LEASEHOLDERS’ RIGHTS AND OBLIGATIONS

What are the effects of the lease?

A lease is an important document and therefore all owners and prospective buyers of leasehold property should ensure they have a copy available to refer to. A lease, which is a legally binding contract, transfers possession of a flat for an agreed fixed period of time and usually gives the leaseholder use of or access to any communal areas. The lease also sets out the rights and obligations of the landlord and the leaseholder and in some cases another named party such as the manager. The lease will normally specify who is responsible for maintaining different parts of the building and its terms may limit how the property may be used, for example, it may prevent or restrict business activity.

It may also contain conditions regarding the sale or transfer of the lease; the landlord may have the first option to buy the leasehold interest and leaseholder may require permission from the landlord prior to sale. This arrangement common where the landlord is a charity or a registered social housing provider, also known as a housing association.

The lease will usually require the leaseholder to pay ground rent to the landlord and will also require leaseholders to reimburse the landlord or appointed managers for any expenditure incurred maintaining the building, through service charges and often by contributions to reserve funds.

A new owner generally only acquires the remaining time left to run on the original lease. However, some leases require the ‘surrender and re-grant’ of the lease which means that a new owner will obtain an entirely new lease term starting from the purchase date.

The lease will expire automatically at the end of the term but most long leaseholders will have a statutory right to continue in occupation as rented tenants at the end of the lease term. They will also have statutory rights to extend their lease or buy the freehold with some of the other leaseholders. (Please see the LA Information Sheet 113 Enfranchisement).

There is no standard form of lease despite the fact that most leases will include similar terms and conditions. Leaseholders need to become familiar with their own lease, perhaps with the help of a professional adviser, in particular with regard to their rights and obligations and those of their landlord. Residential leases within the same property and where the leaseholders are contributing towards the same service charges will usually be substantially the same. This means their leases would be virtually identical apart from individual leaseholder’s personal details and the date and length of term.

In the event of enquiries or disputes, the leaseholder should first refer to the lease itself, and seek professional assistance before deciding what, if any, action to take. The Leaseholder Association (LA) provides to its members with advice on interpreting residential leases.

What are a leaseholders' rights and obligations under a typical lease?

As mentioned above, many leases will contain different terms, especially those relating to specialist types of property such as retirement housing and although it is not meant to be an exhaustive list most leases will include the following rights and obligations:

Leaseholders’ rights (in addition to the statutory rights set out below):

peaceful enjoyment of the property;
reasonable access to the common parts of the building and/or grounds;
support, shelter and protection from the other parts of the building;
access to all utilities and service media in respect of their own property;
to have the common parts kept in a good state of repair and redecoration; and
to benefit from services that are specified in the lease.

Leaseholders’ obligations (in addition to all of the statutory obligations):

to pay ground rent;
to pay a proportion of the service charge, usually in advance of the accounting year;
to contribute towards any reserve fund, either regularly, or at the time of re-sale or both;
to keep their own flat in a good state of repair and decoration;
to meet the cost of any damage they have caused to the common parts or grounds;
to allow the landlord or manager access to the flat in respect of repairs or in emergencies;
not to use the flat for either commercial purposes or for unsuitable activities;
not to make excessive noise or cause nuisance to neighbours or visitors;
not to make structural alterations to the flat without the prior consent of the landlord; and
not to sublet the flat without the prior consent of the landlord;

Landlords’ rights (in addition to the statutory rights set out below):

to receive payment of ground rent;
to recover reasonable expenditure through service charges at the time specified in the lease;
to appoint a manager to carry out the obligations in the lease;
to make reasonable regulations in relation to the common parts and/or the grounds;
to inspect the leaseholders’ properties, with reasonable notice;
to make alterations to the common parts, as long as these do not adversely affect leaseholders’ legal or contractual rights;
to receive the property back at the end of the lease term in a reasonable condition.

Landlords’ obligations (in addition to the statutory obligations):

to enforce leaseholders’ covenants in the lease;
to ensure all of the leases are substantially the same;
to ensure leaseholders have quiet enjoyment of their property;
to keep the common parts in a good state of repair and redecoration;
to provide services that are specified in the lease, such as cleaning and gardening;
to provide buildings, public liability and staff insurance; and
to ensure all service charges are properly demanded and paid.

