Question 1

Holiday Chalets

Accepted Answer

Q: We are a residents’ association representing 40 holiday chalets (brick built, detached), with limited occupancy (8 months).

Is it leasehold law that all service charges levied by the landlord have to be held in a trust account?
As we intend applying for a 50 year lease extension, could you ascertain whether we are definitely classed as dwellings and are eligible to apply? If you have a solicitor on board we would like him to have a look at this.

Any help you consultants can give us on this would be greatly appreciated - preferably someone with a legal background. We did originally seek enfranchisement but have been firmly advised against this route. FPRA Legal Adviser Nicholas Roberts replies: As you will be aware, there is a great deal of legislation which has been passed to improve the position of leaseholders, and offer them various measures of protection. Your position as lessees of detached holiday chalets is somewhat anomalous. Some statutes apply to leaseholders generally, and these will apply to you. Others have been passed to address problems faced by leasehold flatowners. These will not apply to you. It is easy to assume that guidance – articles, or replies to legal queries - that you read in the FPRA Newsletter, or in the publications of LEASE (the Leasehold Advisory Service) or elsewhere, do apply to you, when in fact they do not. Legislation dealing with service charge matters does, in general, apply to the owners of leasehold dwelling generally. It has been accepted in various cases that the term ‘dwellings’ includes properties such as yours, which are not intended to be permanently occupied. It is not a legal requirement that service charge be held in a trust account as such. Section 42 of the Landlord and Tenant Act 1987 requires that a freeholder or management company who receives service charges holds them on trusts, which are set out in that section. This means that the funds are classed as ‘trust moneys’ regardless of what sort of account they are lodged in (and whether they represent current contributions, or funds in a reserve fund or sinking fund). Having the status of ‘trust moneys’ means that, in certain circumstances, they can be recovered if they are misappropriated, and get into the wrong hands. It does not, however, mean that they are absolutely ‘guaranteed’. There is in fact a further section, s.42A, which has been added to the 1987 Act, which would require that all service charge funds be lodged in a designated trust account. In order to take effect, however, it needs the Government to produce supporting Regulations. It has proved impossible to draft these so as to satisfy everyone: in particular so as to strike a balance between protecting leaseholders’ money and not incurring unnecessary bank charges and accounting costs. It might even be in the interests of your freeholder or managing agents to advise their bank that the moneys in an account are trust moneys. The problem is, however, that technically payments such as ground rents, or other charges which may be paid with service charges, are NOT trust money, so they should either not be paid into a trust account, or should immediately be transferred out and lodged in a non-trust account. There are also complications if the service charge funds of more than one estate/development are run through the same account. At the moment it is not illegal to do this. If the bank account is properly audited, and cross-checked to the individual estate accounts, there should in theory be no problem. In practice there can be scope for abuse. Before turning to your other question, I ought perhaps first to explain one issue, to make sure that I have understood your intentions. Generally, owners of flats – and his may include many conversions of buildings into holiday dwellings – will consider the ‘collective enfranchisement’ of the whole development. In other words, the leaseholders will get together, set up a company, and purchase the single freehold which underlies their properties, and the communal facilities. They are entitled to do this under the Leasehold Reform, Housing and Urban Development Act 1993. If they proceed with the purchase they will then remain leaseholders of a company in which they are themselves the shareholders. They may well decide to grant themselves extended leases (without further charge) at the conclusion of this process. In many respects this would be the ideal vehicle for a development such as yours to adopt: the leaseholders would then up owning the development between themselves. Unfortunately, owners of holiday chalets are not entitled to proceed under the 1993 Act, as it is based on the idea that the individual owners are the leaseholders of ‘horizontally divided’ buildings: in other words, flats or apartments. The fact that your chalets are freestanding rules out this route. I assume, therefore, that you are considering proceeding under the legislation applicable to houses (including semi-detached and terraced houses, provided that the properties are divided vertically), which goes back to the Leasehold Reform Act 1967. This was originally passed to give the owners of modest long leasehold houses the right either to acquire their freehold, or to extend their leases. When it was first passed, in order to qualify, one had to have been in occupation of the property as one’s sole or main residence for a number of years. This effectively excluded owners of almost all holiday dwellings. This residence condition was reduced over the years, and since the Commonhold and Leasehold Reform Act 2002 there has been no residence requirement. The only requirement now is that the leaseholder has held his or her interest for at least two years. In theory, you would have the choice of enfranchising i.e. acquiring the individual freehold to a chalet, or of acquiring an extended lease. I would agree that it is likely to cause difficulties if leaseholders go down the route of acquiring their own freeholds. Some means would have to be found of ensuring that owners of what would become freehold chalets continue to contribute to the communal facilities. These are likely to be more significant in estates of holiday chalets than they would be in an estate of ordinary houses. There are methods that could be adopted, but they tend to be less than satisfactory, and it is not clear whether the best can actually be imposed under the Leasehold Reform Act 1967. if individual leaseholders insist on acquiring their individual freehold, it can result in the financial arrangements breaking down, to the detriment of all concerned. It is likely to be more satisfactory in the long term if you instead all stick to acquiring extended leases. I have gone here into more of the history of the reforms in this area than is perhaps strictly necessary, as it does help to explain why individual enfranchisement or individual lease extensions are available to you, but not collective enfranchisement, which in many respects would be the most satisfactory. [Submitted November 2016]

Question 2

Holiday Chalets

Accepted Answer

Q: We are a residents’ association representing 40 holiday chalets (brick built, detached), with limited occupancy (8 months).

