About Leasehold

Leasehold Explained

Leasehold is almost unique to the UK. Most other countries in the world have adopted a form of common hold whereby apartment leaseholders own the freehold between them and collectively manage the building. In America and other countries of Western Europe these are called condominiums.

Under the UK leasehold system purchasers do not actually own their flats or apartments but rent them for a long period typically 99 years, 125 years or sometimes 999 years. Instead of paying monthly rent leaseholders pay a larger sum up front, which guarantees their exclusive use of the property for the whole period of the lease.

The landlord retains the common parts, such as the lobby, stairs, corridors, office, and house manager's accommodation, lounge, laundry and guest room where applicable. But these have very limited value because they cannot be sold as they have been contracted to leaseholders' use and benefit under the lease. As a consequence the value of the freehold is effectively the discounted value of properties at the end of the lease plus the value of the income stream the freehold can yield by way of rent such as ground rent.

The value of the freehold is determined by a calculation that translates the future property value plus income the lease will yield into a present day sum of money. The income is primarily the monies all lessees are required to pay by way of rent, excluding service charge contributions. In most leases with over 80 years to run the leaseholders' interest far outweighs the freehold interest in the property.

The freeholder and the leaseholder have rights and obligations as set out in the lease. The freeholder's chief obligation is to collect service charges, maintain and insure the structure of the building and ensure individual leaseholders abide by covenants in the lease, such as not creating noise or nuisance to neighbours.

The freeholder may decide to manage these tasks itself or it may appoint a managing agent to look after these matters on its behalf. In return for meeting these obligations the freeholder is entitled to charge a management fee and leaseholders will usually pay this fee and all the other expenses of maintaining the building by way of an annual service charge as set out in the lease. Usually all leases for a block will be substantially the same.

In recent years many profit-seeking freeholders have seized the opportunity to extract more monies from leaseholders, often by unethical means. By managing the building themselves, or via management companies they own, some freeholders are taking generous commissions and handling fees for many of the services provided, such as insurances, lift maintenance, security and fire alarm maintenance etc.

On retirement estates some freeholders have found ways to start charging leaseholders an annual rent for the use of facilities previously provided free of charge, such as the use of the scheme manager's accommodation and office. Some have even started charging a rent for the use of the guest suites; others require lessees to pay the freeholder a transfer fee every time a lease is assigned.

It is against this background and after considerable consultation in the industry that Parliament introduced further legislation to address the imbalance in leaseholder rights. In view of the fact that leaseholders' collective investment in a block of flats far outweighs the freeholder's interest Parliament properly decided that leaseholders should have the absolute right to acquire the right to manage the block or appoint a managing agent of their own choosing.

These measures were introduced in The Commonhold and Leasehold Reform Act 2002 and became effective in 2003. If you are a long leaseholder in a qualifying block of flats it is your statutory right to benefit from this legislation.

Common Issues

Service Charges

By far the most common leasehold issue is the level of service charges. By law service charges must represent the actual expenditure incurred in providing the services stipulated in the lease and the cost must be reasonable.

The lease may also require that leaseholders contribute towards a sinking or reserve fund to provide for the future maintenance of the property. These contributions must be reasonable and would usually be based on a professional survey of the property. Service charge monies and reserve funds are held by the landlord on automatic statutory trusts and must be retained in separate bank accounts designated for the benefit of the relevant leaseholders.

Leaseholders have statutory rights in relation to service charge demands. These include the right to obtain a summary of all the costs and the right to look at the accounts, receipts and other documents on which they are based. Leaseholders have a right to be consulted on all major works that exceed £250 per leaseholder and on any long-term agreements exceeding £100 per leaseholder per year.

A landlord can only recover costs that are notified to leaseholders within 18 months from the time the costs were incurred.

The usual remedy to leaseholders subjected to unreasonable service charges is an application to the local Leasehold Valuation Tribunal (LVT) which has jurisdiction to determine such claims. LVT´s are not unfriendly places and are used to dealing with leaseholders in person. An application to the LVT incurs a flat fee of two or three hundred pounds and unlike the civil courts leaseholders would not generally be liable for the landlord´ legal costs.

Rent for managers accommodation

It is commonplace for landlords and managing agents to charge leaseholders rent for the use of the caretaker´s or house manager´s accommodation and office. Whether or not such a charge is justified depends upon the precise wording of the lease. This issue has already come before the LVT, the Upper Tribunal and the Court of Appeal and the guiding principles are now well defined.

Unless a specific rental charge is spelled out in clear and unambiguous terms in the lease, using words an average man in the street would readily understand, the charge is not justified and cannot be applied.

Some leases allow 'the cost of the warden's accommodation' to be included under service charge expenditure. Although this is intended to refer to the cost of upkeep and maintenance, profit-seeking landlords have argued that this also entitles them to charge a rent. They argue that in providing a flat for the warden or manager they gave up income that would otherwise be derived and they seek to recover this 'income foregone' as a cost. The Court of Appeal has rejected this argument and determined that whereas income foregone may well be a 'cost' it is not 'expenditure' of the type to be included in the service charge.

It is also relevant to point out that in most blocks of retirement flats the developer of the estate would usually have already obtained compensation for the provision of facilities such as house manager´s accommodation, guest suite, lounge and laundry etc. Insofar as the provision of these facilities is usually essential in order to obtain planning consent, the compensation to the developer is the increased value of the land due to planning consent, without which the development could not proceed. These requirements are often incorporated into section 106 planning agreements (previously known as section 52 agreements) otherwise known as planning benefits for that reason.

Some recently drafted leases state clearly and specifically that a rent is payable for some or all of the above facilities. A developer may give up a certain amount of space to provide these facilities but as stated that is usually compensated at the planning stage and in the opinion of this website it is unethical and unfair to make an additional recovery from leaseholders, especially retired pensioners.