Leaseholders: When Landlords Are Also Tenants

Official Statistics Leasehold dwellings, 2020 to 2021

Published 7 July 2022

According to the government’s official statistics, there were an estimated 4.86 million leasehold dwellings in England in 2020-21.

This accounts for 20% of the English housing stock. Of these, 2.82 million dwellings (58%) were in the owner-occupied sector, and 1.79 million (37%) were privately owned and let in the private rented sector.  

Leasehold dwellings, 2020 to 2021 – GOV.UK (www.gov.uk)

On this basis, the owners of 37% of properties in England, 1.79 million, are both landlords and tenants. This article is for those people of whom I am one.

What is a Leasehold?

The first thing to note is that we don’t “own” our flats, we own a lease for the use of those flats which remain the property of the Landlord/Freeholder unless we buy the Freehold. Leases usually grant us 99 years of use of the flat with the option to extend the lease during that time under prescribed conditions and usually at a very high premium. As the term depletes the flat becomes more difficult to mortgage and this reduces the resale value and at a certain point it is almost impossible to get a mortgage.

We are known as Leaseholders because that is what we own, the Lease, and that Lease can be very onerous for the Leaseholder because most older leases are written in favour of the Freeholder/landlord where he/she remains in control and we/Leaseholders remain responsible for the costs. I didn’t do my homework when I began buying flats but I have learned since. I have continued to hold some of the flats which I bought mainly because I have long-term, good tenants and no mortgages, therefore they still work for me but for many landlords, tax changes, interest rate increases, and constantly increasing service charges mean that they no longer work as a buy to let. Some landlords have managed to repurpose larger flats into an HMO, but many leases only allow “single-family occupation”. Some landlords have begun letting them as short-term/holiday lets but again, many leases do not allow that. There are now many landlords who are stuck between flats which don’t pay their way and values which have decreased. Why? Because the cost of a lease extension is extortionate at this time. There is finally a light at the end of the tunnel for those landlords and for all the thousands of leaseholders who have decreasing leases and cannot afford to renew them.

Service Charges

Before I go into the other change, I want to cover the dreaded Service Charges. A few years ago, I got so fed up with the increasing service charges on a poorly maintained development that I put myself forward and was accepted as the leaseholder representative. In this capacity, I set about learning more about how the system works – or doesn’t. I was shocked at the imbalance between the Freeholder and Leaseholder and the whole Leasehold system which mainly dates back to the days of feudalism which was introduced in England by William the Conqueror. In those days, nobles/Lords were the landowners and everyone else worked to support them and the King. We may have moved on from those days but the remnants of Lords and Serfs still live on in the current legislation which covers Leasehold properties. The Lord of the Land/Freeholder still has the absolute power to do what they want with their properties. The Serfs/Leaseholders still have the legal obligation to pay for it with very few rights to question them; even those rights that we do have are often misunderstood because it’s unusual for Leaseholders to be an organised group and/or to agree on a course of action, therefore we get the worst of the deal and Freeholders flourish.

I hope that I have always treated my tenants with respect and I am certainly very clear that without good tenants I am not a successful landlord. Since becoming a more knowledgeable Leaseholder, I have begun to feel the uncomfortable feeling of having someone else ‘putting their hand in my purse’ and having no control over the maintenance of the buildings and grounds where I own the leases of flats. I guess this is as close as I will come to feeling as many tenants feel (without actually becoming a tenant) and I hope that this has made me more sensitive to the feelings of my tenants. I have never felt superior to my tenants I have always seen this as a customer-supplier relationship with each needing the other.

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Issues With Leaseholds

I will just list some of the items which I now understand and which I would change if I had the power before talking about some of the changes that are in the new Bill at the moment. I say at the moment because as we all know these things can change as the Bill travels through the Commons and the Lords.

• The freeholder chooses the Insurance provider and takes a commission from the provider which is added to the premium that Leaseholders have no option but to pay and is usually included in the Service Charge without declaring the commission.

