drafting and entering of the same.
Your lease will tell you what you need to ask permission for.
Always read the lease
In theory, leasehold is a system that should work well for everyone. Freeholders can make a reasonable return and leaseholders can live in a well-maintained building.
The lease you sign when you bought the flat is the bottom line. Take time to read it and make sure you understand your obligations and your liabilities for service charges and ground rent to avoid future misunderstandings. If you are in the process of buying a flat, make sure your solicitor explains all of this to you.
Take the opportunity to ask all the questions you consider relevant. It is vitally important that you understand exactly what you are buying!
Reviewed 20 July 2022
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein