Leases can be complicated documents to understand. Comprising critical and legal information that will govern the way you live while delivering serious penalties if breached, it’s definitely not something to be ignored. So, if you’re thinking about buying a leasehold flat, or are currently looking at your lease in bewilderment, this guide to understanding the basics of your lease is certainly a must-read.
What is a lease?
A lease is a legal contract between you (the leaseholder) and your landlord (the freeholder). It documents your rights, responsibilities, and obligations as the leaseholder, as well as those of the freeholder. When you purchase a leasehold property, it is good practice for your solicitor to discuss the terms of your lease to ensure that you are aware of your obligations and commitments, although, we’re aware that this doesn’t always happen.
The term ‘lease’ is usually used to describe a ‘long lease’, which is what most leasehold properties are granted. To be deemed a long lease, the original lease term must have been for a minimum of 21 years. Interestingly, a long lease will hold that title even when the remaining lease term falls below 21 years. Most leases are granted for a term of 99-125 years; however, some stretch to a whopping 999 years.
Unlike most short-term leases (such as assured shorthold tenancies) a long lease is transferable by the leaseholder. So, when the property is sold, the remainder of the lease term will be assigned to the new owner. This means that the number of years remaining on the lease when you purchase the property may be much lower than the original lease term granted. It’s also important to be aware that when the lease term runs out, the property reverts to the freeholder unless the lease term is extended.
Important lease terms to look out for
Date of the lease – the date that the lease was originally created when the property was first sold.
Commencement date – the date that the term of the lease starts from (this can often be the same as the date of the lease).
Term – the number of years that the leaseholder is entitled to live in the property from the commencement date.
Ground rent – a sum of money that you have to pay to the freeholder in return for living on their land. If your lease states, “a peppercorn if demanded”, it essentially means that your ground rent is zero. Be aware that some leases contain a ground rent escalation clause, such as, ‘ground rent will increase with RPI’ or ‘ground rent will double every 10 years. You must therefore factor this into your expenses when considering purchasing a leasehold property.
Service charge – a sum of money that you will have to pay to the freeholder or management company in return for maintenance, repairs, utilities, and insurance for the shared parts of the building.
Forfeiture clause – the landlord (freeholder) will be entitled to terminate your lease and gain possession of your property if you breach the covenants within the lease. The freeholder will need to obtain a court order in order to exercise the forfeiture clause.
Positive and restrictive covenants
Leases consist of a number of positive and restrictive covenants, which dictate both the leaseholder’s and the freeholder’s rights and responsibilities. Positive covenants typically refer to taking an action such as maintaining your flat or paying the service charge. Restrictive covenants, on the other hand, dictate what you must not do, such as keeping pets, making excessive noise, and sub-letting. Both freeholders and leaseholders will be subject to positive and restrictive covenants, but leaseholders are typically bound by a greater number of restrictive covenants.
Maintenance and repair obligations
Maintenance and repairs to the Common areas
When you live in a shared building such as a block of flats, you will typically be responsible for paying for maintenance and repairs to the common parts of the building. Common parts can include the following:
- The roof, floors, windows, and foundations
- Car parks and communal gardens
- Stairways, landings, entrance halls, and lifts
In order for these common areas to receive timely and effective maintenance and repairs that preserve the life and value of the building, it is essential that they are organised appropriately. As such, the freeholder is typically responsible for this task, otherwise, a third-party managing agent will be acting on their behalf. It’s also possible for a Right to Manage company to be in place, where the leaseholders have come together to take over the responsibility of management. In any case, the person or company responsible for repairs and maintenance of the common parts will be documented in your lease.
The Right to Manage
The Right to Manage (RTM) enables leaseholders to take over the management of their building from either the freeholder or a management company. Dictated by Part 2 of the Commonhold and Leasehold Reform Act 2002, leaseholders are entitled to the Right to Manage regardless of whether the current management has been good or bad. If leaseholders wish to exercise the Right to Manage, they must meet strict qualification criteria and invite all other qualifying leaseholders to join the Right to Manage Company.
So, if a Right to Manage Company is in place, and you’re a qualifying tenant (which is likely), you’ll be asked to become a member of the company. This will enable you to have your say in how the building is managed. The structure of the management company is either described in your lease or it may have a separate constitution that provides the rules as to how it must operate.
Maintenance and repairs to your demise
In almost all leases, you will be responsible for the repairs and maintenance of your own demise (flat/apartment), this will include the following:
- Floor coverings and floorboards
- Paintwork and plasterwork
- Kitchen and bathroom fixtures, fittings, and appliances
- Plumbing and wiring
- Furniture and other personal possessions
Some leases may even specify that a flat must be repainted within a certain period of time, such as every five years. Nevertheless, there will almost always be a request within the lease for leaseholders to keep their demise well maintained. In order to comply with this covenant, a leaseholder will be granted ‘access for repair’. This will enable you to gain access to other parts of the building, including other flats after giving reasonable notice, or in case of an emergency.
Your lease will dictate whether you must pay a service charge, how much this charge is, and when and how you should pay it. Service charges are usually apportioned to each flat according to their size and will typically cover the cost of the following:
- Repairs and maintenance to the common parts
- Buildings insurance
- Reasonable management, administration, and legal costs
- Shared utilities i.e. lighting in the common parts
- Reserve fund and/or sinking fund
The freeholder is only allowed to charge leaseholders for items that are stated in the lease. However, some leases can be very vague and generalise items, for example, ‘repairs and maintenance to the common parts’. Other leases can be very specific, stating each item or activity for which the costs can be recovered, for example, brickwork pointing every ten years. Nonetheless, it’s important to remember that you do not have to pay for anything that is not stated in your lease, although if your lease is vague, some charges may be difficult to challenge.
