Leasehold and Freehold Essentials
The chances are if you own property it either has a freehold or leasehold interest.
Far less likely is you will own property with a common hold.
Commonhold being introduced by the leasehold reform act 2002 and was brought about to reform the hierarchical nature of the freehold and leasehold relationship and replace this with a system of ownership that allowed common holders to share the management of common areas through commonhold associations.
Whilst on the face of it commonhold associations offer a perfect solution to the adversarial or potential expense of using a management company they are not without drawbacks. Have you ever tried to agree with a group of people what colour a door is painted? Imagine that decision involving potentially hundreds of commonholders? These shortcomings explain why perhaps the apparent attractions of leaseholders managing their own commonhold association; to date there have only been a handful of them established.
Buying a leasehold apartment
My interest in all this has been awakened as a result of an ongoing attempt to purchase a leasehold attic / penthouse apartment in a converted Victorian property.
The property; a repossession is a large 2 bed. There is also considerable scope to create significant additional space by utilising the roof void and by inserting dormer or Velux roof lights. Ultimately, there would be enough room for the subdivision of the space into two 1 bed apartments potentially doubling the value of my property investment in one fowl swoop.
The starting point is the lease
However, my route to bumper profits as one would expect is not necessary clear and without risk.
When establishing what a landlord or tenant can do with their property the starting point for both is always the lease.
This document should set out the rights and responsibilities for both landlord and tenant.
However, a landlord should be aware that the scope for a leaseholder to compel the freeholder to vary the lease compulsory is limited.
There are only 6 grounds under the 35 of the Landlord and Tenant Act 1987.
The grounds under which a leaseholder can make an application to vary a lease to the Leasehold & Valuation Tribunal ( LVT ) are:
1.The lease has inadequate provisions relating to the repair/maintenance of the flat or building.
2. The insurance provisions of the lease are inadequate.
3. The lease has inadequate provision for the repair/maintenance of any installation required for a reasonable standard of accommodation of any flat within the building.
4. The lease has inadequate provision for providing any service required for a reasonable standard of accommodation of any flat within the building.
5. The lease has inadequate or no provision for the recovery of money from a party to the lease spent on maintaining the building by another party to the lease.
6. The computation of a service charge detailed in the lease is inadequate. An example would be where a service charge proportion expressed as a percentage in all of the leases in respect of a building does not add up to 100%.
Other than these then any alteration to the lease and therefore what a leaseholder can do with their property requires the freeholder to agree an alteration to the lease. Not impossible if for example you want to add a dormer to the roof or reconfigure the internal space. In these cases though money talks!
The freeholder is quite likely to agree changes to the lease where it is not going to cost them anything; improves their property and thereby the value of their freehold interest and where the leaseholder also potentially offers a cash ‘incentive’. However, a landlord should note that there is no legal mechanism for the freeholder to be forced to sign up for the changes even if it makes perfect sense. We all know that there is always the risk of coming across an inherently ‘difficult’ landlord who delights in saying no!
Other reasons for leaseholder and freeholder paths to cross.
As well as the occasional desire to alter their property mainly for development, much more common are issues relating to the ongoing relationship between leaseholder and freeholders in respect to repairs & maintenance, lease extensions and insurance issues.
Repairs & maintenance
Often disputes a rise between the landlord and leaseholder over the repair of their residential block. Disputes typically relate to the length of time that the management take to repair the property, the standard to which the repair is carried out to particularly in the common areas and ultimately the costs to the leaseholders.
In essence we all think as landlords that we could probably have done a better job for less and without having to pay a management agent large fees.
A landlord leaseholder in this situation does have some powers to challenge the landlord if they are not happy with their performance or that of the management company.
For more free and excellent advice on this complex area I’d advise landlords to check out the government sponsored Leasehold Advisory Service.
Property Hawk recently highlighted the occurrence of freeholders and their sharp practice of taking a ‘kick back’ on the block insurance charged to leaseholders for the insurance of their buy-to-let property. A recent survey indicated that over 60% of leaseholders were being overcharged for their landlord insurance.
There are steps that a landlord who owns leasehold property can take to find out whether they are being over charged for the landlord insurance and feathering the pockets of unscrupulous freeholders. This involves requesting the freeholder to provide information on their charges. The LTA 85 s 19 requires that all charges made to the landlord/freeholder are reasonable. The rule of thumb on this is that the premium charged is less than 20% above a range of quotes obtained by the leaseholder. For more details see Property Hawk’s article.
Extension of lease
The other main aspect of the relationship between leaseholder and freeholder is the extension of a lease. Leases by definition are for finite times periods, typically 999 years or 125 years. When the length of the lease starts to drop below a certain number of years say 60; the property will become unmortgageable making it more difficult to sell.
There are however formal mechanisms available to a leaseholder to extend their lease.
After 2 years of owning the lease a qualifying leaseholder can extend their lease by another 90 years.
The costs of extending the lease can be agreed with the landlord or where this is not possible a leaseholder can seek a determination from the Landlord Valuation Tribunal
The other way of overcoming a ‘wasting’ lease is to seek enfranchisement of the freehold interest.
Revisiting the leaseholder freeholder relationship
My revisiting of the topic of the relationship between freeholder and leaseholder has certainly been highly educational.
In my efforts to expand my property portfolio I’m just hoping that ‘lady luck’ shines on me. As all landlords who are buying a repossessed property know the mortgage company in possession is under a legal obligation to obtain the highest price so a deal is never sealed until we exchange. Then the work will really begin.