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Insurance for Blocks of Flats

At Assetsure, we are often consulted on the telephone over the various aspects of Flat ownership, although we can only provide advice on flats insurance UK, we do encounter similar problems every day of the week from ‘confused’ leaseholders who are trying to insure their building or are asking for an opinion on the price of flats insurance as being charged by the freeholder. One thing we can advise is that most people that live in flats, encounter similar problems. Please remember that we offer this information for general usage only, it is not tailor made to anyone’s personal circumstances and is not a substitute for legal advice which should always be sought before any decision is made.

Leasehold/Freehold - What’s the difference?

If you are buying a flat for the first time and are perhaps a little confused as to your rights and obligations, we hope this guide will help you better understand the legal nature of your ownership. Before reading on it is pertinent to point out that if you want to buy a flat in a block in England or Wales, you are pretty much stuck with a lease, you may be lucky and be able to buy one that also includes a share of the freehold or your flat may even be offered to you on a common hold basis, an arrangement which is becoming more popular and is seen as the eventual replacement system to leasehold.

You can obtain the leasehold of flat in pretty much any type of building, it can be a flat a purpose built block, in a converted house or even in former commercial premises such as factories or office blocks. What you will be obtaining is a portion of the building and the right to occupy that portion of the building for a set period of time. This period of time is called the lease and new leases are usually issued for 99 or 125 years, occasionally you will be offered a 999 lease or one that is ‘in perpetuity’ When you are buying a flat freehold, the term of the lease will be specified and unless the property is brand new or in a newly converted building, the lease will usually have run down a little. You could think of a lease as a long tenancy agreement, except that during the period, you are free to sell the lease to someone else, as property prices generally increase, so will the value of your lease, although it’s value can decrease the closer to the end of the lease you get. if a lease is not renewed or extended, then at the end of the term. it returns to the freeholder.

Your ownership of the flat relates everything within the walls that encompass your portion of the building, this includes the flooring and the plaster work and any fixtures & fittings. Ownership does not include the bricks & mortar or the foundations or the land on which the property stands, this will all be owned by the freeholder. The freeholder is responsible for the upkeep of the building but beware, you will be part responsible for paying for the up keep.

So in simple terms, all you are purchasing will be the right to occupy a certain space within the building as defined in the lease. Your Flat will normally be allocated a number or a letter to distinguish it from other flats in the block. As well as ‘your space’, you will also be entitled to use the common parts of the property, this would include any communal areas such as the doors and corridors, if there is a garden, you should also have use of this although it has been known under some leases to restrict use of the garden to certain flats. This is most common in converted houses where the garden is usually allocated to the downstairs flat.

Your landlord can be either a private individual; or a limited company, it could even be one of the other leaseholders in the building. On occasions leases are sold by local authorities or housing associations. Many people have now secured the purchase of their council flat where the authority sells them a lease like any other landlord. It is quite common nowadays for the residents themselves to own the freehold of the building, in which case when you purchase your lease, you will also be purchasing a share of the freehold as well. If the freehold is not owned by the residents, they may still have acquired the right to manage the building and more is written on that later.

The freeholder of a block of flats owns the structure of the building itself and the land on which it stands, he has granted leases to individual portions of the building and if the leases are allowed to expire, then the freeholder will then on that space again. The freeholder of the property will.

  • Own the structure of the building and the land on which it stands
  • Grant leases to people enabling them to occupy portions of the building
  • Look after the upkeep and maintenance of the building
  • Arrange flats insurance UK on the building a and divide the cost up between the Freeholders
  • Charge ground rent
  • Charge maintenance fees which go towards the upkeep of the building.

Although the freeholder owns the building and the land on which the block stands, unless he owns a flat within the block he will not be able to use the building or it’s facilities. Sometimes, you may find that the freeholder does own a flat within the block and has simply purchased the freehold of the building.

Lets now have a look at a lease in general, this can be defined as contract between two parties, in granting the lease the landlord gives conditional ownership to the lessee for a certain period of time as mentioned above.. The lease is an important document and it is vital that you are fully aware of your responsibilities in particular with relation to ground rent and service charges. many people have purchased flats without fully understanding the implications of the lease and found that they have been hit with high maintenance’s charges with very little option but to pay them. Leases are written in legal speak, so it is best to obtain the help from a solicitor. Once you have purchased your lease, you will find it difficult to vary the terms so if there is something you are not happy about, talk about it before you sign.

