Regulatory gaps leave leaseholders exposed, lawyers warn

Regulatory gaps leave leaseholders exposed, lawyers warn

Gaps in regulation have left leaseholders at the whim of “reigning” directors without the proper means to challenge them, lawyers have warned.

Leaseholders who own shares in the land their building sits on - i.e. the freehold - face an uphill battle if they want to challenge the directors of the freehold companies which manage their buildings, FTAdviser has learned.

This is because the tribunal where leaseholders can take directors to court is, according to lawyers, "not built" to oversee common issues they are facing, such as unreasonable hikes in service charge fees, or issues around claims on the insurance. 

This means leaseholders are often left with just one decision - pay the legal costs to take a director to court directly, or sell their home, along with their freehold shares, and move.

“Directors have the benefit of the pot of money of the freehold company,” said Chun Wong, partner at Hodge Jones & Allen.

“You get a lot of leaseholders who are just fed up,” Wong continued. But instead of challenging the status quo, she said many “will just move”.

“They don’t have the fight in them, and that leaves the freehold directors to continue their reign.”

Wong said leaseholders looking to buy a share of the freehold in their building “should be cautious of” freehold companies where there is only a minority in power.

Sherry Fard, a solicitor at Lewis Nedas Law, agreed. “Directors don’t follow voting rules,” she said. “Leaseholders with shares are therefore completely bypassed.”

One couple, who preferred to remain anonymous due to ongoing legal disputes with their freehold directors, said they “are scared” of the power their freehold directors wield. 

“Our building is becoming a hell,” they said. Ten of the 11 tenants in the building are freeholders, another term for leaseholders who also own a share in the freehold.

The couple, who bought their central London flat back in the 1990s, are now in their 60s and 70s. 

They said they have taken their directors to HM Courts & Tribunal Service on three occasions, but lost each time, blaming “government grey areas” in property law.

One ongoing grievance for the couple relates to a large hole in their ceiling, which has been there since October 2019. Caused by a leak, the couple endeavoured to file a claim to the building’s insurer.

But because the freehold company is the named policyholder, any claims have to go through the directors first.

The couple believe the directors were trying to stop the claim from being processed over cost concerns. 

But in court one of the directors accused the couple of not giving the insurer access to the flat to inspect the damage.

“That’s not what happened,” the couple said, before adding: “For us, it’s like not having insurance”. The insurer denies dropping the claim.

Fard said she has seen “lots of leaseholders” facing issues of insurance charges increasing, or them feeling they aren’t allowed to use it - despite this being the purpose of the insurance policy.