Freeholders can take many forms so can be individuals, and different types of companies such as finance companies, mixed use companies (owning both commercial and residential properties in the same development) and ground rent investors. There can also be leasehold resident management companies which are often marketed as ‘share of the freehold’.
A block of flats can also have more than one freeholder if the freeholder who owns the ‘superior’ lease sells what is known as an ‘intermediate’ lease to another party. That party becomes the ‘head lessor’ who can then grant ‘under leases’ to the leaseholders of each flat, making the head lessor their landlord.
This then results in 3 different levels of ownership in the building:
- The freeholder who has the highest level of overall ownership;
- The head lessor (also called the head lessee) who is directly responsible to the leaseholders;
- The leaseholder.
Some freeholders self-manage their blocks but most use the services of a managing agent.
Note: Freeholders are also known as landlords in common law but this is not to be confused by a landlord subletting a property.
The greatest power within the freeholder/leaseholder relationship is the ability of the freeholder to forfeit the lease (i.e. take away both the lease and the property) when leaseholders breach their lease terms. It is the Housing Act 1996 and s167 of the Commonhold and Leasehold Reform Act 2002 (failure to pay small amount for short period) that make it unlawful for freeholders to start proceedings for small debts, (including ground rent and administration charges) where a) the outstanding amount is £350 or less and b) no part of it has outstood for more than 3 years.
What Kind of Breach?
Before any attempt to apply forfeiture is made, the freeholder needs to establish what kind of breach has been committed because not all of them are capable of remedy.
Those breaches that are capable of remedy (and known as non-continual breaches) are:
- Breach of covenant against sharing possession;
- Breach of covenant not to make alterations or display signs;
- Breach of user covenant;
- Breach of covenant to repair or decorate (see below);
- Non-payment of service charges and ground rent for a particular period (which can be remedied by payment);
- Failure to allow access to the landlord or its agents on notice such as where the freeholder obtains the services of a qualified surveyor who will inspect the flat(s) in question to assess the extent of the breaches.
Breaches that can’t be remedied (and known as continual breaches) are:
- Illegal or immoral use of the property which will only be remedied when the tenant leaves;
- Breach of covenant against underletting;
- Breach of covenant against assigning.
After the freeholder has established the type of breach, the next step is probably the most difficult element of the act of forfeiture because it requires the existence of the lease not to be acknowledged in any way, shape or form.
There are 3 components to waiver which are:
- The freeholder has knowledge of the breach;
- The freeholder recognises that the lease remains in existence;
- The freeholder communicates the recognition of the lease to the leaseholder.
There is also the issue of potential acts of waiver (whether committed expressly or by conduct), which include:
- The granting of consents;
- The serving of statutory notices;
- An injunction sought against a covenant breach;
- Arrangements made to inspect the premises;
- Offering to accept or negotiate a surrender of the lease;
- Continuing to send service charge and ground rent demands.
However if communication with the leaseholder (or any representative) cannot be avoided, it must be conducted on a ‘without prejudice’ basis. This includes the sending of service charge and ground rent demands and chasing letters for payment that are required to be carefully worded in order not to incur waiver. There should also be no discussions of future payments with either party, not even on a ‘without prejudice’ basis.
Note: Waiver does not extend to unknown or future breaches but once non-continuing breaches have been waived, they cannot be relied upon as a ground for forfeiture in the future.
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.
The next part of the process is that of serving notice on the leaseholder which can be read here.