Is Leasehold Any Fairer?
There is always going to be an imbalance between the two tenures because owning freehold property is the nearest you can get to owning property outright in English common law. Leasehold tenure is ‘cut’ from estate of freehold and it has a landlord in the shape of a freeholder.
This freeholder can come in many guises: an individual, a finance company, a ground rent investment company, a company which owns commercial and residential property (mixed use) or a local authority.
Some leasehold properties actually have more than one freeholder because whilst a freeholder holds what is known as a superior lease, they can choose to sell what is called an ‘intermediate’ lease to someone else, who is known a head-lessee. This then results in 3 different levels of ownership in the building:
- The freeholder who has the highest level of overall ownership;
- The head leaseholder (also called the head lessee) who is directly responsible to the leaseholder;
- The leaseholder.
Even though a large premium is paid up front, leaseholders will not be able do what they like with the property because they will not actually own the bricks and mortar. The structure, the building, the land the building stands on, plant rooms, lift motor rooms, meter cupboards, gardens, paths, garages and any outbuildings are all owned by the freeholder. As there is no legal definition of these ‘common areas’ it will be the lease that is the definitive document. Instead leaseholders will own a lease, a document that containing a series of covenants (promises) to do (and not do) certain things which will either be expressively stated or implied by law.
The freeholder will usually covenant to provide:
- Quiet enjoyment (this is implied which means it is not expressly written into the lease but implied by common law);
- The upkeep of the structure including the roof and the guttering;
- Maintenance of the communal areas, such as lifts and communal stairways as well as the general management of the building;
- Services – heating, lighting in common areas, cleaning, grounds maintenance etc: caretaker, scheme manager or porter services.
In order for freeholders to carry out their covenants, they use the mechanism of the lease by which to recover their outlay through the service charges paid by the leaseholders and something they covenant to do.
Leasehold purchasing is far more complicated to that of freehold due to the copious amount of information that surrounds it and attempts to make the conveyancing process continue. There has been the introduction of prescribed lease clauses and 2 forms: LPE1 for use from 1st October 2015 and which contains questions asked on behalf of the buyer and LPE2, the buyers leasehold information summary. The latter was introduced in response to the Competitions and Market’s Authority market study on Residential Property Management Services which looked to improve the information given to buyers of leasehold property about the financial obligations they were committing to.
Note: Both LPE1 and LPE2 forms can be downloaded here.
Because leases are likely to be defective (whether they are older, written in legalese and haven’t kept up with the legislative changes or whether they are newer but badly written), prospective purchasers can buy any number of indemnity insurances to protect them because defects are rarely corrected during the conveyancing process. A range of policy types can be found here.
A short lease can also be extended during conveyancing, provided sellers have owned the property for two years or more. A statutory 90 years can be added to the unexpired term but it is important to note that it is actually the ‘benefit’ of extending the lease which is granted. Purchaser will however not have to wait for two years before extending themselves. The process for this can be read here.
But what happens after the conveyancing process is completed and the leaseholder is now in possession of the keys to the castle?
Many freeholders use the services of a managing agent to carry out the covenants on their behalf. This area of third party management has been seriously problematic since the long lease was created. Leaseholder have however been granted a number of rights through legislation in an attempt to balance freehold with leasehold. If they are unhappy with their freeholder they can go through a process called collective enfranchisement, where subject to certain criteria being met they can buy the freehold and become the new freeholders. In turn they can choose to self manage or employ a managing agent themselves. They can remove their managing agent by either the ‘no fault’ process of Right to Manage (which again requires certain criteria to be met) where they can replace the current managing agent with one of their own choosing, or they can use the ‘fault-based’ process of replacing their management through the First Tier Tribunal.
They can also have a management audit carried out or they can apply to obtain the freehold via compulsory acquisition.
PROFIT MAKING DOCUMENT
What most prospective buyers of leasehold flats do not realise is that the long lease was specifically created to make money for freeholders in 4 main areas: lease extensions, granting of consents such as subletting, buildings insurance (commissions) and the one that has caused an absolute explosion from leaseholders who purchased new build leasehold houses, that of ground rent.
More on what is now termed a leasehold scandal can be read here and it does in fact highlight the fact that far too many new purchasers of leasehold remain ignorant of what they have entered into until it is too late to back out.
Some say that estate agents should offer more information and expand on their current role of facilitator between buyer and seller, and some say the conveyancing solicitors are at fault.
It does however stand to reason that a developer looking to sell leasehold tenure will of course recommend that first-time buyers use their conveyancing services (where they can keep quiet on certain key issues) and I have to admit that were I a first-time buyer I would take that advice. After all, why wouldn’t I?
Now however we know why and the Government has in fact proposed a ban on the future sale of leasehold houses, selling them as freehold instead and reducing ground rents to zero but this won’t help those who have already purchased and now they can’t sell.
Interestingly the Nationwide, who announced they were not going to lend on properties whose ground rent doubles every five, 10 or 15 years actually have their own ground rent portfolio of £54m!
These property investments were made in their pension fund and they deny that any of those used onerous incremental ground rent increases but using ground rents as investment vehicles are not illegal. Leasehold Life has approached this little known investment market by publishing an article jointly with Mark Hawthorn, owner and Director of Landmark Investments which can be read here and a more recent article from Mark Chick, property expert, specialist leasehold solicitor and a Partner at Bishop & Sewell LLP, asking why ground rents are so popular with freeholders which can be read here.
How will all this pan out? Only time will tell.