Unfortunately, disputes are very common in the leasehold industry. While people can find it difficult to live peacefully near each other in houses, it’s often exacerbated in buildings containing flats, which are almost always leasehold in England and Wales. Add to that the challenging relationships between leaseholders and freeholders, difficulties interpreting leases, the recent troubles caused by some unscrupulous freeholders, and a general consensus that people typically don’t like to see money leaving their pocket; it can be like living on a volcano, just waiting to erupt.
Of course, the leasehold industry isn’t always that bad, there are some great freeholders out there and some equally as good leaseholders, which can live and exist harmoniously together. Yet, disputes can arise over a number of things and it’s possible for the blame to lie with either the freeholder or the leaseholder, whether knowingly or not.
Common leasehold disputes
- Refusal to pay service charges
- Excessive or unreasonable service charges
- Refusal to pay ground rent
- Lease renewals and extension premiums
- Excessive noise and other disturbances
- Failure to observe covenants in the lease
- Alterations made without freeholder consent or not permitted by 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
Common reasons for leasehold disputes
It is often the case that leaseholders are unaware of their legal obligations, thus providing the reason why many disputes arise. Leases are complicated documents to understand and it can also be difficult to comprehend that owning a leasehold property does not provide outright ownership and is therefore restrictive. As such, leaseholders can essentially be seen more like long-term tenants, governed by their lease and freeholder, while obligated to pay certain fees throughout their stay.
Leaseholders are often required to pay ground rent, service charges, and lease renewal premiums. Furthermore, they may need to request permission from the freeholder in order to make alterations to their leasehold property. However, permissions must not be unreasonably withheld by freeholders, although they are allowed to charge a premium for the benefit of consent. Furthermore, all demands for money made by the freeholder must be reasonable and they must be able to prove reasonableness to a court.
Relatively recently, there have been a number of scandals in the leasehold sector. These involved freeholders and developers taking advantage of loopholes in the industry to the detriment of leaseholders. As a result, leaseholders have been left with rapidly escalating ground rents, onerous lease terms, and ultimately unsalable homes. So, it’s unsurprising that many leaseholders do not trust freeholders and believe that they are being swindled out of money. However, oftentimes this money is legally owed to the freeholder and they, therefore, have a right to demand it.
Although there have been many changes implemented as a result of the scandals, which are set to increase imminently, there are still some freeholders who continue to abuse the system. This typically involves overcharging leaseholders for services; however, leaseholders have become increasingly savvy in recent years, which is preventing deceitful freeholders from being able to get away with these abhorrent practices so easily. With any scent of unreasonable charges or unfair practices, leaseholders can take their freeholder to the First-Tier Tribunal for determination.
What actions can you take to resolve leasehold disputes?
The first and most essential action that you should take as a freeholder is to read and understand the lease implicitly. Vague leases can be a minefield, so it’s always best to employ a solicitor or a professional within the industry if you are unsure of your rights and obligations and those of your leaseholder. Having this knowledge will enable you to take the right course of action should a dispute occur but may also prevent disputes from arising as a result of your failure to adhere to the terms of the lease.
Depending on the nature of the dispute, there are several courses of action that you can take.
How to settle disputes regarding permissions and restrictions
Leases typically contain restrictive covenants on the use and alterations of the demised premises. Examples include sub-letting and making alterations to the property, either of which could be completely prohibited or permitted to be carried out with the freeholder’s consent. Structural changes are typically completely prohibited; however, Section 19 of the Landlord and Tenant Act 1927 gives leaseholders a right to carry out improvements to their property where there is a complete prohibition on alterations.
Evidently, the lines of right and wrong are a little murky here, so it’s best to seek legal advice before taking any further action. If you do go on to discover that the leaseholder is in breach of their lease, you will first need to ascertain whether you would have been legally obliged to provide consent had the leaseholder made the request i.e. the lease permits the specific alteration or subletting with your consent.
