The service charge scandal explained

Ned Browne

It's estimated that 43 per cent of new-build properties are now sold as leasehold. In London, that rises to 90 per cent. Ned Browne explains why this spells bad news…

The Department for Communities and Local Government (DCLG) estimates that there are 4.2 million leasehold properties in England alone. A further 200,000 properties in Wales are estimated to be leasehold too.

In simple terms, if you buy a freehold property, you own the building and the land upon which the building has been built. Leasehold means that you “own” the property for a set period of time, but not the land on which the property sits.

It’s estimated that 43 per cent of new-build properties are now sold as leasehold. In London, that rises to 90 per cent. And this is not good. Research commissioned by PBM Property Management found that 53 per cent of homeowners in London have regrets about buying their property due to service charge costs. Another report by NAEA Propertymark, which specifically looked at leasehold houses, discovered that 94 per cent of affected homeowners regretted buying a leasehold house, while 93 per cent said they definitely wouldn’t buy another leasehold property in the future.

 

leasehold service charges

 

What about Scotland and Northern Ireland?

Legislation passed by the Scottish parliament has effectively brought leasehold to an end in Scotland. The Scottish parliament should be congratulated for this.  

Leaseholders in Northern Ireland are better off too, as they have the right to buy their freehold for about ten times the ground rent. (In England and Wales the cost of buying the freehold will be affected by a number of factors, the main ones being the length of time left on each lease and the ground rent charges. Typically it will cost three to four times as much compared to owners in Northern Ireland.)

 

Service charges

Service charges include such things as maintaining communal gardens, electricity bills for communal areas, repair and maintenance of exterior walls, windows and roofs. You will also need to pay your share of the buildings insurance.

According to the Homeowners Alliance’s research, 26 per cent of leaseholders complained about the high cost of works and management fees, 22 per cent objected to unfair service charges, and a further 23 per cent had issues with the lack of control over which major works were undertaken.

ARMA (the Association of Residential Managing Agents) estimates the average service charge bill in London at around £1,800 to £2,000 a year. That’s a lot of money! It has also been reported that some homeowners have found it impossible to sell due to unattractive high service charges.

 

service charge

 

So, what can be done?

One option is to buy the freehold. But, this can be a costly and time-consuming undertaking. However, leaseholders have the “Right to Manage” (RTM). This means that the leaseholders manage all the maintenance of the building and they notify the freeholder when work is being carried out.  

The Right to Manage lets some leasehold property owners take over management of the building—even without the agreement of the landlord.

 

Does everyone have the Right to Manage?

These are the main criteria that have to be met:

  • The building must be made up of flats (houses don’t qualify).

  • At least two-thirds of the flats in the building must be leasehold—with leases that were for more than 21 years when they were granted.

  • At least 75 per cent of the building must be residential—for example, if there’s a shop in the building, it can’t take up more than 25 per cent of the total floor area.

 

 

How does RTM work?

To form a Right to Manage company agreement is required from a minimum of 50 per cent of apartment owners in a building. Leaseholders must set up an RTM company. The RTM company can manage the building directly, or pay a managing agent to do it. The RTM company must pay for any costs incurred during the management transfer process—even if it doesn’t end up managing the building.

Members of the RTM company have the right to vote on decisions. Typically, each leaseholder gets one vote. Freeholders will get one vote too (or more if they have a leasehold interest in some of the properties too).

 

The effect on service charges of RTM

According to Gary Cane, PBM’s managing director, “Right to Manage provides greater transparency over how costs are determined and why certain suppliers are selected for repairs and maintenance. We have seen time and time again the opportunity Right to Manage provides for people to bring down their annual service charges to a realistic sum that is fully understood by residents.”

So, yes, leaseholders with the RTM are invariably far better off. But there is a time cost, as the RTM company will be responsible for such things as collecting and managing the service charge, upkeep of communal areas (such as communal hallways and stairs), upkeep of the structure of the building (such as the roof) and dealing with complaints about the building from other leaseholders.