What is leasehold?
Leasehold apartments can be located in purpose-built blocks, in converted houses or above commercial or retail premises.
Leasehold ownership of an apartment is simply a long tenancy, the right to occupation and use of the apartment for a long period – the ‘term’ of the lease. This will usually be for 99 or 125 years and the apartment can be bought and sold during that term. The term is fixed at the beginning and so decreases in length year by year. Thus, if it were not for inflation, the value of the apartment would diminish over time until the eventual expiry of the lease, when the apartment reverts to the landlord.
The ownership of the apartment usually relates to everything within the four walls of the apartment, including floorboards and plaster to walls and ceiling, but does not usually include the external or structural walls. The structure and common parts of the building and the land it stands on are owned by the landlord, who is responsible for the maintenance and repair of the building.
The landlord can be a person or a company, including a local authority or a housing association. It is also becoming quite common for the leaseholders to own the freehold of the building, through a residents’ management company, effectively becoming their own landlord. With the introduction of the right to manage, the lessees do not own the freehold but are able to manage the building as if they were the landlord.
What is a lease?
A lease is a contract between the leaseholder and the landlord giving conditional ownership for a fixed period. It is an important document and leaseholders must ensure that they have a copy and that they understand it. The wording of leases is usually in legal language and can vary from property to property. Leaseholders who do not understand their lease can and should get advice.
It is difficult to change the conditions of the lease after you buy, so make sure that the services provided in the lease are those that you want or can accept.
The lease sets out the contractual obligations of the two parties: what the leaseholder has contracted to do, and what the landlord is bound to do. The leaseholder’s obligations will include payment of the ground rent (if any) and contribution to the costs of maintaining and managing the building. The lease will probably also place certain conditions on the use and occupation of the apartment. The landlord will usually be required to manage and maintain the structure, exterior and common areas of the property, to collect contributions from all the leaseholders and keep the accounts.
Leaseholders are not necessarily entirely free to do whatever they want in or with the apartment – the lease comes with conditions, to protect the rights of everyone with an interest in the building. For example, retirement schemes will usually have restrictions on the age of those who can live there.
When an apartment changes hands, the seller assigns all the rights and responsibilities of the lease to the purchaser, including any future service charges that have not yet been identified.
Read the lease – understand your rights and responsibilities. Ask if the landlord or manager produces a plain English summary for you to read and whether there are any additional rules.
What are your contractual rights?
Primarily, the right of peaceable occupation of the apartment for the term of the lease, usually referred to as ‘quiet enjoyment’. In addition, the leaseholder has the right to expect the landlord to maintain and repair the building and manage the common parts – that is, the parts of the building or grounds not specifically granted to the leaseholder in the lease but to which there are rights of access, for example, the entrance hall and staircases.
What are your responsibilities?
Principally, these will be the requirements to keep the inside of the apartment in good order, to pay (on time) a share of the costs of maintaining and running the building, to behave in a neighbourly manner and not to do certain things without the landlord’s consent, for example, make alterations or sub-let. The landlord has an obligation to ensure that the leaseholder complies with such responsibilities for the good of all the other leaseholders. These rights and responsibilities will be set out in the lease.
What is ground rent?
Because leasehold is a tenancy, it is subject to the payment of a rent (which may be nominal) to the landlord. Ground rent is a specific requirement of the lease and must be paid on the due date. This does not apply to every lease and should be checked prior to purchase as some ground rents increase at different intervals throughout the term of the lease.
What are service charges?
Service charges are payments by the leaseholder to the landlord for all the services the landlord provides. These will include maintenance and repairs, insurance of the building and, in some cases, provision of central heating, lifts, caretaker, lighting and cleaning of common areas etc. Usually the charges will also include the costs of management, either by the landlord or by a professional managing agent.
Service charges can vary from year to year; they can go up or down without any limit other than that they are reasonable. Details of what can (and cannot) be charged by the landlord and the proportion of the charge to be paid by the individual leaseholder will all be set out in the lease. The landlord and/or appointed managing agent arrange provision of the services. The leaseholder pays for them.
All costs must be met by the leaseholders; the landlord will generally make no financial contribution. Most modern leases allow for the landlord to collect service charges in advance, repaying any surplus or collecting any shortfall at the end of the year.
The landlord can only recover those costs which are reasonable. Leaseholders have powerful rights to challenge service charges they feel are unreasonable at the First Tier Tribunal Property Chamber.