If it is found that permission would have been granted, the subletting can continue, and any alterations remain subject to your administration costs. You may also be entitled to charge the leaseholder a premium for the alteration as compensation. If you would not have been required to provide consent, you can apply for an injunction or start forfeiture proceedings to regain possession of the property.
How to settle leasehold financial disputes
In accordance with their lease, leaseholders must pay ground rent and service charges. If they deem the charges to be unreasonable, they must refer the matter to the First-Tier Tribunal, but they must not withhold payment. However, leaseholders do not have to pay anything unless the sum has been properly demanded, as dictated by the lease. Demands for ground rent, for example, must be made using a Section 166 Ground Rent Demand, set out by the Commonhold and Leasehold Reform Act 2002.
So, it is incredibly important that you check the lease terms and ensure that money has been properly demanded before you take any further action. If all seems correct, you are within your rights to use reasonable means of recovering the debt should a leaseholder fail to pay. This can include employing debt recovery agencies, applying for a County Court Judgment, and contacting the leaseholder’s mortgage lender.
In most cases, lenders will be prepared to pay the debt on behalf of the leaseholder in order to protect their investment. If non-payment continues, the leaseholder will be in serious breach of their lease which may enable you to begin forfeiture proceedings and regain possession of the property, although this is difficult to achieve in reality. An alternative solution is to refer the matter to the First-Tier Tribunal.
Settling disputes at the First-Tier Tribunal
The First-Tier Tribunal (property chamber) deals with all manner of leasehold disputes. While some may believe that it is only leaseholders who can apply to the First-Tier Tribunal, it’s actually open to freeholders too. Their overriding objective is to ensure that they deal with cases fairly, without favouring one party over another. Proceedings are fairly informal, and you do not require a solicitor, however, it is advisable to seek legal advice beforehand.
What disputes can you take to the First Tier Tribunal?
- Who service charges, administration charges, and ground rent should be paid to
- How much service charge, administration charge, and ground rent should be paid
- When service charges, administration charges, and ground rent should be paid
- How service charges, administration charges, and ground rent should be paid
- Whether a lease can be extended, by how long and the premium payable
- Whether leaseholders have the right to manage
- Whether a lease can and should be varied
- Whether leaseholders can buy the freehold and the premium payable
- Breach of a lease – determination, and compensation payable
Using the evidence provided to them, the First-Tier Tribunal will make an informed decision on the reasonableness of charges, premiums payable, and which party ultimately wins the case. You and the leaseholder(s) will then be provided with the following:
- A decision notice stating the tribunal’s decision
- Written reasons for the decision
- Details of any right to appeal against the decision, including how to appeal and any time restrictions that apply
It is often the case that leaseholders will have to pay for some or all of your professional fees in relation to a case at the First-Tier Tribunal, regardless of which party made the application. These may either be a condition of the lease or may be ordered by the tribunal. However, under section 20C of the Landlord and Tenant Act 1985, leaseholders can apply for an order that all or part of their freeholder’s costs arising from the tribunal proceedings are not to be included in the service charges.
Conversely, there are some circumstances in which the tribunal may award costs to the leaseholder, including;
- Wasted costs – legal or other representatives may have their costs disallowed or be ordered to pay all or part of any wasted costs. Wasted costs include any costs you have to pay as a result of the representative (or their employee) acting improperly, unreasonably, or negligently, or failing to act.
- If a person has acted unreasonably in bringing, defending, or holding proceedings (for example, producing documents late without having a good reason and causing a hearing to whether you are responsible for paying the service charges)
It should be noted that any order made by the tribunal can be enforced with the permission of the county court, so it is not something to be taken lightly. If at any point you wish to withdraw from the proceedings (started by you), you can give notice to the tribunal. However, the tribunal must agree to your withdrawal and may set conditions that you must meet in order to withdraw.
Importantly, you cannot apply to the First-Tier Tribunal for a decision on a matter which has already been decided by a court, has been referred to arbitration, or has been decided by arbitration as a result of an agreement following the dispute. Arbitration is a form of alternative dispute resolution.
