With discussions about how properties are owned (freehold, leasehold, or the relatively unknown commonhold) being stirred up again by the publishing of the draft Leasehold and Commonhold Reform Bill, a topic which continues to generate complaints is what homeowners are being charged for service charges (leaseholders) and estate charges / estate management fees (freeholders). However, are service charges and estate charges the same thing and do leaseholders and freeholders have the same rights to challenge or dispute the reasonableness of what they are being charged?
So, what are leasehold service charges?
As the name suggests, these are annual charges paid by leaseholders for services which benefit the freehold building in which they live, though not necessarily the flat itself.
The exact services that the service charges can be raised to pay for are set out in the terms of the lease, and will vary from block to block. However, to take some classic examples, service charges may be used to pay for the cleaning of the entranceway and internal hallways; the heating & lighting of common parts; buildings insurance; the wages of any concierge/porter; and most importantly, the repair and maintenance of structural and mechanical elements to the freehold building, such as the foundations, the roof, or the lifts. Similarly, if the leasehold residents benefit from outside common parts including gardens, car parking spaces or footpaths, the cost of gardening and maintaining those areas will also form part of the service charges.
I own a freehold house, not a leasehold flat, so why might I need to pay estate charges?
Owners of freehold houses that form part of new developments can often also be liable to pay charges for services provided to the development as a whole, with these charges referred to as estate charges, rather than service charges.
In practice, estate charges largely operate in a similar way to service charges, with freeholders being asked to pay for things such as the upkeep of play areas, communal gardens, street lighting and private roads, which the local authority have not taken control over (known as unadopted roads). The exact terms of what estate charges can be used to pay for are usually set out in the deed of transfer when the freehold 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.
I have a problem with my service charges or my estate charges, so what can I do about it?
Common complaints in recent news reports about service charges and estate charges alike is that they keep going up, they are unreasonably high and sums are being charged for services that are not actually be provided, or provided properly. However, whilst service charges and estate charges are similar in nature, leaseholders and freeholders have very different rights when it comes to challenging what they are being asked to pay.
A leaseholder’s right to challenge service charges
Leaseholders have various statutory rights to challenge the reasonableness of service charges by way of requesting a written summary of service charge accounts covering the last 12-month accounting period; asking to inspect accounts, receipts and supporting documents for service charges; and applying to the First-tier Tribunal (Ft-T) to challenge the reasonableness of service charges.
Leaseholders might also be able to explore other statutory options that would ultimately enable them to address service charges, including forming a Right to Manage (RTM) Company to take over management of the freehold building; or applying to the Ft-T to appoint a new manager; or collectively buying the freehold building and ultimately replacing the landlord.
A freeholder’s right to challenge estate charges
By comparison to all of the options that are currently available to leaseholders to challenge service charges, freeholders who are unhappy with their estate charges do not currently have any statutory rights or options for challenging the reasonableness of estate charges, nor for taking over management of the estate.
Instead, a freeholder’s only real option for challenging estate charges is to lodge a complaint with the Property Redress Scheme, which can award compensation if the complaint is upheld.
However, things might soon be changing for freeholders, because The Leasehold and Freehold Reform Act 2024 (the Act) does contain similar statutory rights and options for freeholders, as leaseholders currently have, particularly the right to challenge the reasonableness of estate charges in the Ft-T. The question remains though, when will these relevant portions of the Act come into force? Watch this space.
