Facts about the Leasehold System
- The Government estimates that in 2014 there were 4.1 million Leasehold dwellings in England and Wales. Whilst the majority of Leasehold dwellings are flats, a house can also be a Leasehold dwelling.
- Leaseholders are a kind of tenant. They do not own the property, they only purchase the exclusive right to use the property for a fixed number of years.
- Long leases are normally for a period of 99 to 125 years, sometimes longer sometimes shorter. When the lease period finishes the Freeholder of the building takes possession of the property.
- Leases are normally long complicated documents setting out in detail the terms and conditions which both Leaseholder and Landlord must abide to.
- All Leaseholders have a Landlord. This Landlord can be the Freeholder, a person or organisation that has purchased a Lease over the property and then Leased it again, a management company, or even a company owned by the Leaseholders themselves.
- The Landlord will normally be entitled to collect a number of further charges from a Leaseholder throughout the period of the Lease. These include Service Charges, Administration Charges, Ground Rent and sometimes direct charges for services such as water and electric.
- The obligation to pay Landlords these additional charges tends create the most problems for Leaseholders. Although the law and the terms of the Lease restrict the amount a Landlord can charge, Landlords sometimes overcharge Leaseholders for services, for unnecessary costs, or work which never takes place.
- Choosing the right Leasehold property involves a lot of research. Even after you have decided that you like the property, and agree the price, the Lease needs to be checked, the property correctly valued in relation to the remaining number of years in the lease period, and the purchaser needs to be sure that the system that is in place for providing services and making additional charges achieves value for money and keeps the building in an acceptable state of repair.
The number of years a Lease lasts is called the ‘Lease Term’. Unless you are buying a newly built property, it is very likely that some of the years of the original Lease Term will have elapsed. For example, if the Lease Term of 100 years started on the 1st January 1990 then on 1st January 2010 the Lease will only have 80 years left to run.
Whilst 80 years might seem like a long time left for a Lease to run, if the number of years a Lease has left to run gets to 80 or less the Leasehold property itself becomes much less valuable. The reason is that it becomes much more expensive to extend a Lease Term when there are only 80 years or less to run. The Law states that Leaseholders have a legal right to extend their leases at a cost (payable to the Freeholder) and the Law also sets out a formula for how this cost will be calculated. For Leases with 80 years or less left to run, the Law says a Leaseholder must pay an addition charge, called the ‘Marriage Value’, in order to extend their Lease Term and this charge can be tens of thousands of pounds.
For this reason, you need to make sure that if you buy a Leasehold either it has at least 82 years left to run (80 years plus 2 years to organise an extension), or that the price you are paying for the Leasehold Property properly reflects the additional monies that will need to be paid in order to extend the Lease.
If you are purchasing a flat then it is very likely that the Landlord is responsible for maintaining the exterior of the building and any areas or facilities inside the building which are used in common with other residents, and that you will have to pay a Service Charge for this.
Exactly who it is that provides services depends on what it says in the Lease for the property. Although in some circumstances a Leaseholder may also need to check a ‘Head Lease‘ to understand the precise details of the arrangement.
The Lease will also describe when and how you are billed for Service Charges. The amount of detail Leases give varies dramatically. It is worth bearing in mind that some Leases give Landlords the discretion to change the way the Service Charge is calculated and billed without the consent or involvement of the affected Leaseholders.
As well as Service Charges for the cost of providing services and maintaining the building, Leaseholders are also often obliged to pay to pay other charges to their Landlord. The main three are:
- Ground Rent: An amount stated in the Lease which must be paid by the Leaseholder every year for rent of the ground upon which the building is located. The amount can range from a ‘peppercorn’, to £10 a year for leases purchased under the Right to Buy/Acquire, to many thousands of pounds for some private sector leasehold properties.
- Administration Charges: Charges which becomes payable to the Landlord when you ask them to do something or when they incur costs only related to that specific Leasehold Poprerty. For instance they may make a charge for providing information about service charge accounts, they will also very likely charge for registering the change of ownership of the Leasehold Property and for consents to do something with the Leasehold Property, such as sub-let it or making an alteration to the flat. More contentiously, Landlords can also sometimes charge legal costs to Leaseholder’s separately, even if the cost are incurred in a dispute with Leaseholders which the Landlord lost.
- Other Costs: Sometimes Landlords can charge for the provision of services used directly by the Leaseholder, such as the supply of gas and electric.
Different Types of Management/Ownership Structure
The Freeholder of the building is not always the Leaseholder’s Landlord, or the party which provides the services and makes the charges. There are in fact 6 basic types of management/ownership structure for Leasehold Properties:
1. Freeholder Landlord: This is where the Freeholder collects the Service Charge and other costs directly from the Leaseholder. The Freeholder may provide the services and administration themselves, or they may hire a Management Company to do it on their behalf. The Freeholder may also be the Leaseholders themselves if they have purchased the Freehold through the statutory right known as ‘Collective Enfranchisement‘.
2. Right to Manage Company: This is where the Leaseholders have exercised their statutory ‘Right to Manage’. The Service Charge is managed by the Leaseholders through the Right to Manage Company. This company does not own the Freehold and there may still be other charges payable to the Freeholder.
3. Tripartite Lease: This where the Lease includes three parties: Freeholder, Leaseholder and Manager. The Manager is responsible for the Service Charges and (typically) almost all other charges save for Ground Rent and Buildings’ Insurance. The Manager can sometimes be a private company appointed by the Freeholder or sometimes a Management Company which the residents themselves control.
4. Head Lessee as Landlord: This is where a person or organisation is granted a Head Lease over a property by the Freeholder, and it in turn grants an Under Lease to the person using the property. In this situation the Head Lessee is the Landlord to the Leaseholder using the property (the ‘Under Lessee’). The Under Lessee pays the Head Lessee a Service Charge. The Head Lessee does not though provide the services. The Head Lessee themselves receives a Service Charge bill from the Freeholder which they in turn recharge to the Leaseholder using the property. This is common arrangement for Shared Ownership flats, where a Housing Association is the Head Lessee and the developer of the property is often the Freeholder. In this arrangement the Leaseholder’s Landlord has (in practice) little control over the charges which the Leaseholder will pay.
5. Head Lessee as Landlord and Service Provider: This is where a person or organisation is granted a Head Lease over a property from the Freeholder and then grants an Under Lease to the person using the property with themselves names as Landlord, and they also undertake responsibility for providing the Services. In this situation, the Leaseholder’s actual Landlord will determine the level of services and the Service Charge, as well as a number of the other charges.
Problems with the Leasehold System
Some people believe that the Leasehold system in England and Wales is fundamentally flawed in that it allows a number of opportunities for Landlords to over charge residents, whether intentionally or by neglect. This is not necessarily a reason never to buy Leasehold property, but it is a reason to make sure that the best safeguards possible are place to protect you from this overcharging. The reason some people believe that the Leasehold system is flawed is that Landlords get to decide what works and services are provided, their quality, how much should be paid for them, and who does them, whilst at the same making no contribution to towards their cost or taking any benefit from their provision. The concern is that landlords have very little incentive to save money on services because they aren’t paying for them, and have little interest in the quality of the services provided even they are occupying the property. Many freehold titles are purchased by companies which are only interested in the fixed income from Ground Rents.
A second potential problem comes in relation to the other types of charges a Landlord can make for other things than services or maintenance of the building. The Leasehold system provides opportunities for landlords to charge very large amounts for things like insurance, ‘exit fees’ from Retirement Leasehold Properties, or consents to sub-let or make alterations to the property.
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