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.
In Fard’s experience, there is no “hard and fast rule” for freehold companies when it comes to how they interact with insurers, and how an insurance claim is filed.
“There needs to be more legislation around insurers and freeholders,” she explained. “There’s a lot of work involved, but directors don’t realise that when they’re maintaining a large or old building - so they claim ignorance.”
Fard added: “If it was a corporate director, they wouldn’t be able to claim ignorance.”
HM Courts & Tribunal Service said it is bringing forward a programme of reform "to end unfair practices" in the leasehold market and to "promote fairness and transparency". But so far, this programme has focused on restricting ground rents to zero for future leases, and providing leaseholders with an easier pathway to owning their homes outright.
A spokesperson from the department for levelling up, housing and communities told FTAdviser: "The first-tier tribunal already deals with a range of disputes, including in relation to buildings insurance and the price of buying the freehold."
But the lawyers argue that whilst these tribunals may hear such disputes, because the issues often straddle both property and company law, they are generally unequipped to form comprehensive judgements on them.
Price disputes
Alongside anxieties around insurance claims, another issue highlighted by both Fard and Wong was directors re-purchasing land from the freehold company at a knockdown price.
“It is quite common,” said Wong. One client of hers, who was a leaseholder, complained of a fellow tenant purchasing a rooftop in order to build an outhouse on it.
“They paid very little for it,” she said. “That’s because the land belonged to the freehold firm, of which he is a director.”
The couple who approached FTAdviser faced a similar issue, where a director bought back land from the freehold company at a knockdown price.
According to the freehold’s company records, the director paid £750 for a space which cost the company - and all the leaseholders with a share in it - £15,000 to buy out the interest of the Church of England on. “It’s just extortion,” the couple said.
Fard, echoing Wong, said knockdown prices like these “tend to happen quite a lot” in leaseholder versus director disputes.
But the reason these cases rarely stand up in direct court is because accusations of fraudulent activity require overwhelming evidence.
“You can imply it,” said Fard. “I had one case where the directors were using freehold company funds for other means. They [the tribunal] took this into consideration, but couldn’t make a judgement on it”.
Fard said she ended up using the tribunal to uncover more information via disclosure. They now intend to use this evidence against the directors in a direct case.
“There’s a huge overlap between service charges and other areas of law,” said Fard. “There needs to be an arena like the tribunal, which is leaseholder-friendly, where issues can be raised rather than restricted.”
The couple FTAdviser spoke to are still battling with their directors, and still have a large hole in the ceiling they can't afford to mend.
With reforms remaining unfocused on issues regarding how tribunals operate, the lawyers believe future cases will be determined by the individual knowledge of the leaseholder.
Fard explained: “Leaseholders are becoming more aware of their rights. In London, you’ve got university educated young professionals who can afford to buy into the housing market, and they’re aware of what they’re entitled to.”
She said social media and the wealth of information online compared to 20-30 years ago helps in this instance.
“Given how hard it is to buy property, it really is a process. They have to sacrifice a lot. Because of that, these sorts of leaseholders want to make sure their property is safe.”
ruby.hinchliffe@ft.com