When considering the purchase of a leasehold apartment, it is important to find out, for personal budgetary purposes, what the current and future service charges are likely to be. Also, check if there is a reserve fund, and what plans are there for major works that could affect the service charge in the next few years after your purchase.
What are reserve funds?
Many leases (but not every lease) provide for the landlord to collect sums in advance to create a reserve or ‘sinking’ fund to ensure that sufficient money is available for future scheduled major works, such as external decorations or lift replacement. The lease will set out the sums involved and when regular, cyclical, maintenance works are due.
How is the building insured?
The lease will normally require the landlord to take out adequate insurance for the building and the common parts, and will give him or her the right to recover the cost of the premium through the service charges. This policy will not normally cover the possessions (generally known as contents insurance) of individual leaseholders
What happens if the leaseholder does not pay?
It is the leaseholder’s obligation to pay the service charges and ground rent promptly under the terms of the lease. If they are not paid and the landlord is able to show that the charges are reasonable, then he can begin forfeiture proceedings. If approved by a court, this can lead to the landlord repossessing the apartment. However, under the Commonhold and Leasehold Reform Act 2002, the right of the landlord will be restricted.
What is a managing agent?
Sometimes the landlord carries out the management of the property himself; alternatively, a managing agent may be appointed to manage and maintain the building on behalf of the landlord, in accordance with the terms of the lease, current relevant legislation and codes of practice. The agent will receive a fee, which will usually be paid by leaseholders as part of the service charges. This may be based on a specified percentage of the day-to-day service charges, but good and common practice is for it to be a fixed fee per annum. Where major works are involved, the agent may charge an additional fee, which will normally be a percentage of the total cost of such works. Please note Arrow Leasehold Management DO NOT take any additional fees/commissions for organising works/contracts on behalf of the block/estate. Only professional fees i.e. surveyors costs will be charged to leaseholders.
What other rights does the leaseholder have?
Probably more than you think. There is a wide range of rights set out in the legislation and advice is readily available; however, where a dispute arises, the first step should be to ask the managing agent for full details and/or an explanation.
- Information: the landlord must provide his name and a contact address within the UK, which must be stated on every demand for service charges. Leaseholders can demand summaries of the service charges, details of the insurance cover and have the right to inspect accounts and other documents.
- Consultation on major works: the landlord cannot carry out major works over £250 per leaseholder to the building without first consulting the leaseholders and they must use the formal consultation process which is S20 consultation; if he fails to do this, he may not be able to recover all the costs.
- Consultation on long-term agreements: the landlord cannot enter into certain agreements or contracts in excess of £100 per leaseholder for any service over 12 months without first consulting the leaseholders.
- Challenging service charges: leaseholders can apply to the First Tier Tribual Property Chamber to seek a determination of the reasonableness of the charges, whether already paid or not.
- Challenging administration charges: leaseholders can apply to the First Tier Tribunal Property Chamber to seek a determination of the reasonableness of other charges arising from the lease in addition to the service charge. For example, consents for alterations and sub-letting, or fees for providing information on resale.
- Right to manage: if leaseholders want to change the management of property whether it is deficient or not, they can do so by using the right to manage. This is a ‘no fault, no compensation’ process that will allow leaseholders as a group to decide the management arrangements for the property. This right does not apply to local authority landlords.
- Appointing a manager: if the landlord’s management is deficient, then leaseholders can apply to the LVT for the appointment of a new manager (except for housing associations and local authorities).
- Extending a lease: an individual leaseholder who satisfies certain conditions can demand a new lease from the landlord, with the price to be agreed between the parties, or, if this is not possible, set by the LVT.
- Buying the freehold: groups of leaseholders who satisfy certain conditions can get together and enforce the purchase of the freehold, again with the price being agreed between the parties or, if this is not possible, set by the First Tier Tribunal Property Chamber.
- Right of first refusal: where the landlord proposes to sell his interest in the building, he must offer it to the leaseholders first or he can be prosecuted (except for housing associations and local authority landlords).
Where can I get advice?
LEASE – The Leasehold Advisory Service
70-74 City Road, London, ECIY 2BJ.
Tel: 020 7383 9800 or local rate on 0845 345 1993
Fax: 020 7253 2043 www.lease-advice.org
LEASE provides free advice and guidance to leaseholders and landlords on all aspects of leasehold law, including problems with service charges, the right to manage, possession proceedings and rights to lease extension and freehold acquisition. The Leasehold Advisory Service is a Non Departmental Public Body (NDPB) funded by Government to provide free advice on the law affecting residential leasehold property in England and Wales.