Is it leasehold law that all service charges levied by the landlord have to be held in a trust account?
As we intend applying for a 50 year lease extension, could you ascertain whether we are definitely classed as dwellings and are eligible to apply? If you have a solicitor on board we would like him to have a look at this.

Any help you consultants can give us on this would be greatly appreciated - preferably someone with a legal background. We did originally seek enfranchisement but have been firmly advised against this route. FPRA Legal Adviser Nicholas Roberts replies: As you will be aware, there is a great deal of legislation which has been passed to improve the position of leaseholders, and offer them various measures of protection. Your position as lessees of detached holiday chalets is somewhat anomalous. Some statutes apply to leaseholders generally, and these will apply to you. Others have been passed to address problems faced by leasehold flatowners. These will not apply to you. It is easy to assume that guidance – articles, or replies to legal queries - that you read in the FPRA Newsletter, or in the publications of LEASE (the Leasehold Advisory Service) or elsewhere, do apply to you, when in fact they do not. Legislation dealing with service charge matters does, in general, apply to the owners of leasehold dwelling generally. It has been accepted in various cases that the term ‘dwellings’ includes properties such as yours, which are not intended to be permanently occupied. It is not a legal requirement that service charge be held in a trust account as such. Section 42 of the Landlord and Tenant Act 1987 requires that a freeholder or management company who receives service charges holds them on trusts, which are set out in that section. This means that the funds are classed as ‘trust moneys’ regardless of what sort of account they are lodged in (and whether they represent current contributions, or funds in a reserve fund or sinking fund). Having the status of ‘trust moneys’ means that, in certain circumstances, they can be recovered if they are misappropriated, and get into the wrong hands. It does not, however, mean that they are absolutely ‘guaranteed’. There is in fact a further section, s.42A, which has been added to the 1987 Act, which would require that all service charge funds be lodged in a designated trust account. In order to take effect, however, it needs the Government to produce supporting Regulations. It has proved impossible to draft these so as to satisfy everyone: in particular so as to strike a balance between protecting leaseholders’ money and not incurring unnecessary bank charges and accounting costs. It might even be in the interests of your freeholder or managing agents to advise their bank that the moneys in an account are trust moneys. The problem is, however, that technically payments such as ground rents, or other charges which may be paid with service charges, are NOT trust money, so they should either not be paid into a trust account, or should immediately be transferred out and lodged in a non-trust account. There are also complications if the service charge funds of more than one estate/development are run through the same account. At the moment it is not illegal to do this. If the bank account is properly audited, and cross-checked to the individual estate accounts, there should in theory be no problem. In practice there can be scope for abuse. Before turning to your other question, I ought perhaps first to explain one issue, to make sure that I have understood your intentions. Generally, owners of flats – and his may include many conversions of buildings into holiday dwellings – will consider the ‘collective enfranchisement’ of the whole development. In other words, the leaseholders will get together, set up a company, and purchase the single freehold which underlies their properties, and the communal facilities. They are entitled to do this under the Leasehold Reform, Housing and Urban Development Act 1993. If they proceed with the purchase they will then remain leaseholders of a company in which they are themselves the shareholders. They may well decide to grant themselves extended leases (without further charge) at the conclusion of this process. In many respects this would be the ideal vehicle for a development such as yours to adopt: the leaseholders would then up owning the development between themselves. Unfortunately, owners of holiday chalets are not entitled to proceed under the 1993 Act, as it is based on the idea that the individual owners are the leaseholders of ‘horizontally divided’ buildings: in other words, flats or apartments. The fact that your chalets are freestanding rules out this route. I assume, therefore, that you are considering proceeding under the legislation applicable to houses (including semi-detached and terraced houses, provided that the properties are divided vertically), which goes back to the Leasehold Reform Act 1967. This was originally passed to give the owners of modest long leasehold houses the right either to acquire their freehold, or to extend their leases. When it was first passed, in order to qualify, one had to have been in occupation of the property as one’s sole or main residence for a number of years. This effectively excluded owners of almost all holiday dwellings. This residence condition was reduced over the years, and since the Commonhold and Leasehold Reform Act 2002 there has been no residence requirement. The only requirement now is that the leaseholder has held his or her interest for at least two years. In theory, you would have the choice of enfranchising i.e. acquiring the individual freehold to a chalet, or of acquiring an extended lease. I would agree that it is likely to cause difficulties if leaseholders go down the route of acquiring their own freeholds. Some means would have to be found of ensuring that owners of what would become freehold chalets continue to contribute to the communal facilities. These are likely to be more significant in estates of holiday chalets than they would be in an estate of ordinary houses. There are methods that could be adopted, but they tend to be less than satisfactory, and it is not clear whether the best can actually be imposed under the Leasehold Reform Act 1967. if individual leaseholders insist on acquiring their individual freehold, it can result in the financial arrangements breaking down, to the detriment of all concerned. It is likely to be more satisfactory in the long term if you instead all stick to acquiring extended leases. I have gone here into more of the history of the reforms in this area than is perhaps strictly necessary, as it does help to explain why individual enfranchisement or individual lease extensions are available to you, but not collective enfranchisement, which in many respects would be the most satisfactory. [Submitted November 2016]

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