Historically there used to be only two parties to a lease: the leaseholder and the freeholder, but being a freeholder in the 1980’s had lost much of its attraction due to the ever-increasing rights of leaseholders. So, in yet another game of ‘cat and mouse’, freeholders created the tri-partite (tri-party) lease consisting of the freeholder, the leaseholder and the resident management company. The management company consists of leaseholders, the company is usually established as being limited by shares (see below) and its main purpose is to manage and keep up the common areas of the building, (in other words, any areas that do not belong to each leaseholder).
The idea behind these leases is to give leaseholders the feeling that they are more in charge of how their buildings are managed. However, the developers/freeholders keep the freehold and carry out minimal duties such as collecting ground rent (their investment income) and placing buildings insurance (where they make money on commissions). The RMC on the other hand is required to carry out the more complex and time-consuming elements such as service charge collection (under which the demands have to comply with statutory requirements), dealing with nuisance leaseholders (such as keeping pets, erecting satellite dishes, and noise issues) and embarking on legal action for lease breaches.
Tri-partite leases are the most commonly used leases for new builds today. If the RMC is party to the original lease then it’s obligations are expressly set out according to the lease terms, which makes a contract between itself and the freeholder unnecessary. This is because its contractual rights lie directly with the leaseholders.
On the other hand, if the RMC is directly responsible for performing the landlord’s covenants but another party is carrying out maintenance duties then that other party is merely the agent of the landlord. If the tri-partite lease says that the freeholder must also appoint a managing agent, then that must also be complied with.
However, further rights granted to leaseholders means that flats in older blocks can be marketed as share of the freehold, where leaseholders have used the right at some point to collectively purchase their freeholds and become the new freeholders.
Whilst the flats will individually still be held on leases, all those leaseholders who took part in the freehold purchase become shareholders as the company will be one that is limited by shares. It is sometimes possible for leaseholders to buy into the freehold for which a premium will be payable, but a freehold company owned collectively by the leaseholders is under no obligation to sell a share in the freehold.
The main advantages in owning a share of freehold are:
- The leases can be extended at little or no cost to 999 years at a peppercorn rental (i.e. nil). It is however important to take advice if there has been a considerable time lapse between the tenants collectively acquiring the freehold and the new property company granting themselves extended leases;
- As the freehold is collectively owned by the tenants of the block, any changes to the terms of the leases that are causing problems (for example, pets or wooden flooring) can be varied so long as the majority of shareholders in the freehold company agree;
- The tenants have far more control over the day-to-day management of their building;
- The tenants have the ability to govern the level of service charges and insurance premiums levied as they are in control;
- The saleability of a flat with a share of freehold is generally increased. Often, a property is an individual’s most valuable asset and securing a share of freehold will protect it.