What statutory rights does the leaseholder have?

This is a summary of the statutory rights leaseholders have which will be additional to the contractual rights set out in the lease for their particular property:

the right to information about the landlord, please see below;
the right to seek recognition for a tenants’ association. (Please see the LA Information Sheet 102 Tenants’ Associations);
the right to information about service charges and the right to challenge at a First-Tier Tribunal (FTT) the reasonableness of those charges, whether they have already been paid or not. (Please see the LA Information Sheet 103 Service Charges);
the right to apply to an FTT to seek a determination of the liability to pay and the reasonableness of administration charges. (Please see the LA Information Sheet 106 Administration Charges);
the right to information about insurance (Please see the LA Information Sheet 107 Buildings Insurance);
the right to be consulted about major works and long term agreements. (Please see the LA Information Sheet 109 Section 20 Consultation);
the right to seek the variation of a lease and the right to make an application to an FTT if not agreed by all interested parties. (Please see the LA Information Sheet 110 Lease Variations);
the right to extend a lease, adding 90 years to the existing term, with or without a landlord’s consent. (Please see the LA Information Sheet 112 Lease Extensions);
where it is alleged the landlord has failed to manage the property properly, the right to ask an FTT for the appointment of a manager. This does not apply to landlords who are Housing Associations. (Please see the LA information sheet 121 Appointment of a Manager)
the right to a management audit and the right of recognised tenant’s associations to appoint a surveyor;
the collective right to take over the management of the block without having to prove fault or compensating the landlord, known as Right to Manage;
the collective right to buy the freehold of the building, even if the landlord does not wish to sell, known as enfranchisement; and
the collective right to first refusal where the landlord proposes to sell a controlling interest in the property.

Please see The LA information sheets 111 Lease Extensions, 113 Enfranchisement and 117 Right of First Refusal for a full explanation of the collective rights listed above.

What is ground rent?

Ground rent is a payment made by a residential leaseholder to the landlord as an obligation set out in the lease. The lease will state the amount of ground rent for the duration of the lease and it will clarify the date of an increase, if any, or a formula for reviewing this rent. Most long residential leases require ground rent to be paid on a particular date and possibly in a specific way, whether or not the landlord has demanded payment from the leaseholder. However, changes to legislation now mean that landlords must serve a written notice in a prescribed form on a residential leaseholder on each occasion ground rent becomes payable.

The demand in the form of a written notice must specify:

the amount of the ground rent due; and
the date on which the leaseholder is liable to pay it, or if the demand is sent after the due date, the date on which it would have been payable under the terms of the lease.

This demand for ground rent, must also include:

the name of the leaseholder it applies to;
the period the ground rent demand relates to;
the name and address of the person or company to whom the payment is to be made;
the name and address of the landlord (or manager if applicable) from whom the notice is given; and
supporting information, that must be provided as notes, which are part of the notice.

The date specified for payment must not be less than 30 days before or more than 60 days after the date of service of the notice, or before it is meant to be paid in accordance with the lease. Unless the leaseholder has previously notified the landlord of an alternative address, the notice must be sent by post to the address of the house or flat to which it relates.

The landlord is prevented from making any additional charge in respect of the ground rent unless they have served a written notice and the ground rent remains unpaid after the due date. The landlord is also prevented from beginning forfeiture action, which means to re-enter and take possession of the property, without issuing a Section 146 written notice and the ground rent remains unpaid after the due date.

The landlord cannot begin any legal action for recovery of ground rent, including action for forfeiture and possession, unless the demand notice has previously been served in the correct format, given the required period of notice, and the leaseholder has failed to respond.

What might happen if charges are not paid by a leaseholder?

Although there is no specific legislation relating to housing debt recovery, there is useful good practice guidance in the government approved codes of practice for the landlord or manager to follow and it is expected they will have their own procedures for dealing with this matter.

