Liz Hodgkinson is an experienced property developer, landlord and journalist. Over the past decade she has bought, renovated and rented out or lived in many flats of all kinds, from new-build to Victorian, from purpose-built 60s and 70s blocks, to conversions and mansion blocks. She contributes a regular landlord and tenant column to the Evening Standard and also writes for the Mail on Sunday, The Lady, Saga, The Independent and Daily Mail.
It is the freeholder’s responsibility to insure the building, usually with a block insurance that comes out of the service charges. There will almost always be an excess to pay for any insurance claim; the amount depends on how many claims the particular block has had in the past. It is usually expected that the excess will come out of the collected service charges; in reality, there may not be enough in the kitty to pay this. The excess on a block insurance policy can easily be £1,000.
ASK FOR EVIDENCE OF EXPENDITURE
The bigger, older or more complex the building, the higher the service charges are likely to be – although this is not always the case, as service charges on brand-new blocks can also be very high, especially where there are such facilities as underground parking, expensive carpets in common parts, landscaped gardens, a swimming pool and gym. As all bills must be supported by receipts, you can always ask to see the accounts, if you are not satisfied as to how the money is being spent. In any case, all residents must be sent a copy of the yearly accounts by the managing agents or whoever is managing the property.
If you are buying a flat, one of the most important questions to ask is whether the service charges are likely to go up in the near future or whether major works are planned. Sometimes, in new buildings, service charges are kept low for a few years and then they rocket.
RECOVERING SERVICE CHARGES
It is very common indeed for disaffected leaseholders to threaten or actually withhold service charges and this causes many problems for all concerned. Some people imagine that paying service charges is optional, and that they can be withheld at will. If enough people do this, then the building goes to rack and ruin and the value of the place plummets.
You are shooting yourself in the foot when you refuse to pay service charges. It is a form of protest which is emphatically not recommended as it means the value of your property goes down. Few people will buy a property if they are told service charges are owing. Also, interest can legally be charged on late payments.
APPLICATION TO THE LEASEHOLD VALUATION
If you, either collectively or individually, believe the service charges are too high or ‘unreasonable’ you can challenge them via the LVT. This is a quasi-legal body whereby three people will sit in judgment at the hearing. Then, your case is either thrown out, or the judgment sent to the County Court for enforcement. If the judgment goes against the landlord or freeholder, they can appeal, and frequently do.
All information regarding the LVT including application forms and scale of costs can be downloaded from the website of the Residential Property Tribunal Service at www.rpts.gov.uk, of which the LVT forms a part.
You as the leaseholder complaining have to complete application form S27A, Landlord and Tenant Act 1985. You then send the completed form with a copy of the lease and details of the service charges under dispute. There is an application fee which varies from £50 to £350 according to the amount in dispute.
The case may be considered either with or without a hearing but even the ‘fast track’ route is pretty slow, and it will take at least ten weeks for your application to come to the top of the pile.
If the landlord is a large company, they will usually be represented by a Rottweiler-type solicitor who will forcefully argue his client’s case. And you should not imagine that the LVT necessarily pronounces in favour of the complainant.
THE LEASEHOLD ADVISORY SERVICE
Lease, the government-funded advisory service, will advise individuals and Residents’ Associations on their leases. If you are considering buying a flat and want to check aspects of the lease, this organisation can help. It can also advise on whether certain charges are ‘reasonable’ and whether they can be legally challenged. But Peter Haler, the founder and Chief Executive, says that if all leaseholders read their lease properly, most of the calls to their office would stop.
The lease is king and this must always be remembered when buying a flat. A resident in my building wrote to the managing agents complaining that she objected to some of the terms of the lease. This is tough! She should have had a good look before buying.
There are many complex laws regarding service charges, recovery of these charges and consultations for major works. In reality, landlords – whether outside landlords or where leaseholders own the freehold – will not embark on major works until and unless all the money, or at least most of it, is in.
Local authorities do things the other way round from the private sector: they bill leaseholders after the works have been done and for service charges in arrears. But, then local authorities are a law unto themselves.
Although the government-funded Leasehold Advisory Service states that landlords may not be able to recover costs for major works unless they followed the proper consultation procedure with the leaseholders, most have no money to fall back on anyway and so they cannot carry out the works unless leaseholders agree to them and pay up.
This is an annual sum, usually very nominal, for the use of the ground on which the building stands. The payment of ground rent is specified in the lease and is usually included in the service charges. In theory, the landlord or freeholder can instigate forfeiture proceedings for non-payment of ground rent and this in the past has led rogue freeholders to make sure ground rent is not collected, and then start forfeiture proceedings for its nonpayment. Such abuses are becoming ever more difficult to sustain.
FORFEITURE AND POSSESSION
This is a stick often waved at recalcitrant leaseholders but it is a last resort and, in reality, very difficult to repossess, as this has to be done by court order. No landlord is allowed just to throw a leaseholder out, however tempting this may be, and however bad their behaviour. The ‘innocent until proved guilty’ idea is enshrined in our law and applies to late-paying leaseholders just as much as mass murderers. Most of these legal matters take months, if not years, to come to court and by that time the original leaseholder may have sold up and moved on anyway.
Because of the more stringent checks now made by buyers’ solicitors, it is becoming increasingly difficult, if not impossible, to sell a flat with any outstanding or unpaid charges. It is also difficult to sell an individual flat where there are service charge disputes ongoing. Buyers will just run in the opposite direction; after all, there are plenty of flats on the market which do not have leaseholder disputes ongoing.
Peter Haler, Chief Executive of Lease advises:
I cannot say this strongly or often enough: read the lease! Many people are not aware when they buy a flat that they have entered into a contractual obligation. They don’t know what they have agreed to when they buy the flat, but half of our queries could be solved in advance if buyers only read the lease first.
