The legal basis of a freehold service charge
Freehold service charges can cover the provision of a variety of services on an estate, such as the upkeep of:
- play areas
- communal gardens
- private (unadopted) roads
The requirement to make a financial contribution is usually defined in the deed of transfer when the property is first sold by the developer. Alternatively, liability to pay might arise as a result of an estate rent charge that forms part of the purchase contract.
The developer usually enters into a contract with a management company to organise the necessary work on the estate and to recover the cost of the work from home owners. Sometimes the developer will set up a Residents’ Management Company (RMC) to take over ownership of the communal areas – where this happens the RMC can appoint a management company to work on its behalf.
Can owners challenge unreasonable charges?
There has been a good deal of media coverage on the difficulties freehold owners face in challenging the standard and/or cost of the work carried out by management companies.
Long leaseholders who pay service charges in England and Wales have a statutory right to challenge unreasonable service charges and the standard of work carried out. This done through an application to a First-Tier Tribunal (or Leasehold Valuation Tribunal in Wales). Freeholders do not have an equivalent statutory right.
In the July 2017 consultation paper, Tackling unfair practices in the leasehold market (PDF 261 KB), the Government said:
Freeholders will usually have some rights under the arrangements in the deeds or in common law, but these may not be equivalent to the rights enjoyed by leaseholders under the terms of their leases and statute. Freeholders may also be able to bring pressure to bear indirectly. In cases where a Residents’ Management Company is set up, the terms of the deeds of transfer may set out obligations that ensure individual freeholders have a say on the maintenance of communal areas.
The contrast between the positions of freeholders and leaseholders can be particularly clear where a developer retains the ownership of communal areas and facilities and the responsibility for their maintenance through a managing agent, or where a developer sells on the ownership of the communal areas and facilities to a private company.
In all these cases, even though freeholders may be paying for exactly the same services as leaseholders, they do not have a right to challenge the reasonableness of service charges through the First-tier Tribunal (Property Chamber), which qualifying leaseholders can do.
Where the developer employs a managing agent/property management company, one option for a freeholder is to lodge a complaint with the relevant redress scheme. All managing agents/property management companies in England are required to be members of a Government approved redress scheme. The Ministry of Housing, Communities and Local Government has published more information: Lettings agents and property managers: which Government approved redress scheme do you belong to? (PDF 281KB)
Plans for reform
On 21 December 2017, the Government announced an intention to legislate in this area:
The Government will legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed use estate can access equivalent rights as leaseholders to challenge the reasonableness of service charges.
On 15 October 2018, the Government published Implementing reforms to the leasehold system in England: a consultation (PDF 377 KB). This paper announced an intention to:
…create a regime for freeholders which provides that maintenance charges must be reasonably incurred and that services provided are of a reasonable standard. We will also replicate consultation requirements and obligations on the provider of services to provide information to the freeholder. Finally we will provide freeholders with the ability to challenge the reasonableness of the charges they are required to pay towards the maintenance of communal areas and facilities at the First-tier Tribunal.
On 29 January 2019, the then Minister, Kit Malthouse, confirmed an “aspiration” to legislate within the next 12 months.
The outcome of the October 2018 consultation exercise was published on 27 June 2019: Implementing reforms to the leasehold system in England: summary of consultation responses and government response (PDF 578 KB). The Government committed to:
- Equal rights for freeholders: we will legislate to give freeholders on private and mixed tenure estates equivalent rights to leaseholders to challenge the reasonableness of estate rent charges (replicating relevant provisions in the Landlord and Tenant Act 1985) as well as a right to apply to the First-tier Tribunal to appoint a new manager to manage the provision of services covered by estate rent charges (replicating relevant provisions of the Landlord and Tenant Act 1987).
- Right to Manage for freeholders: we will consider introducing a Right to Manage for residential freeholders after the Law Commission has reported to the Government (on their review of Right to Manage for leaseholders) as part of creating greater parity between leaseholders and residential freeholders.
In addition, in April 2018 the Government confirmed an intention to regulate letting and property management agents. Minimum entry standards will be set and an independent body will carry out the regulatory function. A Working Group was established to assist in developing the new regulatory model. The group reported in July 2019 and recommended the creation of a statutory regulator that would have enforcement powers to cover a variety of matters, including the transparency of freeholder charges (see: Regulation of Property Agents Working Group: Final Report (PDF 655 KB) for more details).
On 1 October 2018, the Government announced an intention to require all developers of new-build homes to be members of an Ombudsman scheme.
The devolved administrations
Legislation introduced in Westminster will not automatically apply in Wales.
Freehold estate charges were debated in the Welsh Assembly following a Member’s Legislative Proposal on 14 March 2018. The proposal suggested bringing in similar reforms to those consulted on in England. The motion was agreed; the responding Minister said that the Welsh Government would create a “task and finish group” to look at the matter. The task and finish group published its report, Residential Leasehold Reform: A Task and Finish Group Report (PDF 892 KB), in July 2019. It suggested several options for reform which are set out on pages 8-9 of the report.
Estate charges are also an issue in Scotland. Scottish factoring provisions can provide a remedy (the removal of the management company) in certain circumstances. For more information, see the Scottish Parliament Information Centre’s paper: FAQs: factoring and maintenance of common property (PDF 323 KB)
This specific issue does not appear to have arisen in Northern Ireland.