The precarious relationship between leasehold property owners (Leaseholders) and their Freehold counterparts (Freeholders) has become a focal point of discussion and reforms in the property sector. What was once a relatively stable arrangement has recently been plunged into chaos, resulting in a litany of disputes and claims from both sides of the spectrum.

Recent cases have highlighted monumental issues within the leasehold property sector, with ever-rising ground rents and mounting service charges, lack of transparency and accountability, management incompetency and failures, repudiatory disregard for required consultation and inclusion, forming the core grievances from Leaseholders.

As a solicitor with extensive experience representing both Leaseholders and Freeholders, I’ve seen firsthand that the Freeholders, usually called “the landlords”, have to contend with Leaseholders’ issues bordering around breaches of terms of their leases. For instance, typical claims from the Freeholders often revolve around Leaseholders’ breach of their obligations to pay service charges, ground rents and non-compliance with the conditions of their leases.

These competing interests have produced widespread complaints and criticisms with the outcome that the Leasehold property sector has becomes burdened with inherent structural defects resulting in substantial calls for effective and lasting reforms. Core grievances from both Leaseholders and Freeholders are discussed below.

The Core Issues

1. Escalating Ground Rents

Over the years, most leasehold agreements included clauses that permit the doubling of ground rents every 10 or 15 years. As a result many of the freehold properties become unaffordable over time, with leaseholders effectively trapped and burdened with increasing costs and properties that are difficult or impossible to sell.

On the part of the Freeholders, there are recurring disputes about Leaseholders’ failure to pay ground rents as required by their leases. Leases usually maintain clear obligations on the part of the Leaseholders to pay ground rents, in addition to other provisions allowing the Freeholders to pursue legal action for rent arrears which may lead to forfeiture of Leaseholders’ leases in some cases.

In the circumstances described above, the aggrieved party can approach the tribunals or courts for the resolution of these disputes, which may lead to the losing party providing the remedies required by the winning party, as well as a possible court order requiring the losing party to pay the winning party’s costs.

2. Rising Service Charges and Lack of Transparency

Most leasehold properties are typically managed by property management companies on behalf of the Freeholders through a service charge regime that is wholly controlled by the management company and the Freeholders. Generally, on account of the involvement of management companies, Leaseholders often face very high and obscure service charges imposed by Freeholders or their management companies, albeit with little or no transparency and accountability. A vast number of disputes between the Leaseholders and the Freeholders emanates from disagreements over whether service charges are justified or reasonable and whether Leaseholders get value for money in respect of the services provided by the Freeholders or their management companies or agents.

On the other hand, when Leaseholders fail to pay service charges or dispute them on the basis of reasonableness or justification, Freeholders are entitled to recover the costs of maintenance and management of the property in accordance with the terms of the lease. Claims are typically issued at the First-tier Tribunal (Property Chambers).

3. Breach of Maintenance Obligations

The obligations to maintain properties are generally divided between the Leaseholders and the Freeholders. Failures on the part of any of the parties to comply with their obligations to maintain the part of the property assigned to them by the leases can lead to property damage or deterioration. For this reason, standard leases impose obligations on the Leaseholders to maintain internal repairs of their individual properties (to prevent damage to the common arears), and the Freeholders to maintain and repair common and external areas as delineated by the leases.

In cases where any of the parties fails to comply with their repair obligations, the other party can apply for a court order to compel compliance with these repair obligations, which may lead to claims of damages in severe cases.
Furthermore, there are many instances where Leaseholders complain of exploitation of lease extensions on the basis that the costs of extensions are often excessive, especially for leases approaching the 80 years threshold. Thus, Leaseholders are forced to pay excessive fees to bolster the value of their properties. Leaseholders also often complain of inadequate regulation of Freeholders and their managing companies or agents. It is believed that Freeholders and their management companies operate with nominal oversight, thereby perpetrating unfair practices such as unauthorised commissions, excessive insurance charges and hidden fees.

Similarly, Freeholders also complain of breaches of Use restrictions for the purposes prohibited under the leases, such as subletting, running a business, causing damage or nuisance. Freeholders may apply to court to seek injunctive reliefs in these instances. Moreover, Freeholders have to deal with cases where Leaseholders refuse to contribute to major works or refurbishment as required by their leases. Freeholders may apply to a tribunal for determination as well as seek recovery through legal action.

Finally, Freeholders also lament that Leaseholders often fail to ensure that their individual properties are insured, as well as fail to contribute towards collective insurance policy covering the entire property, despite the clauses of their leases requiring them to adequately insure their properties, together with contributing to communal property insurance. In these circumstances, claims can be issued to enforce compliance with leases or recover unpaid insurance contributions.

Government Response and Reforms

Recognising the systemic issues, the UK government has demonstrated intention to continue to reform the leasehold property system, including but not limited to legislations that would abolish the payment of ground rents for existing leases and the promotion of commonhold property ownership.

The reforms are aimed at creating a fairer, equitable and transparent leasehold property regime that would address decades of systemic defects in this sector. Key legislative developments include:

• The Leasehold Reform (Ground Rent) Act 2022 (the 2022 Act). This law abolishes the payment of ground rents for most new residential properties
• The Leasehold and Freehold Reform Act 2024 (the 2024 Act), mainly to enhance affordable and simplified lease extension process and sanitise the service charges system. This act makes it easier for leaseholders to purchase their freehold and manage their properties. However, there are delays in the implementation of the 2024 Act as the legislation is reported to have encountered challenges due to identified flaws in the law. It is believed that the government intend to rectify the issues with the legislation in the coming months.
• Leasehold and Commonhold Reform Proposals, which are directed towards promoting commonhold ownership, simplify lease extension and removal of “marriage value.”

Conclusion

Due to government action on issues affecting the leasehold property sector, Leaseholders and Freeholders hope the reforms will improve their relationship, particularly by resolving disputes over recurring service charges and ground rents.

While the reforms appear to have mostly addressed Leaseholders’ grievances, Freeholders contend that there is the danger that the reforms may disproportionately shift financial and operational burden onto them. Policymakers are therefore faced with the task of balancing these opposing interests to create a fair and sustainable leasehold property system.

While the government has responded with decisive legislations and policies, ongoing consultations and probable future legislative responses mean that the landscape of the leasehold property system will continue to evolve.

How we can help

We pride ourselves on promoting and protecting our clients’ best interests. Whether you are a Leaseholder or a Freeholder our experienced Dispute Resolution team is here to provide expert guidance and representation to help you navigate the complexities of property disputes with confidence. Call 020 3440 8000 or email disputeresolution@tvedwards.com.