What is freehold?
Unlike the leasehold, freehold is the tenure that is held in perpetuity and does not expire with effluxion of time. The freehold title is an absolute title and is at the top of the chain and can be held for an unlimited period.
When you own the freehold land, you are responsible for any upkeep and repairs. This works out slightly differently if you own a freehold land and there is a building that contains leasehold flats, in this case the freehold owner/landlord will be responsible for the maintenance of the building, but this cost is recoverable from the leaseholders in the form of service charge.
If the leasehold property is in Scotland and Northern Ireland
The legislation is different in these countries when compared to England & Wales.
In the Scotland, all flats are held on the freehold title in form of commonhold which means that common parts and upkeep of building is managed by a managing agent and flat owners are responsible for contributing to a maintenance fund.
In the Northern Ireland, the leasehold legal system is somewhat similar to the England & Wales, with exception that there is an easier legal mechanism in place to buy the freehold via an application to Land & Property Services. The cost of buying freehold is calculated as 9 times the annual ground rents payable. For more information see Housing Advice Northern Ireland.
What to look out for when buying leasehold property
When buying the leasehold property, you will be instructing different professionals to advise and complete your purchase such as solicitors and valuers. It is recommended that you personally take time to complete due diligence on your lease and prescribed obligations. Also, as part of initial legal due diligence it is important to take the time to understand the past records of service charge and the future planned works. As these can affect your service charges significantly in the future. For example, if there are any majors works planned such as an elevator replacements or external decorations and depending on the block size these works can run into five or six-digit amounts.
The drawbacks of owning a leasehold property
When you own the leasehold property, you will incur various expenses associated with the property. These elements below can be applicable depending on the lease:
- For the upkeep of the building you might be required to pay service charge.
- Your lease might have prescribed ground rents.
- You property is always on the lease which diminishes with time.
- There will be some form of insurance payable.
You need to be vary about the associated costs above because these can add up significantly. If you have never owned the leasehold property before, these costs can come to a bit of a shock at first, therefore it is always good to know what you are getting yourself into beforehand (from costs perspective). The services charge contributions usually are equally split between the leaseholders but can also slightly differ from each other depending whether you use certain common services.
The leasehold property communal areas and block structure is usually managed by specialist leasehold block management company instructed by your landlord. There are cases where management companies in place tend not to do the best of the job and something may be left unattended. However, this issue can be tackled by leaseholders joining together to form their own management company via ‘right to manage’ or collective enfranchisement.
Under Section 42 Landlord and Tenant Act 1993 you are allowed to extend your lease for an additional 90 years on top of existing term. But this comes with the cost as you have to compensate your landlord for granting you an extension. You will need to instruct a specialist lease extension surveyor to provide you with lease extension valuation report which will detail how much you will need to pay your landlord to for a right to extend the lease.
If you are planning to purchase a leasehold property based on the lease term remaining you can check how much it would cost for you to extend your lease with our free lease extension calculator.
Who exactly manages the leasehold block?
As mentioned above usually the landlord appoints the specialist management company to deal with the upkeep of the block. The management company can be a contractor that is instructed by the landlord or it can be the management company that was formed by leaseholders via ‘right to manage’ and they themselves undertake the management of the building.
The specialist management companies are usually members of ARMA and IRPM with accreditation in leasehold property management.
The good management company has all systems in place to effectively manage the block and will prepare the maintenance schedules way in advance, letting the leaseholders to understand what works are planned for a year and sometimes way more in advance.
The management company will hire different contractors to undertake upkeep of the building. For example, contractors can be hired to undertake – cleaning, gardening, repairs, security and etc. These contractors will be usually hired on the periodic basis with contract in place for a certain time length.
All these costs will be included in the annual service charge demand which is payable by all leaseholders in the block in accordance with their set lease provisions.
The service charge depending on the management company processes in place will be charged on the annual basis. The service charge budgets are made from estimates and actual budgets.
For example, if your service charge accounting year ends on September, the management company will prepare a service charge budget estimates for the next year and the actual expenditure for the current year up to September.
The service charge for the current year will show the actual expenditure and will either contain surplus or deficit and along with this the next year service charge estimate will be sent as well requiring the leaseholders to make the payment.
The actual accounting processes will differ from management company to management company, but this type of service charge budget preparation is the most common in the block management.
The service charge and any works payment demands have time limitations and can only be recovered within 18 months from when it is incurred. If your landlord or management company fails to notify or demand the payment within this period then you are not obliged to make any payments and management company or landlord will need to cover the loss from their own pocket.
The management company must complete a tender process when introducing a periodic contract worth more than £100 per annum per leaseholder or single repair works worth more than £250 per annum per leaseholder.
This process is prescribed by the statute law in the Landlord and Tenant Act 1985 section 20 which states that if periodic contracts or single repair works exceeds the amounts mentioned above then management company will have to complete a tender process which is formed of three stages:
- The pre-tender stage – making the leaseholders aware of works planned; and
- The tender stage – obtaining quotes for the planned works; and
- Awarding the contract – with reasons provided for nominating the award.
During tendering leaseholders are consulted in every stage of the process. You as the leaseholder can raise the observations to the management company’s proposals and nominate your own contractors for planned works.
When the contract is awarded the notice will be sent along with the payment demand to the leaseholders. The payment demands are allocated in accordance with the set lease provisions.
The right to information
There can be a lot of issues between parties in the leasehold block whether with managing agents, freeholders or other residents in the block it is imminent at some point in time.
As the leaseholder you have a right to information about service charges and insurance. These should be disclosed to you at as soon as you request it. If for some reason your landlord or managing agent refuses to disclose these, you have a right to apply to court to force them to disclose the documents.
The disputes can also arise when it comes to the ground rent payments especially if your lease contains RPI linked ground rents increasing every 10 years and etc. These are usually calculated by landlord’s appointed surveyor.