• The Service Charge is set each year and should be based on the known annual expenditure for the coming year, insurance cover, the cost of Management, out-of-hours service, contribution to a Sinking/Major Works fund, items which are legally required, and accountant fees.

• The Leaseholder has the right to be consulted if there is a single item of work which is going to cost more than £250 per lease and they must be served a Section 20 Notice. This doesn’t always happen and I was told recently that the agent could actually “regularise” the lack of consultation having spent our funds – they can’t!

• The Leaseholders have the right to be consulted if there is a new contract of work which is going to cost £150 per leaseholder in any one year and they must be served a Section 20 Notice. This also doesn’t always happen and I was told recently that the fact that the “contract” is a year less a day negates the need for consultation; even where the new contractor is given work outside of the contract before the start of the “year less a day” and is paid on a separate invoice!

•  Also, even where there are potential health and safety concerns the Freeholder can override what the Leaseholders want in favour of their preferences even when they are unnecessary and/or unimportant.

• The Managing Agent can be replaced by the Leaseholders either by another Managing Agent or by a group of Leaseholders who form a Board of Directors to manage the whole development. Either of these must be agreed by the majority of Leaseholders and someone (unpaid) needs to organise it and this is why it doesn’t happen as often as it should.

• A Managing Agent who is appointed by the Freeholder will only have the interest of the Freeholder in mind and even after agreeing on works will change that agreement if the Freeholder doesn’t want it, without further discussion or even notification.

• Improvement to individual flats must have permission and that permission can cost up to £500 for absolutely nothing.

• A 99-year Lease is really only a 20-year lease because at that point the lenders begin to look twice and some will not lend.

• Lease renewal is loosely based on “marriage value” and the Freeholder’s costs.

Overall, the Freeholder and his Managing Agent have a “feudal system” which only works for the Freeholder. I have spent many, many hours since 2020 learning all this and this is why I am keeping a close eye on proposed changes to legislation and challenges.

What is the Leasehold and Freehold Reform Bill?

The new Bill would make major changes:

Leasehold and Freehold Reform Bill

“A Bill To Amend the rights of tenants under long residential leases to acquire the freeholds of their houses, to extend the leases of their houses or flats, and to collectively enfranchise or manage the buildings containing their flats, to give such tenants the right to reduce the rent payable under their leases to a peppercorn, to regulate charges and costs payable by residential tenants, to regulate residential estate management and to regulate rent charges.”

Leasehold and Freehold Reform Bill – Parliamentary Bills – UK Parliament

I will begin by saying the parts which relate to Leasehold houses are not part of this article because these have different issues. I intend to concentrate on Leasehold flats and remember when this Bill refers to tenants that is us – Leaseholders.

This Bill only covers England and Wales

In my opinion as a Leaseholder, there are two main issues

1. Cost – Ongoing and Lease Extensions
2. Management/control

What does the Bill say about these?

The Key Points of the Leasehold and Freehold Reform Bill

I will only list the ones which are relevant to the points above because this is a big Bill and you can read the full details at the link above:

• Increasing the standard lease extension term from 90 years to 990 with a ‘peppercorn’ ground rent (we can’t get away from that old feudal system)
• Removing the requirement for a new leaseholder to have owned their house for two years before they can extend their lease or buy their freehold and for flats before they can extend their lease.
• Introducing a standardised service charge demand form and an annual report, so that all leaseholders receive minimum key financial and non-financial information regularly so that they can challenge costs if they are considered unreasonable. A written Statement of Account is to be provided by landlords within 6 months of the end of the 12-month accounting period for which service charges apply, as well as landlords providing an annual report to leaseholders.
• Replacing buildings insurance commissions with transparent administration fees. “The Secretary of State asked the Financial Conduct Authority (FCA) to review the residential multi-occupancy building insurance market because of dramatic premium increases. In 2022, the FCA published a report that found over the period 2016-2021, premiums for residential multi-occupancy buildings had increased by 187% for buildings which had flammable cladding, and 94% for buildings without flammable cladding. 30 The FCA followed up with a report in 2023 that found that commissions were often at least 30% of the total insurance premium, with some commissions being over 50%.”
• Removing the automatic liability for leaseholders to pay their landlords’ legal costs when challenging poor practice. The relevant court or tribunal will make a decision on applications that is just in the circumstances.
• sets the method for calculating the price of a statutory lease extension or freehold acquisition, known as the valuation process. The Bill removes the requirement for marriage value to be paid, caps the treatment of ground rents in the valuation calculation at 0.1% of the freehold value and allows the Government to prescribe the rates used to calculate the enfranchisement premium. Rates will be set by the Secretary of State in secondary legislation.
• Leaseholders who are extending their lease or exercising their right to manage will no longer generally pay the landlord’s costs of dealing with the claim (such as valuation, conveyancing and legal fees). Each party will generally bear their own costs.
• Where intermediate leases are present, the Bill treats those interests as merged into the freehold to determine the premium a leaseholder must pay.

