Unravel the leasehold maze
Whether you are a first time buyer, downsizing or wanting a city pad, understanding the leasehold can be confusing. Mary Anne Bowring, creator of www.leaseholdersupport unravels the jargon.
So, you have seen the flat you want, it caters for your needs, it's positioned near to train station and it's within your budget but do you understand your rights as a leaseholder?
Firstly what is a lease? A lease is simply the right to occupy a demised space in a building for a term of years. A long lease is the term referred to as a lease that at date of original grant was for a term of more than 21 years at a low rent. The lease gives you the right to live in your home for a certain amount of time but the freeholder is the legal owner of the land on which the building is situated.
The lease is a legal contract between the leaseholder and the freeholder who could be an individual, a private company, a council or a housing association. Contractually a lessee (the leaseholder) must pay the ground rent reserved or set out in the lease to the Freeholder and abide by the schedule of leases covenants. The schedule of leases covenants will include duties such as paying the ground rent, service charge and any taxes arising from the occupation of the property as well as complying with statute, bye laws set by the Local Authority or government from time to time. In buying a leasehold property you should look for a property that has a reasonable service charge. The service charge usually covers things like; repairs, cleaning, maintenance of communal gardens and sometimes the building insurance.
In addition to the ground rent the lessee may also have to pay the freeholder contributions towards a reserve fund. A reserve fund is defined as pool of money created to build up sums which can be used to pay for large items of infrequent expenditure (such as the replacement of a lift or the recovering of a roof) and for major items which arise regularly (such as decoration). A reserve fund also helps to spread costs between successive Leaseholders/Tenants and can, if the leases/tenancy agreements allow, be used to fund the cost of routine services, avoiding the need to borrow money. A healthy reserve fund which has benefited from several years of payments from previous lessees is a big advantage. As part of the conveyancing process it is the Solicitors job to get the Law Society standard leasehold enquiries answered, this will include obtaining copies of past years service charge accounts. A prudent buyer would look on the balance sheet of these accounts to find out what accrued reserve funds are held.
The freeholder has a responsibility to the lessees and should comply with his schedule of covenants such as keeping the building insured, effecting repairs to the structure, ensuring that communal service ducts and pipes are maintained. The freeholder can off-load the unprofitable loss making obligations such as collecting service charges, procuring maintenance or dealing with lessee complaints if at the time the lease is drafted, a third party called a management company is set up and becomes a party to the lease. Where this option is chosen the lease is often referred to as a tri-party lease as it has three parties; the management company sits between the freeholder and the lessee. If the management company isn't fulfilling its functions the freeholder will reserve the right to take back the management.
As a leaseholder you have a number of rights. Even if the freeholder isn't managing the block correctly the Commonhold and Leasehold Reform Act 2002 proves the owners of leasehold properties with the right to manage. Provided 51% of qualifying lesse of the block want to participate in setting up a Right to Manage Company, leaseholders can take over the running of their block and can benefit from having more control over the level of service.
Having the right to manage doesn't mean you own the freehold and you will still have to pay the freeholder ground rent. However, the right to buy the freehold was given to lessees in 1993. Since then it has progressively got easier for lessees as there is no requirement to reside in the flat and you can own the flat through a company. Provided 2/3rds of the flats have long leases and 51% of the qualifying lease participate you can force the Freeholder to sell you his title. Holding a share in a freehold company is more advantageous than just holding a lease. It not only gives you more control of the management of the block most leaseholders who also own a share in the freehold title don't pay ground rent and it can substantially increase the value of your property, particularly as your lease gets shorter!
Should the freeholder wish to dispose of his title lessees are protected as they have the first right of refusal which means the freeholder must either offer the freehold to the lessees before he sells it to anyone else, or if he has a purchaser lined up must give the lessees the first right of refusal to take the contract from the prospective buyer at the same price and terms. Buying the freehold at an investment price will be cheaper than exercising the right to buy the freehold.
With leases continuing to get shorter, for example some areas of London leases of 40-60 years are common, leaseholders should also be aware of their legal right to extend their lease. Since 1993 when the right to extend your lease was passed, legislation has been changing to benefit the leaseholder. For example qualification criteria have been relaxed and it is no longer necessary to live in the flat or own the lease for 2 years first. The prospect of extending your lease may seen like a daunting task but it can be achieved by serving a formal legal notice on the freeholder and intermediate landlords. Your statutory right is an additional 90 years to add to what ever unexpired term you currently hold with ground rent reduced to a peppercorn.
Government figures suggest that in addition to conversions of the 160,000 new homes being built each year approximately 50% are flats. This means half of property owners are leaseholders and therefore need to understand their rights.
The Leasehold Valuation Tribunal (LVT) is the body that settles disputes over the reasonableness and recoverability of service charges as well as valuation issues, such as determining the premium for a lease extension or freehold purchase matters. Recourse to the Leasehold Valuation Tribunal is not something lessees should fear, the application costs are around £350. Even if a lessee loses they are not personally responsible as the principle is that each party bears their own costs and that depending on the construction of the lease the freeholder may be able to recover his costs as a service charge expense. However, a lessee can oppose this and may be successful if they can convince the Tribunal that the freeholder has not acted in accordance with the lease, law or generally subjected the lessees to bad practice
Even in serious cases of breach of lease where forfeiture (an action to end the lease) would be the usual solution, it is now necessary for the LVT to grant consent to such action or such action to only take place after a Country Court has made a judgement.