Leasehold is almost unique to the UK. Most other countries in the world have adopted a form of common hold whereby apartment leaseholders own the freehold between them and collectively manage the building. In America and other countries of Western Europe these are called condominiums.
Under the UK leasehold system purchasers do not actually own their flats or apartments but rent them for a long period typically 99 years, 125 years or sometimes 999 years. Instead of paying monthly rent leaseholders pay a larger sum up front, which guarantees their exclusive use of the property for the whole period of the lease.
The landlord retains the common parts, such as the lobby, stairs, corridors, office, and house manager’s accommodation, lounge, laundry and guest room where applicable. But these have very limited value because they cannot be sold as they have been contracted to leaseholders’ use and benefit under the lease. As a consequence the value of the freehold is effectively the discounted value of properties at the end of the lease plus the value of the income stream the freehold can yield by way of rent such as ground rent.
The value of the freehold is determined by a calculation that translates the future property value plus income the lease will yield into a present day sum of money. The income is primarily the monies all lessees are required to pay by way of rent, excluding service charge contributions. In most leases with over 80 years to run the leaseholders’ interest far outweighs the freehold interest in the property.
The freeholder and the leaseholder have rights and obligations as set out in the lease. The freeholder’s chief obligation is to collect service charges, maintain and insure the structure of the building and ensure individual leaseholders abide by covenants in the lease, such as not creating noise or nuisance to neighbours.
The freeholder may decide to manage these tasks itself or it may appoint a managing agent to look after these matters on its behalf. In return for meeting these obligations the freeholder is entitled to charge a management fee and leaseholders will usually pay this fee and all the other expenses of maintaining the building by way of an annual service charge as set out in the lease. Usually all leases for a block will be substantially the same.
In recent years many profit-seeking freeholders have seized the opportunity to extract more monies from leaseholders, often by unethical means. By managing the building themselves, or via management companies they own, some freeholders are taking generous commissions and handling fees for many of the services provided, such as insurances, lift maintenance, security and fire alarm maintenance etc.
On retirement estates some freeholders have found ways to start charging leaseholders an annual rent for the use of facilities previously provided free of charge, such as the use of the scheme manager’s accommodation and office. Some have even started charging a rent for the use of the guest suites; others require lessees to pay the freeholder a transfer fee every time a lease is assigned.
It is against this background and after considerable consultation in the industry that Parliament introduced further legislation to address the imbalance in leaseholder rights. In view of the fact that leaseholders’ collective investment in a block of flats far outweighs the freeholder’s interest Parliament properly decided that leaseholders should have the absolute right to acquire the right to manage the block or appoint a managing agent of their own choosing.
These measures were introduced in The Commonhold and Leasehold Reform Act 2002 and became effective in 2003. If you are a long leaseholder in a qualifying block of flats it is your statutory right to benefit from this legislation.