This simplifies the valuation process for leaseholders, and in many cases will reduce the premium payable and reduce their costs.

This Bill could have gone further and put in the regulation of Management companies including compulsory training in the law surrounding their duties and set up a redress scheme like the ones which Letting Agents must join by law. But it does cover some very, very important issues and, if they make it through to the Act, will change the lives of Leaseholders overnight.

What Will the Leasehold and Freehold Reform Bill Change for Landlords?

To illustrate what some of these changes will mean:

When I extended a lease on one of my flats there were 60 years left on the Lease and the flat with the lease extension was worth around £140,000/145,000 without it it was worth around £135,000. I extended the lease because as the remaining years diminished the cost of the extension rose and there was no real “formula” to know what this might be because it was in the power of the Freeholder to charge what he wanted and if I challenged it I would pay both my own legal costs and those of the Freeholder

What I didn’t know until that point was that there was not only a Freeholder above me there was also a sub-lessor, the importance of this will become apparent in the costs below

Quoted Cost of extending Lease £15,750

TOTAL of final bill £20,822.11

NB only £660 of this was my own legal costs

I paid, not only the Freeholder’s legal costs and valuation fees, but I also paid a sub-Lessors legal costs and valuation fees. Not forgetting a £500 initial application fee paid to the Managing Agents which brings the total cost to a staggering £20,822.11 to extend the lease to 99 years from 60 years. A long way from the initial cost of £15,750

How would that differ under the proposed legislation?

The original quote was based on the “marriage value” which means the amount of the increased value of the property if a new lease was granted. There will now be a “fairer” prescribed formula for this cost and the marriage value will no longer be considered.

I would pay my own legal fees and the Freeholder would pay his and if there is a sub-Lessor that will not be taken into account for this transaction.

The Freeholder would also pay his own valuation fees. Actually, no one visited the flat despite my paying two valuation fees (one for the freeholder and one for the sub-lessor) and therefore this was a questionable cost – had I actually questioned it I would have paid my own legal fees and those of the freeholder and Sub-lessor. You can begin to see how important it is that these costs will now be borne by those who commission the legal help unless a Judge or tribunal awards the costs against the other party – I think that is very unlikely in these cases. I also would not now pay the application fee to the agent who did nothing more than send me a form to complete for them to hand it over to the freeholder’s legal representative, who as you will remember I would no longer be paying.

I would not be paying the Freeholders surveyors fees and legal fees in advance regardless of whether I continued to pursue my application or not.

I would hope that the total cost of this extension would be more in the area of £8,000-10,000 but we won’t know for certain until the Secretary of State publishes the secondary legislation, which will hopefully be early next year. I will report back when it is published.

Too late for me, but I am happy to say that this will really make a difference to owner-occupiers and landlords who have leases which need to be extended.

Finally, and I will benefit from this, the shocking amount of commission being charged on top of our insurance premiums will end. When I think that some agents actually make an annual Admin charge and THEN add a commission…., I look forward to a reduction in those charges which this year for a 2 bedroomed flat (no cladding issues) were twice the cost of my houses in the same area and claims have been very, very low.

There is definitely a light at the end of the tunnel for Leaseholders in 2024.

I wish you good health, peace and happiness.