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The most significant difference between being a freeholder and a leaseholder is that being the former means you are as close to owning property outright in English common law as possible. As a leaseholder you only own what is termed an ‘interest’, which is cut from the dominant freehold estate. This ‘interest’ takes the form of a document (a lease) which acts as a contract allowing those who purchase it the right to live in the property (or sublet it) for a pre-determined number of years.

This means that the long leaseholder doesn’t acquire the whole estate because the freeholder retains their interest by way of the reversion which means that the property returns to them when the lease expires.

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. Other leases in older buildings 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.

However, because the long leaseholder didn’t acquire the whole estate (this is because the freeholder retained an interest by way of the reversion), there remained major differences between the two with many problems still being experienced by the owner occupier.

Covenants

A long lease brings obligations for both freeholders and leaseholders in the form of the covenants (promises) they make to each other. In other words, what the leaseholder has contracted to do and what the freeholder is bound to do. There have always been two types of covenants: positive, which is a promise to do something, and restrictive which is a promise not to do something.
How many covenants (and what they are) depend on how the lease is drawn and they 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 freeholder will usually covenant to:

  1. Quiet enjoyment (this is implied anyway);
  2. Provide buildings insurance;
  3. Repair and maintain the common areas which include the structure, roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings as well as anything inside the building such as plant rooms, lift motor rooms, and meter cupboards;
  4. Provide services such as heating, lighting in common areas, cleaning, grounds maintenance etc: caretaker, scheme manager or porter services;
  5. Keep the service charge accounts.

The freeholder recovers the outlay for abiding by these covenants through the mechanisms of the lease by which the leaseholders covenant to pay service charges, buildings insurance and ground rent which is not exactly what it says on the tin but is instead an investment mechanism for the freeholder.

Leaseholders also covenant not do certain things such as not to sublet without freeholder consent, and not to alter the property without freeholder consent (to name just two).

BUYING A LEASE

Whilst some  elements of leasehold purchasing is the same as that of freehold, many prospective leaseholders still have no idea what they are purchasing and the long-term financial commitments they are making.

There have been periodic attempts to make the leasehold conveyancing process less complicated and since the introduction of prescribed lease clauses there have been two more leasehold forms created: the (amended) second edition of the LPE1 form released on 1st October 2015 which can be used for asking for information on behalf of the buyer about a property held by landlords, management companies and managing agents such as ground rent, insurance and service charges.

The amendments have been made to:

  1. Reflect changes in the Association of British Insurer agreements with lenders;
  2. Provide better definitions and general wording;
  3. Include new questions aimed to reduce the need for additional enquiries, for example with regard to any transfer fees payable on sale.

This form was introduced alongside the LPE2 (the Buyers Leasehold Information Summary) in response to recommendations from 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.

The idea is that using both forms makes it easier for solicitors to advise clients because information will be receive in a standardised and consistent format.

We now have a new Freeholder Enquiries Form created by ARMA in March 2019 with questions to be asked on behalf of the buyer.

Note: The seller should only however respond to these enquiries if they are the following:

  1. The Rentcharge Owner;
  2. The Management Company;
  3. The Managing Agent;
  4. The appointed representative for any of the above.

Because the use of these forms is not mandatory I have compiled an alphabetical list of some of the questions that need to be asked when purchasing a leasehold flat but it is important to note that it is not yet exhaustive!:

About the Lease

  1. Are the leases in a similar form throughout the development (which ideally they should be);
  2. How many flats are there?
  3. Are all the flats sold on long leases:
  4. How many unexpired years are there remaining on the lease?
  5. Can the lease be extended?
  6. Have there been any breaches of the lease by the freeholder?
  7. Have any lease breaches been remedied or are they still ongoing?
  8. Does the lease allow the keeping of pets?
  9. Does the lease allow you to use a car park or space and allow access to the gardens?
  10. Are there any other conditions or restrictions in the lease which impacts on how the property is used?
  11. Is a direct Deed of Covenant required? This often applies to leases written before 1996 which have a need for the new leaseholder to give their details to the freeholder/managing agent in the form of a Deed of Direct Covenant meaning that they agree to abide by all the original lease terms before completion and through the duration of ownership. It will be provided by the solicitor acting for the selling leaseholder in a draft form to the buyers conveyancing solicitor, and the latter will then produce the final deed for the buyer to confirm that they will comply with the existing lease terms

Buildings Insurance

  1. Are there any defects in the lease relating to buildings insurance?
  2. Who insures the building?
  3. Are the buildings insurance payments up to date?
  4. Are the interests of lessees and their mortgages automatically noted on the buildings insurance Policy?

Freeholders

  1. What is the name and address of the freeholder?
  2. Who are the freeholder’s solicitors?
  3. Is the freehold owner deemed a ‘absentee landlord’ i.e. are his whereabouts known?
  4. Is the freeholder deemed ‘absent’ i.e. his whereabouts are unknown?
  5. Has the Landlord ever served a Notice on the seller (or to their knowledge their predecessors in Title) in matters relating to the Lease or the use of the flat?
  6. Have there been any consents granted for alterations? If so, they should show as part of the Title Document as a Deed of Variation. If there have been structural alterations made without permission then this renders the lease defective and it must be remedied;
  7. Is there a head lessee?
  8. Is the flat ‘share of the freehold’?
  9. Is the company limited by guarantee?
  10. Is the purchaser required to become a member of the company?

Note: If the propety has an absent freeholder it is less attractive to mortgage lenders. If they agree to lend but then have to reposses a mortgaged property the size of the market they can then sell to will be limited. This may result in the property having to be sold at auction and at a loss to the lender. It will also not be possible to exercise the right to buy the freehold during the conveyancing process because a premium needs to. be agreed with the freeholder.

