Freeholder Owners and Leasehold Management
Buying freehold property is the closest anyone can get to owning property outright in English common law. With blocks of flats, the freeholder owns the building structure, the land it stands on, the roof, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings. Inside the freeholder owns plant rooms, lift motor rooms, and meter cupboards. All of these areas, both inside and out are collectively known as the common areas. Their management is covered by the requirements of the Health and Safety Executive (HSE) which enforces most health and safety matters and the Courts view these areas as workplaces, just as they do commercial properties.
A freeholder can be an individual, a finance company, a mixed use company (owning both commercial and residential properties in the same development, and in the social housing sector, local authorities. A resident management company can also be a freeholder.
Some blocks of flats 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.
Freeholders also have the ultimate sanction against leaseholders who breach the terms of their lease in their right of forfeiture, the taking back of the lease (and therefore the property) before its natual expiry. Such breaches will be financial (i.e. service charge arrears), those of disrepair or both. More on forfeiture can be read here.
Many freeholders will use managing agents as will many leasehold resident management companies due to the complexities of self-managing anything larger than half a dozen or so flats. The role of the managing agent is wide-ranging and depends on the type and size of the property but in the main it will send out service charge demands, manage the payments, obtain buildings insurance, and collect ground rent. The management agreement is the contract between the managing agent and the leaseholders and all managing agents make their money from the fees they charge for their services. These are paid for by the leaseholders and any management fee charged under a long residential lease is subject to s19 of the Landlord and Tenant Act 1985 (limitation of service charges: reasonableness). The RICS Service Charge Residential Management Code (3rd edition effective from 1st June 2016) states the basis of fee charging.
More on the role of managing agents can be read here.
In the ongoing evolution of Landlord and Tenant law there have been many new Acts of Parliament which are not only lengthy but also come with a number of Statutory Instruments (secondary legislation) attached to them. The long leasehold sector has seen many such Acts, with 5 specifically concerned with the management of blocks of flats:
The Landlord and Tenant Act 1985, the Landlord and Tenant Act 1987, the Housing Act 1996, the Leasehold Reform, Housing and Urban Development 1993, and the Commonhold and Leasehold Reform Act 2002. There has also been the newer Act, that of the Leasehold Reform Amendment Act 2014.
In addition to being familiar with the above legislation, both freeholders and managing agents must also be familiar with the lease(s) and abide by the RICS Service Charge Residential Management Code and Additional Advice to Landlords, Leaseholders and Agents (3rd Edition). This came into effect on 1st June 2016 under the Approval of Code of Management Practice (Residential Management) (Service Charges) (England) Order 2016.