Alternative dispute resolution
Alternative dispute resolution is an effective means of dealing with a range of leasehold disputes, which affords you more control over the situation compared with tribunal or court proceedings. Typical forms include Mediation, Arbitration, and Early Neutral Evaluation which provide the freeholder and leaseholder with an opportunity to discuss their issues together with a neutral third party. Alternative dispute resolution is voluntary, so you’ll need to get your leaseholder to agree to attend but this also means that you can walk away at any point, should you feel that progress is not being made.
Mediation enables both parties to put their views across (typically in separate rooms) to a mediator, who will then encourage both sides to devise a mutually acceptable solution. It is a confidential process with the objective of discovering the underlying reasons for the dispute and taking steps to mitigate any future disputes from arising. This is often a much faster and cost-effective method of resolving a dispute and permits more flexible outcomes than litigation.
Mediators, who can often be solicitors, barristers, surveyors, and accountants, are impartial, highly trained, and accredited by a recognised body. You can expect to pay anywhere between £500 and £5,000 per day based on the mediator’s expertise but this cost will be shared between both parties. However, it may be necessary to seek legal advice or consult surveyors depending on the nature of the dispute, which will present an additional cost.
If an agreement cannot be reached, either party can progress the matter to the First-Tier Tribunal or a court, however, neither of you can request the mediator to provide evidence. Although you may believe from the outset that mediation cannot resolve your particular dispute, it’s advisable to not refuse an offer made by your leaseholder. If they proceed to take the matter to court, your refusal will be deemed a lack of effort and will thus be looked upon unfavourably.
Arbitration is less formal than tribunal and court proceedings but more formal than mediation, with rules for disclosure and a requirement for expert evidence, furthermore, the outcome is decided by the arbitrator, which is enforceable by a court of law. An arbitrator is an independent, impartial, and highly trained professional, governed by the Arbitration Act 1996 which prescribes that arbitration outcomes remain confidential, unlike with court and tribunal proceedings.
The objective of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense, so it’s generally much faster than tribunal or court proceedings. It is common for leases to contain a provision for arbitration as the required method of dispute resolution between the freeholder and the leaseholder. As such, if a party takes the matter to tribunal or court, it would be a breach of the terms of the lease. However, both parties may agree to ignore such a clause and use an alternate method of dispute resolution.
The lease may also state that the way in which an arbitrator must be appointed. While some may allow both parties to agree to the appointment of a suitable person, others may require the appointment to be made by the President of the Law Society, the Chartered Institute of Arbitrators, or a local Chamber of Commerce. Nevertheless, leases typically require an arbitrator to be a chartered surveyor appointed by the President of the Royal Institution of Chartered Surveyors (RICS).
Depending on the nature of the dispute, arbitration can either be a formal process that includes a hearing, or it can be conducted informally in writing. The arbitrator will use the evidence provided together with their own findings and expertise to deduce a course of action. While it is advisable that both parties provide their version of events and opinions to the arbitrator in order to influence their decision, this is not a requirement.
The decision reached by the arbitrator is final and binding on both parties with limited rights of appeal. It is also entirely within the arbitrator’s discretion to award costs of proceedings overriding any terms set out in the lease for costs to be shared equally between the freeholder and the leaseholder. So, although arbitration is generally much cheaper than litigation, costs can start to climb, particularly if third-party experts are called upon to support the case.
Early Neutral Evaluation
Early Neutral Evaluation involves a third party professional providing their unbiased, expert opinion on the dispute and the likely outcome of any litigation. Their judgment is not legally binding but provides a basis for further negotiations and helps to avoid unnecessary litigation. Both parties can then make an informed decision on how to proceed with resolving the dispute, either through litigation or through an alternative method of dispute resolution.
The Early Neutral Evaluator is typically a retired judge or solicitor who can competently test the strength of the legal points in a dispute case. The appointment of whom must be made by both parties. Early Neutral Evaluation can be a very effective means of dispute resolution as it’s generally much less stressful and is cheaper and faster than the aforementioned methods. However, it’s important to be aware that anything said during the proceedings cannot typically be used at a later date in court or tribunal proceedings.