Covenants in a Lease are usually not overly restrictive and are generally based on common sense. However, in leasehold management, disputes do still arise, some of which are being reported on in the news.
This is the most common dispute, where the leaseholder feels the freeholder is overcharging them.
There are generally three distinct types of fees that the leaseholder is liable for:
Payable to the freeholder purely as rent for sharing the ground that the building is built on. Usually this is a nominal fee and goes straight to the freeholder. However, when you are buying your property, it is worth checking for any escalating ground rent clauses. Some cases have been reported in the news recently, where ground rents on leasehold houses are set to double every 10 years, making them effectively unsaleable before the Lease expires.
Service charges are spent on maintaining the land, the building and any common parts. For a large building, the typical expenses, in order of value, are as follows:
Leaseholders have the right to know:
a) what their service charges are spent on
b) how their service charges are calculated
c) and they have the right to access and view any receipts, invoices and paperwork related to their service charges
A good leasehold management company or their managing agent will be able to clearly explain how the charges have been calculated, and demonstrate how both the freeholder and leaseholder are getting value for money from the services they provide.
A good managing agent, at the end of each financial year, will prepare a file of the service charge accounts which include the bank statements, contractor invoices and any other documents used in the preparation of the accounts. This file to be available for inspection on request by any leaseholder, which is their right under the Landlord and Tenant Act 1985.
This refers to Section 20 of the Landlord and Tenant Act 1985, where any work undertaken by the freeholder that will cost over £250 to any one contributing leaseholder must follow a defined consultation process.
There are strict restrictions on how this consultation must take place but if it is approved and a contract awarded by the leasehold management company for the works then the leaseholders are liable to pay any shortfall if there are insufficient funds in the Sinking or Reserve funds to cover the cost of the project.
Unfortunately for leaseholders, the freehold of a building can, and often is, bought and sold by third party investors. This can make it difficult to engage the freeholder directly in fulfilling their obligations, especially if the freeholder has appointed a managing agent who has performed poorly. For such schemes leaseholders can apply to set-up a Right to Manage company, and manage the service charges themselves or appoint their own managing agent.
With the rise in buy-to-let property over the last decade, this can occur when the property is sub-let. The leaseholder is still responsible for the condition of the property, and the payment of service charges, even though the property is tenanted.
A common issue is the leaseholder or their tenant behaving in contravention to the terms of the Lease resulting in a nuisance to their neighbours.
The rules concerning leasehold management are biased toward the people that own the land (freeholders) and in usual circumstances this is a good thing. The restrictions and obligations set out in the Lease, clearly spell out who has what responsibility (see our blog article: Freehold and Leasehold explained, and the obligations of the Freeholder and Leaseholder).
Service charges cover a lot of things and can vary year-to-year but every leaseholder has a right to inspect how they are calculated and spent.
Unscrupulous or absent freeholders, sub-let properties and bad managing agents all contribute to the stigma that leasehold is a money making scheme to the detriment of leaseholders. Good communication and transparency between the freeholder, or their managing agent, and the leaseholder is essential to a happy residential development!