UK: LESS FREEDOM FOR THE FREEHOLDER? - Freeholders have traditionally done well out of their investment, often at the expense of their leaseholders. Isabel Berwick asks whether new proposals will redress the balance.

Last Updated: 31 Aug 2010

Freeholders have traditionally done well out of their investment, often at the expense of their leaseholders. Isabel Berwick asks whether new proposals will redress the balance.

If you've ever owned a leasehold you'll know that you have a freeholder out there ... somewhere. If you know and like your freeholder, you're lucky.

For many leaseholders, freeholders are anonymous, shadowy figures. Contact often comes only via a charge for ground rent or a large bill for building maintenance, collected by a managing agent.

The least fortunate leaseholders are victims of inadequate protection against a new generation of 'mega-landlords'. Elements of the country's less scrupulous investors have been going around snapping up large numbers of freeholds of blocks of flats, then dumping huge service bills on their hapless tenants. New Government proposals, likely to come into effect this summer, will give leasehold home owners better protection against such caddish behaviour.

Several million houses and flats in England and Wales have leaseholds.

The system was started by the aristocratic owners of estate villages.

They feared the peasants wouldn't look after their buildings properly and decided it was better to arrange the repairs themselves, then send out the bill. Today's freeholders are similarly obliged. Ian Read, the property manager at Close Brothers, notes that it is all too easy to get seduced by the returns on holding a freehold 'without realising the amount of work involved in running the thing'.

That said, the attractions of multiple freeholding are many for those with cash to spare. It can be a wonderful nest egg for the nearest, the dearest and those yet to be born. The landlord has the right to collect ground rent from tenants during the whole term of what may be a very long lease. And when the lease is up, the property reverts to the freeholder - a great present for a lucky descendent.

But the attractive yield is the main lure for freehold investors. David Glass Associates is a reputable firm in the freeholding business. It owns the freeholds on around 13,000 flats, and, says, David Glass: '(Freeholds) produce around 11.5% to 12% a year at the moment. About 10% comes from ground rent.' Many leases oblige the freeholder to arange insurance for the building, but this allows him or her to earn a fat commission from the insurers. Freeholds are also relatively easy to buy and sell, and are among the lots traded at almost every London property auction. Your freeholder could be anyone - or could have been several people already.

It's also possible for the would-be multiple freeholder to invest in a diversified ground rents portfolio, although many property investments of this sort are unregulated.

The Government's proposals, which were going before the House of Lords at the time of writing, make it easier for leaseholders to defend themselves against unreasonable bills for their landlord's services. As things stand, the freeholder is dominant and most leaseholders don't know their rights.

Those who do and who refuse to pay 'unreasonable' service charges can find themselves threatened with lengthy and costly legal action just to keep their homes, something most individual leaseholders can ill afford.

The leaseholder's lender might not be much help either. The bank or building society could pay the service charge but then add it to the mortgage for fear the lease will be forfeited. The new proposals mean any action to kick out a leaseholder can only happen after a ruling on whether a service charge is fair or not, although it will still cost to go to court.

The law currently requires landlords who wish to dispose of their interest to offer it first to their tenants. The Government's proposals would make failure to do this a criminal offence. The new rules also close a loophole which has prevented some leaseholders from buying the freehold on their block of flats. Some landlords have frustrated these attempts by splitting the freehold ownership of a block of flats into several parts.

Most of those buying up freeholds en masse will probably hold onto their investments. The consensus seems to be that, while the proposals will prevent the worst excesses of the nastier landlords, they will hardly dent the freehold market. And leaseholders probably still won't know who their freeholder is.

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