Annex A: The leasehold system and the leaseholder protections

This Annex provides background on the leasehold system of property ownership.

Remediation contribution orders can be used in relation to the costs of remediating relevant defects in medium and high-rise residential buildings. In England, the structure of such a building is typically owned by an entity called a freeholder, and individual flats are usually owned by leaseholders under the terms of a lease.

A basic understanding of the leasehold system, and the leaseholder protections in the Building Safety Act 2022, is useful context when considering an application for a remediation contribution order. This section explains aspects of the leasehold system relevant to the use of remediation contribution orders, including:

  • a glossary of terms relevant to the leasehold system;
  • who is responsible for the repair of the common parts of the building, that is the parts not occupied by the leaseholders including the exterior of the building;
  • the leaseholder protections in sections 116 to 125 of, and Schedule 8 to, the Building Safety Act 2022; and
  • what remediation costs leaseholders and landlords are liable for.

1. Glossary

For ease of reference in the following section, a glossary of terms relevant to the leasehold system is provided below:

  • Freeholder: the person who indefinitely owns the land and any buildings constructed on the land.
  • Head lessee: a landlord who leases some or all of the building directly from the freeholder. A head lease typically covers the entirety of a building.
  • Landlord: a general term used to describe the person who has management responsibilities for the building, and could mean the freeholder or a head lessor, or another party. depending on the ownership structure of the building.
  • Leaseholder: a person who has entered into a lease with a landlord, giving them the exclusive right to occupy part of the building for a set period of time.
  • Managing agent: a person appointed by a landlord, RTM company or RMC, to manage the building as their agent.
  • Named manager: a commercial company which is party to the lease with the obligation to provide services to the leaseholders, and right to recover service charge, but has no legal interest in the building.
  • Relevant landlord: any landlord under a lease or superior landlord or any person who was a landlord under a lease at the Qualifying Time (14 February 2022, as defined in Schedule 8 to the Building Safety Act 2022).
  • Repairing obligation: Responsibility for the repair and maintenance as set out in the lease. A repairing obligation in relation to the common parts of the building, includes the exterior envelope. Leaseholders will be responsible for the repair and maintenance of the part they occupy.
  • Resident Management Company (RMC): a company which is party to the lease, whose shares are owned by leaseholders. RMCs usually have the repairing obligation.
  • Right-to-Manage Company (RTM): a company formed by leaseholders to allow them to take over management of the repair and maintenance of their building, under sections 73-74 of the Commonhold and Leasehold Reform Act 2002.). RTM companies usually have the repairing obligation for their building.

2. Responsibility for repairs

For a leaseholder, the terms of their lease will typically set out their landlord’s repairing obligations. If there is a superior interest, the landlord is likely to have an obligation towards its landlord covering repair, maintenance, etc, and this is likely to continue up any further chain to the freeholder. Depending on the ownership structure and lease terms, the repairing obligation for different parts of the building could be held by different entities.

Some or all of the leaseholders can collectively assume the repairing obligation, if they organise an RTM company. See more information on setting up and running an RTM company.

Typically, the leaseholders in a building pay for the repair and maintenance of common parts of the building through a service charge. The service charge will be payable to the landlord, or to the RTM company, if there is one, either of whom may collect the service charge through the services of a managing agent.

3. Leaseholder protections

The Building Safety Act 2022 introduced protections for leaseholders from the costs associated with remediating historical building safety defects.

Sections 116 to 125 of, and Schedule 8 to, the Building Safety Act 2022 limit the costs connected with remediating certain historical building safety issues which can be passed to leaseholders through the service charge.

Under paragraph 2 of Schedule 8, no service charge is payable for the cost of remediating relevant defects if the landlord / superior landlord at the qualifying time is responsible for the relevant defect (i.e., undertook or commissioned the works relating to the relevant defect, or was the developer / in a joint venture with the develop who undertook or commissioned the works), or is associated with a person responsible for the relevant defect (see section 2.3 for the definition of “associated” in this context). 

If the landlord is not responsible for the defects, then the leaseholder protections limit the costs which can be passed to qualifying leaseholders. You can find out whether a lease is a qualifying lease.

Under paragraph 3, if the landlord, or the landlord group if there is one, has a net worth of more than £2 million per relevant building which they own (see section 2.4.1 for a definition of “relevant building”), then qualifying leaseholders do not need to pay for remediation. This is known as the “contribution condition”.

Under paragraphs 4 to 8, if the landlord, or the landlord group, does not meet the contribution condition, then a capped amount, calculated on the basis of the lease’s value, can be charged to qualifying leaseholders. To learn about how the leaseholder contribution caps are calculated, see here.

The Building Safety Act’s leaseholder protections apply retrospectively. This means that no service charge is payable for works covered by the protections, regardless of whether a service charge was demanded or incurred before or after 28 June 2022. For example, if a landlord issued a service charge demand to leaseholders in April 2022 for costs that leaseholders are protected from under the Act, and the charge remained unpaid on 28 June 2022, the leaseholders would not have to pay this charge.

For more information on the leaseholder protections, see the Government’s guidance for leaseholders.

4. Leaseholders’ and landlords’ liability for remediation costs under the leaseholder protections

Depending on the terms of the lease, leaseholders may be liable to pay through the service charge for any remediation costs incurred by the landlord which are not covered by the leasehold protections. Any costs which cannot be recovered from the leaseholders will have to be met by the relevant landlord.

If a building has multiple landlords, then the formulae in the Building Safety (Leaseholder Protections) (Information etc.) (England) Regulations 2022 can be used by those landlords to determine how the landlords split the costs of remediation.

See more information on what costs leaseholders do and do not have to pay. You can check whether you have to pay for any particular remediation costs through your service charge.

5. Liability in other circumstances

Where remediation costs have been incurred by an RMC, an RTM company or a named manager, those costs may be recovered from their landlord once a notice has been served on their landlord in accordance with Regulation 3 of the Building Safety (Leaseholder Protections) (Information etc.) (England) Regulations 2022. The landlord must then pay the RMC or RTM, or named manager the amount for which they are liable, or if they do not consider they are liable must lodge an appeal in respect of the notice.