It's an archaic system riddled with injustice and something that affects close to five million people, yet most of us barely register the controversies surrounding leasehold properties. If you own a flat in England or Wales, chances are you do so under a leasehold contract, which is by definition grossly one-sided. As a result, some flat owners face questionable practices and high fees from managing agents looking to maximise profits.
These companies spend millions of pounds charged to leaseholders every year but are still not yet regulated by any watchdog. Last month the Office of Fair Trading (OFT) found that Cirrus Communications Systems, a subsidiary of Peverel (the largest property management company in the UK) had colluded with other firms to fix prices and win contracts worth approximately £1.4m to supply alarm systems and door entry services to elderly people in retirement properties.
Despite the verdict, Cirrus escaped any fines or penalties through an immunity deal because it was the parent company Peverel that confessed and brought this to the OFT's attention.
Sebastian O'Kelly of consumer group Leasehold Knowledge Partnership (LKP) says: "Leasehold is the murky corner of residential property. Managing agents are in bed with the freeholder in certain circumstances. It's a pernicious relationship."
Earlier in a Supreme Court case, freeholder Daejan, part of the Freshwater Group, was found to have failed to properly consult residents about £280,000 of major works at their Queens Mansions property in north London. The court ultimately found that even though the landlord had failed to follow the appropriate procedures, there was no proof of "relevant prejudice" as a result i.e. the leaseholders needed to prove they were out of pocket. Dejan did offer a £50,000 reduction in its bill to leaseholders.
It's easy to see why problems arise when you look at the balance of power. It is the leaseholders who pay first for the development itself and then for ongoing maintenance of the block through service charges, yet they have little say or control over how this is spent. The freeholder makes all the decisions even though they have no incentive to get value for money.
Some managing agents can easily take advantage by over-charging, providing poor quality services, spending money on unnecessary projects, and taking hidden sales commissions for buildings insurance. On a new-build block, the service charge is often considerably higher in year two by which time flat owners may be tied into long and uncompetitive contracts for running their block.
In the worst cases the freeholder, management company and insurer are all affiliated or part of the same parent company. Having said that, there are many agents which are bona fide and only charge the going rate for a building's upkeep.
There are things leaseholders can do for themselves, namely taking back control by acquiring the Right To Manage (RTM) from the freeholder. Leaseholders who have acquired the RTM can direct how their own money is spent on their block, whether it's maintenance work or buildings insurance policies, potentially saving thousands of pounds simply by removing the commissions and surcharges.
This isn't always as straightforward as it should be, however, because at least half of the leaseholders need to support the move. Some flat owners may prefer to stick their head in the sand and overseas flat owners in cities such as London can be impossible to get hold of.
The Leasehold Valuation Tribunal (LVT) – now part of the First-tier Tribunal (Property Chamber) in England – was set up to resolve disputes but leaseholders are at an immediate financial disadvantage. Fees for surveyors and solicitors can quickly mount up and some freeholders are even allowed to add their legal costs to future service charges.
The Leasehold Advisory Service is a Government-approved agency and can offer useful advice, but it does not help leaseholders build their case or prepare for a hearing.
Nigel Wilkins at CARL (Campaign for the Abolition of Residential Leasehold) says: "In a lot of cases that go to the LVT lawyers are putting obstacles in the way and this tactic works because people don't have the energy or the money to proceed with legal battles."
Conservative MP Sir Peter Bottomley has been particularly outspoken in his criticism of the flaws in the leasehold sector, calling on lawyers to stop playing the system to delay proceedings on frivolous grounds and at extra expense to leaseholders.
There are success stories - for example, 40 elderly leaseholders in Worthing, Sussex, won their battle against the freeholder Oakland Pension Fund to reclaim charges totalling £137,0000 levied since 1986. This money had been added to their service charge to cover notional rent of their warden/house manager's flat, even though it was not mentioned in the lease.
There is even a chance that statutory reform will be put in place at some point after the OFT announced it will soon begin an investigation into the excesses of the property management industry, a move welcomed by campaign groups. The Association of Residential Managing Agents (ARMA) is also planning to introduce more robust measures such as a consumer charter when it launches the ARMA-Q initiative in early 2015.
Michelle Banks, ARMA's chief executive, says: "The lack of statutory regulation is the source of many problems in the residential leasehold sector. Anyone can set up as a managing agent without having any relevant qualifications or experience. This lets unscrupulous agents operate outside of any controls."
All leaseholders undoubtedly need much more information at the point when they buy a flat, in order to fully understand their rights and responsibilities.
For ultimate control, residents of a building can club together to buy their freehold, a process known as enfranchisement. Owning a share of the freehold gives flat owners full control over the management and outgoings, leases can be extended to 999 years with only legal costs to pay, and there should be a considerable uplift in the value of the properties.
However, the process costs considerably more than RTM and can take a long time, particularly if the landlord tries to thwart the move or if neighbours can't work together.