Robert Levene, Chief Executive of the Federation of Private Residents’ Associations, a voluntary body, adds:
Most people who buy flats have no idea of the terms of the lease, and in our view lawyers and estate agents have a lot to answer for here.
When you see a flat and make an offer, the estate agents never tell you what the covenants are, and when you get to the solicitor stage, they never tell you either. We feel that sight of the lease and explanation of its terms should come upfront, not when you are about to complete.
Although the new Home Information Pack has many critics, one thing it will do is include a copy of the lease, which all prospective buyers should read very carefully beforehand.
Robert Levene says one of the biggest problems concerns pets.
Many, if not most, leases state: no pets, yet buyers keep bringing cats and dogs into the building because they haven’t read the lease beforehand. Then they express surprise and say: I didn’t know pets weren’t allowed. The ‘no pets’ rule is the one most flagrantly ignored, but eventually the freeholder is likely to seek legal redress for a breach of the lease.
Also, many flat buyers believe service charges are optional. They take the view that they’ve bought the flat, so why should they keep paying out? But again, service charges will all be on the lease.
Very occasionally, flats may be advertised for sale as ‘commonhold’. This type of ownership is common in America, Australia, Cyprus and many other countries, but as yet, rare (and at the time of writing, unknown) in the UK.
It was brought into being by the Commonhold and Leasehold Reform Act of 2002 and came into force in 2004, although leaseholders have yet to take it up. Briefly, commonhold properties are still governed by the lease, as with ordinary leasehold properties, but there is no outside freeholder. Instead, the property – which will usually be a new property – will have been built and developed as a Commonhold property. The lease is known as the Commonhold Community Statement (CCS).
A commonhold is divided into units and common parts in exactly the same way as an ordinary leasehold property, but the difference is that the common parts are owned by the Commonhold Association which has its own title number at Land Registry.
The commonhold association combines the functions of a landlord owning the common parts, a management company providing services and a Residents’ Association determining policy and settling disputes.
If a flat you like the look of has commonhold tenure, the Association will be registered at Companies House, and all details will be available from Land Registry. Again, at the time of writing, this is all in the future, mainly because the government has made Commonhold an option, not a necessity.
In my own investigations into newbuilds, either begun or completed in 2005 in the UK, not one was a commonhold. All were standard leaseholds, with 99-year leases and an outside freeholder.
But although commonhold seems stretched out into the future, it will happen one day, and it is as well to be prepared.
How does a Commonhold Community Statement differ
from a lease?
It will, to all intents and purposes, be exactly the same, except that there is no length of time on the Commonhold Community Statement (CCS) and all units within one block will have an identical document. The provisions of the CCS can be enforced under the terms set out in the document. It is as legally binding as a lease, and there will be dispute resolution procedures set out in the document.
Also, as with a lease, if there are major disputes, the matter can be taken to court. There will be clauses governing how service charges are to be paid, and these are known as the commonhold assessment. Again, as with an ordinary lease, levies can be imposed to pay for unforeseen works and expenses, and assessments can be increased.
A commonhold is a self-managing community but unlike leasehold charges, there is no overriding legal requirement for charges to be ‘reasonable’. This means that the charges cannot be challenged at the LVT, or in a court of law.
As a commonhold unit is considered a freehold property, it could be more valuable than a leasehold equivalent. But because commonhold is very new, it is a good idea to take legal advice before proceeding with a purchase if you come across a commonhold unit.
Because commonhold units are not subject to a number of years on a lease, they are not wasting assets. But commonhold is new and untried, whereas leaseholds and leases, with all their problems, are at least well-known and familiar. Plus, they are subject to a large amount of statutory regulation. At the time of writing, commonhold units are unregulated by law.
THE MANAGEMENT OF A BLOCK OF FLATS
The following chapter deals with the management of a block of flats, but not everybody understands how this works.
Briefly, if the building is owned by an outside freeholder, they will be responsible for appointing the managing agents.
In some cases, freeholders act as their own managing agents, but in other situations, outside managing agents are appointed to look after the day-to-day running of the building. Where this happens, the leaseholder will have no say in the management of the building, but will just be billed for service and other charges.
Leaseholders can, however, challenge these charges at an LVT if they consider them to be ‘unreasonable’. They can also demand to see evidence of expenditure. In any case, managing agents should provide a yearly breakdown of costs to each leaseholder, rather than just presenting them with a total bill.
Where the leaseholders have won the Right to Manage, or have Collectively Enfranchised, they will be responsible for their own management. Again, they can either decide to manage the building themselves, or appoint outside managing agents. There are now firms which specialise entirely in managing blocks of flats and in most cases these will be members of ARMA (the Association of Residential Managing Agents). ARMA was founded in 1991 to put this unregulated business onto a professional footing.
Chapter 4 explains what managing agents do, how to appoint them, and what is involved when management is passed over to a specialist company.
Chapter 5 explains how leaseholders can win the Right to Manage, and wrest management control from outside freeholders or landlords, and also gives information on how to go about Collective Enfranchisement.
New to buying a flat?
If you are new to buying a flat, you need to know about the management of the building. So before making an offer, ask the estate agents:
- Does the property have an outside freeholder? (This will normally be the case unless the particulars specifically state ‘share of the freehold’.)
- If so, who are the managing agents? Does the freeholder use separate managing agents? If so, who are they? And are they members of ARMA? The estate agent will be able to discover these details by going back to the vendor, who must supply answers to these questions.
- If the flat you are interested in buying is being sold with a share of the freehold, again ask about the management of the building. Do the residents manage the place themselves, or are there separate managing agents? Again, are they members of ARMA?
This last question is important because ARMA has a grievance procedure you can invoke if you are not satisfied.