Freeholders’ estate and service charges

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 might arise as a result of an estate rent charge that forms part of the purchase contract.

The developer usually enters a contract with a management company to organise the necessary work on the estate and to recover the cost from homeowners. 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?

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 is  done through an application to a First-Tier Tribunal (or Leasehold Valuation Tribunal in Wales). Freeholders do not currently have an equivalent statutory right.

In the July 2017 consultation paper, Tackling unfair practices in the leasehold market, 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, a freeholder can 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 published guidance on this requirement: Lettings agents and property managers: which Government approved redress scheme do you belong to? (PDF)

Plans for reform

On 21 December 2017, the Government announced an intention to legislate in this area.

Following a consultation in 2018 on implementing reforms to the leasehold system in England, 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.

The Law Commission’s final report Leasehold home ownership: exercising the Right to Manage  was published on 21 July 2020.

The Government has also 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 set up to help develop the new regulatory model. The group reported in July 2019 and recommended the creation of a statutory regulator with enforcement powers to cover a variety of matters, including the transparency of freeholder charges (see: Regulation of Property Agents Working Group: Final Report for more details).

Timetable for reform

The King’s Speech on 7 November 2023 announced a ‘Leasehold and Freehold Bill’ will be introduced in the 2023-34 parliamentary session.

The Government’s background briefing notes to the King’s Speech say the Bill will grant:

freehold homeowners on private and mixed tenure estates the same rights of redress as leaseholders – by extending equivalent rights to transparency over their estate charges, access to support via redress schemes, and to challenge the charges they pay by taking a case to a Tribunal, just like existing leaseholders.

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 the Welsh Government would create a “task and finish group” to look at the matter. The group published its report, Residential Leasehold Reform: A Task and Finish Group Report, in July 2019. It suggests several options for reform on pages 8-9.

The then Minister for Housing and Local Government, Julie James, launched a Call for evidence on estate charges on 6 February 2020. She highlighted the issue of poor management of leasehold properties and said:

To address this I have commissioned work to develop a new accreditation scheme for those companies which are engaged in the management of leasehold properties as well as housing developments where estate charges are in use. The scheme will be voluntary in the first instance with a view to it becoming mandatory in the future.

A summary of responses to the Call for Evidence (November 2020) concluded that the practice of estate charges was not working effectively for everyone and the Government would consider options for change.

In May 2022, the Minister for Climate Change confirmed the Welsh Government was committed to introducing legislation to give freeholders equivalent rights to leaseholders:

I have also committed to working with the UK Government to introduce legislation on a Wales and England basis that will give freeholders equivalent rights to leaseholders in relation to such matters. This would include the right to apply to a tribunal to challenge the fairness of estate charges, and to appoint a new manager to manage the provision of services covered by estate rent charges…

Although it is usually my preference to make legislative change for Wales in the Senedd, I believe that pursuing these joint measures through a Bill introduced in the UK Parliament will be the most efficient route to change. Such a Bill would, of course, be subject to the legislative consent of the Senedd…

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 Property factors – mygov.scot.

This specific issue does not appear to have arisen in Northern Ireland.

Further information

Department for Levelling Up, Housing and Communities: Guidance: Freehold estates

Library briefing paper: Freehold houses: estate charges

About the author: Hannah Cromarty is a researcher at the House of Commons Library specialising in housing and homelessness.

Disclaimer

The Commons Library does not intend the information in this article to address the specific circumstances of any particular individual. We have published it to support the work of MPs. You should not rely upon it as legal or professional advice, or as a substitute for it. We do not accept any liability whatsoever for any errors, omissions or misstatements contained herein. You should consult a suitably qualified professional if you require specific advice or information. Read our briefing for information about sources of legal advice and help.