Introduction

Life in a leasehold flat isn’t always simple, especially when the lease itself has problems. Some leases leave out key clauses, like how to recover certain costs through the service charge. This can leave freeholders, resident management companies, and leaseholders scratching their heads – and sometimes fighting about who should pick up the bill. In this blog, we’ll unpack what happens when a lease is defective, whether the freeholder has to pay, and how shortfalls are handled when a freehold or residents’ management company is in charge.

What is a defective lease in leasehold property law?

A defective lease is one that has mistakes or leaves out important clauses. For example, it might fail to mention how certain costs can be recovered, say the cost of managing the lift, or decorating the window, or it may miss out a reserve fund clause. Albeit missing a reserve clause is not considered a defect in the First Tier Tribunal as monies can still be collected in the budget, albeit as a lump sum when works are planned. Certainly, defective leases make running the block harder because the management company or freeholder can’t legally recover some expenses, leaving a shortfall which then has to be funded by the freeholder (which may be some but not all of the leaseholders, if not 100% of the leaseholder are members of the company).

For leases missing reserve clauses – the Morshead mansions case offers some reprieve and options to collect money as members contributions relying on company law.

Who pays when the lease is defective and the service charge can't cover costs?

If the lease doesn’t allow recovery of certain expenses, the shortfall can’t usually be passed to leaseholders. In many cases, the freeholder has to cover the costs themselves, which is why freeholders often push to correct defective leases to avoid significant financial risk.

When a Residents’ Management Company (RMC) is in charge, things can be even more complex. The company, made up of leaseholders, still incurs the expense even if it can’t legally recover it through the service charge. That leaves the RMC to absorb the cost as a shortfall, often leading to disputes among neighbours. In practice, directors may look to members’ contributions under company law to fill the gap, but this isn’t always straightforward.

What happens if a Residents' Management Company runs the service charge?

When a Residents’ Management Company (RMC) is in charge and the lease is defective, things get tricky. The RMC is usually made up of leaseholders themselves, so if the lease doesn’t cover a cost, the company can’t recover it. That can leave the RMC in financial difficulty and cause disputes among neighbours about fairness. That said, what cannot be recovered as service charge is still incurred, so ends up being a shortfall that the company has to cover, if not via service charge, via members contributions.

Can a defective lease be fixed to cover missing costs?

Yes, but it takes effort. Leases can be varied, either by agreement between all leaseholders or by applying to the First-tier Tribunal. This process can be slow and sometimes costly, but it’s often the only long-term fix for a defective lease.

What practical steps can take without a reserve clause?

The best approach is to get advice early. Leaseholders can speak to solicitors or property professionals about options for varying the lease. In the meantime, good communication in the block is vital – explaining why certain costs can’t be recovered can help reduce tensions. In some cases, voluntary contributions are agreed while a more permanent fix is being worked out.

Defective leases are a headache for everyone involved in leasehold blocks. They can leave freeholders out of pocket, residents confused, and management companies stuck. The law does provide routes to fix the problem, but it takes cooperation and effort. At the end of the day, the key is planning, transparency, and making sure the lease is put right for the future.

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