Today, freeholders 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.
The greatest power of the freeholder when leaseholders breach the terms of their lease (whether the breach is financial or that of disrepair) is forfeiture, i.e. the taking back of the lease (and the property) from the leaseholder before its natural expiration.
It is however not an easy process because of the introduction of a number of legal measures designed to protect leaseholders from being faced with both the threat and the real action of forfeiture. This was because it used be carried out arbitrarily, resulting in the freeholder getting the return of an asset in monetary value that far outweighed the monetary value of any breach.
It is the Housing Act 1996 and especially the Commonhold and Leasehold Reform Act 2002 that make it unlawful for freeholders to start proceedings for small debts, with specific legislation under s167 of the 2002 Act preventing the freeholder from forfeiting leases for service charge arrears (including ground rent and administration charges) where a) the outstanding amount is £350 or less and b) no part of it has been outstanding for more than 3 years.
Forfeiture is also not possible in any of the following situations:
- Against a Rent Act protected tenant;
- Against an Assured tenant and an Assured Shorthold tenant under the Housing Act 1988;
- Against a long leaseholder of a house who is claiming to enfranchise under the Leasehold Reform Act 1967
- RMC’s set up via Right to Manage or through tri-party leases because these companies do not own the freehold.
What has to be confirmed before the process starts, is what type of breach has been committed which can be read here.
There has been extensive legislation created over the decades in ongoing attempts to balance freehold with leasehold but this cannot be achieved fully because leasehold tenure is ‘cut’ from estate of freehold. This makes it the lesser of the two tenures as it is only an ‘interest’. 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. Legislation has however given leaseholders a significant number of rights that they can use to combat unfair practices of both managing agents and freeholders. They can use the ‘no fault’ process of Right to Manage (which 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.
All this hasn’t however stopped the big freeholders from playing dirty. A prime example surrounds the owners of new build leasehold houses, where their freeholds have been sold on to companies who have significantly increased the ground rent, without the knowledge of the leaseholders. It has actually been termed a leasehold scandal, more of which can be read here.
It has culminated in calls for leasehold to be brought to an end but this isn’t going to happen any time soon (if it ever does because of the vested interests in the tenure). So unless Commonhold ever takes off (which does away with the role of freeholder) then this particular leasehold scandal is set to continue!