The lease sets out the contractual duties of both parties and you must remember, it is a legal document and must be treated as such, even though you have the right to occupy a certain space within the block you still may not be free to do what you like within your own four walls. Leases are often written to protect the majority of people in the building and you will often find restrictions on what you can and cannot do. In obtaining a lease, you will acquire the right of peaceful occupation for the term of the lease. You will have privacy within your portion of the building and you can expect the landlord to keep the common parts in good condition. Leases work both ways, if you think the landlord is not looking after the building ( which could lead to a fall in the value of your lease) it is probably best to broach the matter sooner rather than later. For your part, you will have to keep the flat in good condition.

It must be remembered that as a leaseholder you will have to comply with all the terms and conditions of the lease, if you fail to pay requested amounts for ground rent & services charges, you may find that your landlord takes you to court to obtain repossession of the flat.

Ground Rent

Many people ask, why if they are buying a flat must they still pay ground rent, the answer is quite simple, your lease is really a tenancy agreement and tenants pay rent. The good news is that ground rents are usually very low and are never normally more than a few hundred pounds a year. If yours is higher than this ask the landlord for clarification.

Service charges

Services charges on leasehold flats are a contentious issue, these are payments made by the leaseholder to the freeholder for the upkeep of the building. This will include maintenance and repair and also to pay for the building insurance. If you live in a large purpose built block, you can expect to pay towards heating & lighting of the common parts, lift maintenance, window cleaning & up keep of the grounds and anything else that the landlord feels is chargeable. Often people are hit with large unexpected bills for replacement of the heating system for example or painting the exterior of the building and one of the reasons people seek to control there own block is to help keep these costs under control. The charges are levied by the landlord or in some cases a professional managing agent will be appointed. The managing agent will normally run quite a few blocks and is the representative of the landlord or freeholder and not the leaseholders. The managing agent must make the landlord aware of leaseholders wishes and will communicate any grievances to him or her.

The Sinking Fund

Sinking funds or reserve funds are amounts of money built up by landlords to ensure that there is sufficient in the kitty to deal with any major repair or renovation works. The lease will set out details of the sinking fund and should also alert you to the major repairs and their expected date. If you make contributions to the sinking fund, please remember, these are not refundable if you sell your flat before the works are carried out.

Building Insurance

The freeholder will arrange the flats insurance UK and will charge a proportion to each flat in the block. Some people try to insure their own property or are incorrectly sold flats insurance UK by mortgage providers who do not realise that the building is also insured under a block policy. Sometimes this scenario can go undetected for many years. As the insurance costs are often sent out under the guise of a service charge, it may not always be apparent that you are paying for a building insurance policy. When you purchase your flat ask your solicitor to enquire about the building insurance policy, your mortgage lender will not normally mind you being insured elsewhere, providing of course, their interest is noted under the policy. They may also want a copy of the policy documents for their records. Large highrise flats often have an insurance policy which automatically notes lenders interests and this helps to keep the cost of administration down.

Leaseholder Rights

Up until now it has looked as if the landlord has the bulk of the rights when it comes to leasehold flats, however you do have rights and these include the following;

  • The landlord must provide you with information that will enable you to contact him, his address must be clearly stated on any financial demand which is made upon you, You will have a right to examine accounts for service charges etc
  • The freeholder will not be allowed to carry our major works to the building without first obtaining your permission. He can however carry out works which will result in a cost of not more than £250.00 to every leaseholder in the block
  • The freeholder is not allowed to enter in to any long term agreements for services etc without obtaining the permission of leaseholders where the charge involved is in excess of £100.00 to each leaseholder
  • You have a right to challenge any charge made even if it has already been paid
  • You have a right to challenge any administration charges even if they have already been paid.

You have other rights as a leaseholder and these are now dealt with in greater depth.

Extending the term of your lease

If you own a lease of a flat in a block, you now have a legal right to extend the lease.. The leasehold reform act and urban development act 1993 gave leaseholders the right to obtain a lease extension by having an additional period of 90 years added on to their current lease at a fair price and at a peppercorn rent. The imposition of a peppercorn rent was to stop unscrupulous landlords trying to make extra money from the leaseholder. By peppercorn, a zero rent is usually applied. The rules are simple and straightforward:-

  • Your lease must be a long lease
  • You must have owned the lease for a period of not less than 2 years.

If the above mentioned conditions are met and your landlord is not except from the law then you can extend the lease without have to obtain your landlords permission. Obtaining an extension is normally carried out people wanting to sell their flats and wanting to sell them with as long a lease as possible. There will be a cost involved to extend the lease and you will also incur legal costs and valuation costs. You solicitor will be able to help you prepare the documents and should be able to give you an indication of the costs. Generally speaking you will be unable to extend the lease of property owned by the Crown or National Trust.

