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What is the leasehold system?

Leasehold is a form of tenure in residential properties, where a freeholder owns the land a building is on as well as the exterior elements of a building, while a leaseholder owns their property within that structure.

What do professional freeholders do?

Professional freeholders are able to utilise legal, commercial and property expertise to handle the maintenance and running of buildings on behalf of leaseholders.

A lease sets out clear obligations for professional freeholders. These obligations ensure they play a vital role in the maintenance of buildings by assuming responsibilities that most leaseholders are unable or unwilling to take on.

Professional freeholders have detailed knowledge of property management and the various stakeholders involved, meaning they can help when things go wrong.

Their independence, expertise and size means they can secure more competitive prices across a number of areas and closely monitor the effective performance of stakeholders involved in management of buildings.

While professional freeholders typically own a very small economic interest in the buildings they manage, the arrival of institutional investors in this market has professionalised the industry, helping eradicate rare examples of poor behaviour.

The RFA is clear that better regulation is needed to cement professional behaviour and raise standards.

Benefits of leasehold

Consumer choice

Leasehold provides residents and potential buyers with another form of tenure to choose from when purchasing their property.

Single entity

One of the benefits of leasehold is the presence of a single entity (i.e. the freeholder) which is entirely focussed on the long-term upkeep of the building.

High standard and safety

Freeholders have a long-term interest in the upkeep of the buildings, including ensuring their buildings are safe for residents.

Quick turnaround

Given freeholders own and maintain buildings as their full-time profession, they are able to sort issues and maintenance requests quickly.

Alternatives to leasehold

Commonhold – where residents manage a property between them – may be an appropriate form of tenure for smaller apartment buildings. That is because, in general, the smaller a building, the less complex its issues are – meaning residents can more easily manage a building.

However, for more complex, larger buildings, the technical skills required for insurance, maintenance and repair often require significant time and resource commitments.

Independent research suggests a majority of leaseholders do not want or do not have the time to take on these responsibilities.

A similar system to Commonhold is used widely in Scotland which serves as an example of the problems associated with relying on communal management for complex buildings. Studies suggest half of all properties in Scotland are in “critical disrepair” because there is no legally enforced maintenance system for buildings.

Common misconceptions

There are a number of misconceptions associated with the leasehold system.

Ground rents are out of control

While frequently doubling ground rents have previously been an unfortunate element of the leasehold sector that affected a small proportion of homes, today very few exist – from an initial 20,000, the data shows there are closer to only 5,000 ground rents which are ‘onerous’, and this number is falling still.

It is also important to note that, contrary to some reports, professional freeholders can’t impose ground rents or set them; they buy them from developers who create them.

Professional freeholders do nothing for the ground rent they are paid

Professional freeholders invest heavily in professional teams to fulfil a vital role, especially in large, complex apartment buildings, quickly dealing with issues that arise, providing strong value for money to leaseholders.

Managing agent

Maintenance of the building funded by the service charge

On average £1,800 – £2,000 per year*

Drawing up and agreeing budget with the freeholder and leaseholders

Maintenance of the building including repairs to shared areas and the outside of the building, such as the roof, external pipes, drains and building insurance

Coordination of property inspections and necessary checks

Collection of service charge and management of finances

First point of contact for leaseholders

Freeholder

Stewardship and governance in exchange for an annual ground rent

On average £200 per year*

Freeholder responsibilities:

Long term stewardship of land and property in perpetuity

Enforcement of covenants in the lease for the benefit of all leaseholders

Holding the managing agent to account

Independent resolution of resident disputes (e.g. short-term letting, noise, anti-social behaviour)

Governance of resident community, protecting varied interests

Oversight of critical safety measures and safety nets for residents

*Estimated by the Association of Residential Managing Agents (ARMA)
*Combined average from industry figures

Commonhold would solve everything

The current situation in Scotland is the closest example we have to widespread commonhold in the residential sector.

Recent studies suggest 50% of all properties in Scotland are in “critical disrepair” because there is no legally enforced maintenance system for buildings. From our members’ experience, a significant number of disputes in apartment blocks are between individual neighbours. Such disputes will cause problems in managing commonhold buildings smoothly.

Managing agent responsibilities:

Leasehold

Commonhold

Professional stewardship and long term oversight of your property

The choice of whether or not to participate in the day-to-day management responsibilities for your property

All residents’ opinions are taken into consideration before setting rules (rules cannot be changed by majority)

No requirement for you to foot your neighbour’s bill when they fail or refuse to pay their contribution

Independent arbiter of neighbourly disputes and disputes between you & your managing agents

Provisions of immediate funding in an emergency

*In both tenure types managing agents fees will be payable and there will be costs associated with buying & selling, or requesting permission to do something outside of the rules

The public wants commonhold

Savanta polling conducted in 2020 found that 75% of leaseholders felt negatively toward obligations they’d assume, should professional freeholders be removed from the market.