On the other hand if a clear title can be provided (also known as a  “clean title,” “just title,” “good title” and “free and clear title”) which is a title without any kind of levy from creditors or other parties, they may lend as there is no question as to legal ownership.

Ground Rent

  1. Can a copy receipt be obtained from the landlord showing that the seller has paid the ground rent for the last three years?
  2. Is the ground rent paid to the landlord separately to service charges paid to managing agents?

Health and Safety

  1. Is there an up to date health and safety risk assessment?
  2. Is here an up to date fire risk assessment?
  3. Is there a copy of the asbestos survey for the common parts?

Managing Agents

  1. What is the name and address of the managing agent?

Notices

  1. Has any Notice under s5 of the Landlord and Tenant Act 1987 been served? (the right of first refusal)

Resident Management Companies

  1. What is the name of the resident management company (or a Right to Manage Company)?
  2. Is the management company registered at Companies House and still in existence?
  3. Where can the RMC (RTM) Memorandum and Articles be found?
  4. Is the RMC limited by shares?
  5. Has confirmation been obtained that the sellers share certificate will be handed over on completion along with a (signed) stock transfer form?
  6. Does the lender need a copy of the company’s Memorandum and Articles of Association?

Service Charges

  1. What do service charge cover?
  2. Are the service charges calculated on a percentage or a square footing?
  3. Are there any interest charges and penalties for late payments?
  4. Will there be a surplus or deficit in the service charge accounts after the financial year-end and are they transferred back across individual leaseholders?
  5. Can the previous 3 years service charge accounts be provided?
  6. Have any problems with the service charges been reported to the lender?
  7. Is there a sinking fund to cover large items of expenditure that come as the building ages?
  8. Are sinking fund payments up to date?
  9. Is there a reserve fund to cover day-to-day maintenance
  10. Are reserve fund payments up to date?
  11. If a sinking/reserve fund is held, how much is being held for this particular property?
  12. Are there or will there be any major works either ongoing or scheduled for a later date?;
  13. Is a receipt for rent and service charges required by the lender following completion?
  14. What happens if confirmation of ground rent and service charge receipts cannot be obtained, such as when the freeholder is absent?

If the answer to any of the following questions is ‘no’ then the lease is defective in this area:

  1. Are there any service charge collection dates?
  2. Are there any incentive for arrears to be paid up quickly? If service charges are the only form of funding then this can cause a serious knock on effect as arrears increase and work can’t be carried out as expected. It’s also a particular problem for those that do pay their service charges on time, not least from a fairness perspective;
  3. Are there any provisions for advance maintenance contributions to be set because before expenditure, service charges are sometimes only equal to the ground rent that can be collected;
  4. Are there limits on flats to pay for what they reasonably use. For example, a flat on the ground floor might have to pay for the maintenance and repairs of the lift even though they don’t use it or a flat with a private front door may find themselves having to pay towards redecoration of the internal communal entrance;
  5. Does it enable the fees of a managing agent to be an allowable service charge expenditure item?
  6. Are there provisions for a reserve fund which is designed to even out normal day to day service charge expenditure?
  7. Are there provisons for a sinking fund to cover large areas of expected (or unexpected) expenditure that comes as the building ages?

Subletting

  1. Does the lease allow subletting?
  2. Is the consent of the freeholder required?
  3. Does the lease allow the subletting of the property to tenants on housing benefit?
  4. Is there a sitting tenant?
  5. Is the current mortgage a buy-to-let mortgage?
  6. Does the lender need a counter-part or a certified copy of the tenancy agreement?

SUMMARY

The tenure has been the subject of campaigns for change for many years with MP Barry Gardiner chaining himself to railings back in December 1998 to emphasise the restraints on leaseholders. This time around it seems that Government may actually be listening. This is due in part to the efforts of a recently established campaign group, the National Leaseholder Campaign and the longer established Leasehold Knowledge Partnership. Particularly highlighted at the moment is the issue of onerous ground rents, with freeholds being sold onto other parties without the knowledge of the leaseholders and impacting on whether lenders will lend or not.

There have also been many calls for leasehold tenure to be abolished and replaced by Commonhold which was introduced as the third way of purchasing property in 2002 but has seen very little take-up. Even if it were to become mandatory for new builds (which is also being called for), it would not negate any of the problems continuing to be experiended by those who have already purchased leasehold properties.

I suppose the real question at the moment is will any amount of forms make leasehold conveyancing and ownership any easier? Leases aren’t the same from development to development and even today, they can be badly written and therefore defective. And what about the knowledge of conveyancing solicitors who are more than likely not very well versed in leasehold? Buyers of new build properties are being kept in the dark on key issues such having to pay for road maintenance and estate services in addition to paying their Council tax and many of them find their ground rents sold to parties without their knowledge. As a result their ground rents have raised to such a degree as to make their properties unsellable!

The long leasehold sector still allows the unscrupulous to commit fraud, deception, flout the law and yet be allowed in many instances to continue operating unchecked, hiding behind other companies in order to deny any wrongdoings. In no other sector would people on the receiving end of such transgressions be expected to jump through so many legal hoops (sometimes over a period of years) to get any redress. Nor would any other sector expect consumers to fight to get every piece of information the law says they are entitled to have.

Leasehold reform (including unfair terms) has however been announced as being included in the Law Commission’s 13th Programme of Legal Reform where it recognises that there is an extensive list of highly significant problems with residential leasehold law. The Law Commission will also review why Commonhold has failed and consider what reforms are necessary to the law to enable it to operate successfully.

So will Commonhold really take off and provide the third option for owning property, or will it eventually replace both leasehold and freehold? Only time will tell but considering the vested interests in the two tenures, I doubt it.

 

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