Obtaining the right to manage your Block of Flats

The right to mange your own block was seen as a major break through for leaseholders and at last many were able to take over their own affairs for the first time. The Right to manage provisions of the common hold and leasehold reform act was passed in 2002 and came in to effect in 2003. This well received and popular act provides legislation so as flat owners can take care of their own communal affairs regardless or not if the freeholder has been acting incorrectly. For some, the fact they can control their own affairs dispenses with the need to buy the freehold of the building, once you gain control of your block, you are free to shop around for the best deals on services and in particular blocks of flats insurance, If your flat meets the following listed criteria, you have a statutory right to gain control of your own affairs.

  • The property must be a self contained building or part of a building.
  • Your building must include at least two flats
  • At least two thirds of the flat owners must qualify
  • To qualify the original lease must be for in excess of 21 years
  • There is no limit on the number of flats any one person can own
  • Any commercial/non residential content of the building must not be in excess of 25 % of the floor area

Once you set up a right to manage company, it will assume the following responsibilities to all leaseholders:-

  • services
  • repairs
  • maintenance
  • insurance
  • management of the whole or part of the premises

Buying the freehold of your Block

Many leaseholders now believe that with the introduction of the right to manage, the need to purchase freeholds is less great, certainly freeholders do not have the power they once had. However, long leaseholders have the right to buy the free hold of their building, they must do this collectively as it is not possible to obtain the freehold to individual portions, you have to purchase the lot. No person can act alone in this venture, purchasing normally happens after much consultation amongst residents. The usual course is to set up a limited company and the leaseholders are awarded shares in the company.

The limited company controls the freehold and it can award lease extensions and take care of all the usual issues that the right to manage company deals with. To qualify for freehold purchase you must originally have been awarded a lease of in excess of 21 years, you must have also been resident in your building for the last twelve months or for periods amounting to at least three years in the last ten years.

The building that you wish to acquire the freehold of must have at least two flats and the qualifying tenants must own at least two thirds of the leases in the block. Some buildings are not eligible for freehold purchase but these are in the minority and not worth mentioning. At least 90 % of the building must be given over to residential use.

Provided the above conditions are met, you will be able to apply to the landlord to purchase the freehold. Regrettably the process is quite drawn out and involved. Initially, you must serve notice on to the landlord of your intention to purchase the freehold and you must also offer a price. The landlord must reply with a counter notice, normally landlords will be willing to sell but they almost always reject the price on offer. This is where things start to get a little complicated and to save time it is worthwhile obtain professional valuation at the outset. If you present the landlord with an independent valuation to compensate for the loss of the freehold you are more likely to conclude the sale in the shortest time possible.

This is an area where good quality legal advice is essential, remember, you have the law on your side and provided you carry out procedures exactly as required, there is very little a hostile landlord can do to prevent you acquiring the freehold to your block of flats.

Common hold

Recently new laws have been enacted which offer the biggest change to property ownership law in England and Wales in over 80 years. The new right to common hold has been heralded as the way forward for flat ownership and it is envisaged that this system will eventually replace the leasehold laws which are universally unpopular. Previously, the only two ways you could own property were, freehold and leasehold. Common hold in effect allows the owner of a flat in a block or converted building to have a freehold and thus ownership is not restricted to a set period of time. Common hold has been popular in Australia and the United States for in excess of 50 years and the system introduced in England Wales is based on the results obtained in these two countries.

In essence, common hold has been introduced to make things easier for people living in buildings that are in multi occupation and it is hoped by doing this many of the problems with rogue landlords will be over come. Developers of new properties can now choose to make a building leasehold or common hold. Under the common hold system, there is no landlord or freeholder and every resident or owner, owns a unit in the property and has equal rights, not only do they own their own portion of the building freehold, they also own a share in the structure itself and the land on which it stands.

All unit holders have a joint responsibility to sort out the maintenance and insurance issues and must take responsibility for the general up keep of the building. The common parts of the building are owned by and managed by a limited company known as a common hold association. There are some distinct advantages with common hold over the old system.

  • Each flat in a block will be freehold, it will not lose value as the term of the lease runs down
  • Ownership documentation is standardised and transparent, there is a unique common hold community statement for the whole building, this will; help avoid inconsistencies between leases
  • Management of the building is on a joint basis, by the owners for the owners, there is no third party involved and thus costs can be kept to a minimum
  • An end to landlords using freehold as a way of generating an income our of leaseholders.

If you are leaseholders of an existing block with leases in place, it is unlikely you will be able to persuade your landlord to effect a change to Common hold ownership, for these scenarios, purchasing the freehold would still remain the route to ownership. Many of the matters discussed in this article are fairly complex and Assetsure always recommend taking professional, legal
advice before you make any financial decisions.

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