These procedures might include the following:

Monitoring service charge and ground rent payments to try to help leaseholders to avoid arrears.
Ensuring leaseholders have the information they need to deal with arrears.
Contacting leaseholders promptly when arrears arise to discuss the arrears.
Suggesting welfare agency advice or referral to debt counselling if appropriate.
Acting consistently and in accordance with the lease, the law and codes of practice.

In cases where a leaseholder has arrears and these continue to accrue in order to avoid legal costs and to minimise any distress leaseholders are advised to seek independent advice, e.g. from The LA, a housing advice centre, citizens’ advice bureau, the Leasehold Advisory Service or a solicitor.

What enforcement action might be taken?

If a leaseholder does not keep to an agreed payment arrangement or fails to keep in contact with the landlord or manager to try to resolve the arrears problems, they may find that one of the following enforcement options is taken for recovery of the debt:

Contacting the leaseholder’s mortgage lender;
Civil action, such as a small claims action or a county court judgement;
Forfeiture (please see section below for details of this).

In cases where a leaseholder has passed away, the landlord or manager may agree to defer payments of charges until the property can be sold or perhaps let. However, this concession is discretionary and the landlord or manager retains the contractual right to take action for recovery in accordance with the lease.

What is forfeiture?

If a leaseholder breaches any of the terms of the lease the landlord may have a contractual right to begin action to forfeit the lease and recover possession of the property. However, the legislation offers leaseholders some protection in these circumstances. Where a leasehold property is still lawfully occupied neither the landlord nor any other party acting on their behalf can re-enter the premises without obtaining a court order. A landlord is also required to serve a notice, known as a section 146 Notice, before exercising the right to forfeit the lease.

The process usually will start with the landlord serving a valid notice under section 146 of the Law of Property Act 1925, the Notice of Seeking Possession. This must provide the leaseholder with details of the alleged breach and give the leaseholder the opportunity to remedy the breach or to compensate the landlord for any effects of the breach. If the action relates to non-payment of service charges, the landlord is unable to start forfeiture action unless the charge has been either agreed or admitted by the leaseholder or determined by a court, FTT or by arbitration.

Where the landlord begins forfeiture action, the steps to be taken are:

the leaseholder must have agreed that a breach has taken place and/or that the arrears the landlord is demanding are outstanding; or
the landlord must make an application to the FTT or a court for a determination that the breach has occurred; or
confirm a breach has been occurred under a post-dispute arbitration agreement; and
where the breach is in relation to arrears, that the sum is payable and reasonable;
once the determination becomes final, the leaseholder must be allowed a further 14 days in which to resolve the breach or to pay the arrears;
if after 14 days the leaseholder has not resolved the breach, the landlord has the right to proceed with service of the Section 146 notice. However, this will require determination by the county court before it is enforceable.

There are a number of opportunities during the legal proceedings for the leaseholder to deal with the matter and therefore avoid forfeiture of the lease.

What restrictions are there on forfeiture action?

The landlord cannot serve a valid Section 146 notice to begin forfeiture action unless:

the amount of service charges, administration charges or ground rent owed, or a combination of all of these, is more than £350; or
if less than £350 has been outstanding for more than three years.

Administration charges for non-payment of the outstanding amount will not be taken into account in determining whether the £350 limit has been exceeded.

Although forfeiture or action seeking repossession may not take place, a landlord may seek to recover arrears by other means, such as the small claims court. Therefore leaseholders should not withhold amounts below the ‘£350 figure’ that are reasonable for the landlord to demand in the mistaken belief that no action can be taken.

Although there is no legal obligation for this, some government approved codes of practice recommend that where forfeiture action has been taken and a property repossessed and sold, a landlord should repay the value of the forfeited lease to the former leaseholder, subject but not limited to the following deductions;

Legal and management costs in taking the forfeiture action.
Costs of marketing and re-sale of the property.
Any other reasonable costs arising during the period of the lease or upon re-sale.

What are the leaseholders’ rights to information about their landlord?