As a leaseholder, you have the right to be consulted about any works that are to be carried out to the building, where the contribution from any one leaseholder will exceed £250. The freeholder will follow the Section 20 Consultation procedure in order to comply, which will enable you to have a say in how your money is spent. You’ve also got a legal right to see service charge accounts, receipts, and invoices so that you can determine whether the building is being managed effectively and thus your money spent well.
Reserve funds and sinking funds
The terms reserve fund and sinking fund are often used interchangeably, however, they are two different things. Essentially, a reserve fund is collected to cover the long-term costs of maintaining a building, which can often include unexpected, irregular, and expensive works. Conversely, sinking funds are collected to cover the future costs of periodically recurring works, such as painting the common areas of the building every five years or maintenance of the roof every ten years. Not all leases will contain provisions for either or both reserve funds and sinking funds but it is prudent to pay into one as they can prevent you from receiving large and unexpected bills.
As highlighted above, leaseholders are required to comply with a number of restrictive covenants, which can involve the following:
- Letting the property
- Making noise
- Structural alterations/changes to the layout of the demise
- Hard floor installations
- Commercial property use
- Rubbish disposal
Some of these activities may be completely prohibited by your lease, while others may be permitted with the freeholder’s consent. However, your freeholder may charge you a premium for granting consent, particularly when it comes to making alterations to the property. This premium would cover the freeholder’s professional costs such as the surveyor’s fees for assessing the plans and solicitor’s costs for drawing up the consent document. Therefore, if you’re thinking about purchasing a leasehold flat and making alterations to it, you’ll need to bear in mind such consent costs, which can sometimes run into the thousands. The good news is that a freeholder cannot unreasonably withhold consent.
Disputes are common in many leasehold buildings as they’re typically blocks of flats with people living in close proximity to one another. While your lease will dictate that you must abide by certain rules in order to keep the peace i.e. no loud music between 10 pm and 8 am, it is usually the freeholder’s responsibility to ensure that leaseholders comply. If you fail to meet your obligations, the freeholder can involve the courts with the maximum penalty being forfeiture of your home.
Although disputes can arise between individual leaseholders, there can also be occasions when the dispute is with your freeholder. Common leasehold disputes can include:
• Excessive or unreasonable service charges
• Lease renewals and extension premiums
• Failure to observe covenants in the lease
• Management standards not meeting expectations
• Repairs and maintenance not being carried out
• The building falling into disrepair
• Failure to provide service charge accounts
• Failure to consult leaseholders on major works
If you find yourself in one of these disputes, a possible course of action is entering into mediation using an impartial third-party mediator. In fact, many leases dictate that you must use Arbitration (a form of mediation) in order to settle disputes before using any other method of dispute resolution. Nevertheless, if the mediation fails you can take the matter to the First-Tier Tribunal (property chamber) in order to attain settlement.
Leaseholders are provided a number of significant ‘rights’ under Landlord and Tenant Law, which help to keep this form of tenure fair and just. These include the Right to Manage (outlined above) the Right of First Refusal, the right to collectively enfranchise, and the right to renew your lease.
The right to renew your lease
Leaseholders who have lived in their property for two years or more are entitled to increase the number of years remaining on their lease. Lease extensions can be negotiated directly with your freeholder, or you can take the statutory route by serving a Tenants Notice on your freeholder under the Leasehold Reform, Housing & Urban Development Act 1993. While the statutory route will provide you with a 90-year extension and peppercorn ground rent, an extension agreed directly with your freeholder can often be much more beneficial with longer lease terms and flexible payments. In any case, you will have to pay a premium to your freeholder for granting the extension, which will continue to increase the lower the remaining term becomes. Therefore, it’s always best to extend as early as possible.
The Right of First Refusal
If the freeholder wishes to sell the freehold interest, they must first offer it to leaseholders within the building as dictated by the Landlord and Tenant Act 1987. However, in order for the Right of First Refusal to apply, both the leaseholders and the building must meet strict qualification criteria as follows:
Property qualification criteria
- Must contain at least two flats
- More than 50% of the flats must be owned by qualifying leaseholders
- No more than 50% of the building must be in non-residential use.
Leaseholder qualification criteria
- Must have a lease term of at least 21 years
- Must not own three or more flats
- Must not have a short-hold or assured tenancy
If the qualification criteria are satisfied, the freeholder must serve a Section 5 Notice on qualifying leaseholders to offer them the opportunity to purchase the freehold before another party.
The right to collectively enfranchise
Leaseholders who live in a block of flats have the right to join together to purchase the freehold of their building. However, leaseholders and the building must first meet strict qualification criteria, dictated by the Leasehold Reform Housing & Urban Development Act 1993. If the qualification criteria are met, leaseholders can serve a Section 13 Notice on their freeholder to start the enfranchisement process. It is highly advisable to contact a solicitor for advice and support for this process and to be aware of the vast range of freeholder responsibilities that you would be taking on.
Help to understand your lease terms
It is crucial that you understand the terms set out in your lease to ensure that you do not breach the terms and that both parties comply with their obligations. Not all leases are the same and it is not uncommon for them to be difficult to interpret. So, if you need some help, contact Freehold Sale for an expert lease interpretation.