When you purchase a flat and become a leaseholder you will NEVER own the bricks and mortar outright regardless of whether you pay off a mortgage or buy outright with cash. This is because you only own an ‘interest’ in the property, which is cut from the dominant estate of freehold in the form of a long lease. This lease acts as a contract which allows you to live in the property as an owner-occupier for a pre-determined amount of years (where historically the tenancy falls between being a freeholder and a renting tenant) or sublet it. Because freehold is the closest anyone can get to owning property outright in English common law, freeholders who own blocks of flats own the structure, the roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings. Inside they own things such as the plant rooms, lift motor rooms, and meter cupboards and any other areas that are not owned by each leaseholder. All of these areas are known collectively as the common areas.
Lease Terms and Provisions
A lease of a new build property usually starts with a term of 99 or 125 years and each time the lease is sold, the unexpired term (how many years are left) reduces. Others can be very short, with some having so few left that they are difficult to market due to the criteria demanded by lenders. Others are of a duration of 999 years, and other leases fall somewhere between the two.
Leases should be the same throughout the block and contain the following provisions:
- Adequate rights of support and shelter from the other parts of the building;
- Rights of access;
- Right of entry to other parts of the building (including other flats) for the repair and upkeep of the property;
- Rights to use the services (water, electricity, gas etc) which cross other parts of the building;
- Contain the same covenants.
These are promises that the parties make to each other to do certain things (positive) and not to do certain things (restrictive) and they govern the relationship between freeholder and leaseholder. Covenants are either going to expressly written into the lease or implied and its important to be aware that the latter have just as much force in law as the former.
The main covenant freeholders are required to meet is the maintenance and repairs of the common areas (which include risk assessments).
Note: Indemnity insurance is not essential where the responsibility of maintenance of the common parts falls on the freeholder.
The main covenants leaseholders enter into are to pay service charges, (so that the freeholder can meet its repairing obligations), ground rent (which is not exactly what it says on the tin but is a financial asset for the freeholder) and buildings insurance.
Examples of the type of restrictive covenants leaseholders enter into is not to play loud music, not to erect satellite dishes, not to keep pets, not to install laminate flooring, not to make alterations (without freeholder consent), not to change the use of the property, not to sublet (without freeholder consent) and not to hang washing in public view.
Freeholders are sometimes referred to as having what is known as a ‘reversionary interest‘ which means they have the right to take possession of the property on the expiry of the lease. However, if leaseholders breach their covenants, freeholders can take back the lease before its natural expiration, using the mechanism of forfeiture.
Since the introduction of prescribed lease clauses there have been two leasehold forms created: LPE1 for use from 1st October 2015, which has questions asked on behalf of the buyer, and LPE2, the buyers leasehold information summary which was introduced in response to the Competitions and Market’s Authority Market Study on Residential Property Management Services. This study looked to make clearer the ongoing financial obligations leasehold purchasers were committing to making. By that they meant service charges, buildings insurance, ground rent, administration charges and the freeholder granting consents such as subletting and altering the property.
Whilst some elements of leasehold purchasing is the same as that of freehold, such as checking the property title, and carrying out local authority searches many prospective leaseholders still have no idea what they are purchasing because of the sheer size of the information that surrounds leasehold tenure.
This is backed up by not only the number of documents that the buyer needs to get from the seller but also a the number of questions that need to be asked at the pre-contract stage which can be read here.