Although the details should be provided as a matter of good practice, the landlord must:

notify the leaseholder of an address in England or Wales where notices can be served for example in connection with court or tribunal proceedings. This may be the address of a representative such as a solicitor. If the landlord fails to supply this information, there is no legal requirement for the leaseholder to pay the ground rent or service charges and these charges do not become payable until the information is provided;
include the landlord’s notified name and address on any written demand for ground rent or service charges. If the landlord fails to do this any part of this demand, which includes service charges, is not payable until this information is provided;
if the address on the demand from the landlord is outside England or Wales, an address in England or Wales for the service of notices must also be given;
if the landlord is a company, the leaseholder can write to the landlord to obtain the names and addresses of all the directors and the secretary of the company; and
if a new landlord takes over the property, the leaseholder must be informed in writing and be given the new landlord’s name and address before the next rent demand is due or within two months of the assignment, whichever is the later. It is a criminal offence to fail to provide this information.

What is a management audit?

Most leaseholders have the right to arrange for a management audit to scrutinise all of the management functions carried out by the landlord or appointed manager. Leaseholders have to meet the full cost of a management audit which will not only include the costs of employing the auditor but also the reasonable costs of the landlord or manager in dealing with the audit. It is mainly for this reason The LA would not advise its members to arrange a management audit until all other methods of trying to obtain relevant information have been exhausted. The LA may help its members in this respect by means of its conciliation services.

This right applies to all long leaseholders who pay variable service charges but must be carried out by a suitably qualified person. Where there are only two properties, one or both leaseholders may exercise the right. If there are more than two, the right must be exercised by at least two-thirds of the long leaseholders. The right to management audit does not allow long leaseholders or their representatives to carry out any investigations of their own into the activities or practices of the landlord or manager.

What is the objective of a management audit?

The main purpose of management audit is to ascertain whether the landlord is carrying out their management obligations required by the lease and by statute in an efficient and effective manner. The audit can apply to any aspect of the management and it can be used to investigate whether service charges are being spent in an economical way.

The auditor can carry out an inspection of the common parts and scrutinise any documents relating to the property. As the management audit can be used to identify discrepancies and obtain evidence of inadequate management, this evidence may be valuable in court or at an FTT. The right to management audit does not in itself provide any specific remedies to problems but it does supply leaseholders with information:

as a general check on management standards and procedures;
as a thorough audit of the service charge accounts;
to enforce covenants of the lease covering management, repair and services;
to ensure compliance with government approved codes of management practice;
to provide evidence for challenge of service charges at an FTT; and
to support an application for the appointment of a manager.

The management audit must be carried out by a qualified surveyor or accountant, who is neither a tenant of any property in the building in question and who does not have any connection with the landlord or manager. The legal right to management audit requires the appointed auditor to serve on the landlord a notice that has been signed by each leaseholder who is supporting the audit.

It should be emphasised that the management audit itself does not provide any redress and leaseholders may find they will still need to apply to a court or FTT if they have found evidence of irregularities or that the level of service charges might not have been reasonable.

What is Appointment of a Surveyor?

The right to appoint a surveyor is only available collectively to a formally recognized Tenants' Association (TA). Individual leaseholders, regardless

of whether they are a member of a recognized TA, do not have this right.

Once appointed by a recognised TA the surveyor has legal rights to scrutinise the landlord's documents and to inspect the common parts. The TA members would be responsible for the full cost of employing the surveyor.

Conclusion

Please see the LA information sheet 101 Glossary for a precise explanation of the terms used in this information sheet. In general the lease will add to the leaseholder’s legal rights and in most circumstances the terms of the lease would not have priority over the relevant legislation. It is essential for all prospective buyers of flats to have basic knowledge of the legal rights and obligations relating to leasehold property and for them to be aware of the terms of their lease and its implications.

Disclaimer: This is a very general explanation of the subject. Where issues are not governed by statute the information is our opinion or best practice. You are advised to seek professional advice before acting on the guidance contained herein. Whereas The Leaseholder Association endeavours to ensure that published information is correct, it does not warrant its completeness or accuracy. The Leaseholder Association assumes no responsibility or liability for any injury, loss or damage incurred as a result of any use or reliance upon the information and material contained herein.