Why do we have leasehold properties and service charges?

Leaseholders are having to stump up an average of £600 a year more in service charge fees than they were five years ago, leaving many struggling to pay, a BBC investigation has found.

In some cases, those living in leasehold properties have told of increases of more than 400%, leaving them both struggling to meet the cost and unable to sell a home with such high fees attached to it.

What are service charges used for and what can leaseholders do if they feel their charge is unreasonably high?

The leasehold system in England and Wales dates back to the Middle Ages.

The system as we know it today came about in the 1920s.

While freeholders buy the land beneath their property, leaseholders effectively buy the right to live in a property for a fixed period of time.

Most leaseholders pay fees to freeholders or their managing agents for things like building insurance and maintenance. Exactly what is covered by the service charge is stated in the terms of the lease.

It can include maintenance and repairs to things like the roof, the foundations, windows, gutters and communal drains.

These payments are known as a service charge and the sum charged varies from year to year depending on the costs the landlord incurs.

The service charge is often payable yearly or twice yearly, either at the beginning of the calendar year or the financial year (April), or quarterly.

Most modern leases allow for the service charge to be payable in advance of the landlord incurring the costs, based on an estimate of costs in the coming year.

Some older leases allow recovery in arrears (meaning the landlord has to incur the cost first and then claim it from leaseholders).

There are more than 4.7m leasehold dwellings in England accounting for 19% of the country’s total housing stock.

And the number has been increasingly rapidly – at a rate of about 100,000 new leasehold dwellings a year during the past five years.

London, with 1.3m leasehold properties, and the North West, with 910,000, have the highest proportions of leasehold dwellings – 36% and 27% respectively.

The service charge is based on what a landlord thinks they are going to spend in the coming year.

At the end of that year, the landlord should provide a statement of the actual costs. If they exceed the estimate, they can get the shortfall from a leaseholder using something called a “balancing charge”.

If the landlord has spent less than estimated, a credit for the overpayment should be carried forward to the leaseholder’s next yearly payment.

Where the works are improvements rather than repairs, the landlord has a heightened duty to consider the financial impact on the individual leaseholder and to give full consideration to alternative, cheaper options.

Many are concerned that freeholders or their managing agents are exploiting the current system and imposing unreasonable costs.

Some, including Peter Bottomley, former MP for West Worthing and a longtime leasehold campaigner, want to see the leasehold system scrapped entirely.

“There are still hundreds of thousands of leaseholders being exploited by extending their leases or in various other ways,” he said.

Freeholders and their agents, however, are adamant the system is not being abused and that they are simply “re-charging” the costs they face to the leaseholders.

They speak of spiralling energy, insurance and materials costs and warn of the dangers of going too far with any legislation.

Lawyer Mark Chick, a founder committee member of the Association of Leasehold Enfranchisement Practitioners, said: “Unfortunately, you’ve got to be a little bit careful about what you wish for.

“If people do self-manage they have to do that properly and do it well.”

In 2017 the Conservative government said it wanted to abolish leasehold on all new builds.

There have since been some important changes made in the Leasehold and Freehold Reform Act including rules on standardising maintenance costs and forcing agents to provide a full breakdown of costs.

However, these changes now need secondary legislation to come into force, which has not yet been put forward by the current government.

On Thursday, the government set out plans for significant changes to the leasehold system in England and Wales.

It plans to publish a Bill introducing a “commonhold” system in which residents own the land beneath their building. The new Bill is expected in the second half of next year.

The government said commonhold – which exists in Scotland and elsewhere around the world – would be the default system of tenure by the end of the Parliament – and added it that it would be consulting on how to ban new leasehold flats.

How England and Wales transition from the current leasehold system will also form part of a government consultation.

Despite the announcement, some campaigners feel the government has not set out clear plans for those who feel “stuck” in the leasehold system right now.

The service charge is the hot topic among leaseholders.

More than 125,000 people have sought advice from the government-funded Leasehold Advisory Service during the past five years, according to figures obtained by the BBC.

The service provides outline legal advice designed to help people make informed decisions about their next steps.

For some, that will involve taking their landlord to a tribunal.

A service charge can go up or down without any limit, but a freeholder should only implement it if the costs have been reasonably incurred and the work done was of a reasonable standard.

A leaseholder can challenge the “reasonableness” of their bill by applying to a tribunal, which has the power to make a ruling on whether, or how much of, a service charge is reasonable or payable.

In England, this is the first-tier tribunal (property chamber).

In Wales it is the leasehold valuation tribunal.

A service charge demand must contain:

• The landlord’s name and address (an agent’s name and address is not sufficient)
• A summary of leaseholders’ rights and obligations (including details of a leaseholder’s right to apply to a tribunal)

If the demand does not comply with either of these requirements, the leaseholder has a legal right not to pay unless and until the service charge is demanded in the proper manner.

If the charges are very high, or work was not done or was done badly, or you cannot find out how your service charges are being spent, or you are charged for services or works not in your lease, you can challenge the charges.

You have the right, within six months of receiving a written summary of costs, to require a landlord to provide you with the opportunity to inspect the accounts, receipts and other documents.

It is a criminal offence for a landlord to refuse to supply this information.

Your lease may give your landlord a right of re-entry or forfeiture where you have failed to pay charges which are properly due.

However, the landlord must meet all the legal requirements and obtain a court order, which will only be granted if you have admitted you are liable to pay the sum owed or it is finally determined by a court.