Where Did the Long Lease Come From?
Before the First World War around 90% of all housing in Britain was privately rented because their work and accommodation were tied. However, when landlords started taking advantage of the increased wages of munitions workers at the beginning of the war by arbitrarily raising rents, the first (temporary) Rent Act was passed in 1915 to try and prevent this.
The introduction of the Law of Property Act 1925 saw the number of legal estates reduced to two: freehold, the closest anyone could get to outright ownership in English common law and characterised as ‘not being derived from, or conditional on, the estate of another’, and leasehold, characterised as ‘an estate carved out of freehold’.
In 1926 the Act removed the manorial system by abolishing copyholds, a form of land holding which was common from the Middle Ages. This type of land tenure took its name from the ‘title deed’ received by the tenant which was a copy of the relevant entry in the manorial court. The last of these copyholds were converted into freeholds or 999-year leases. As Lords of the Manor could only be Lords of land they directly owned, they therefore had to be compensated for the loss of this right.
AFTER THE SECOND WORLD WAR: BUILDING UPWARDS
After the second World War, flat occupation was really the only viable form of tenure as it was far more economical to build upwards in the form of blocks than outward in the form of houses but there was a problem. The ‘temporary’ Rent Act passed in 1915 to prevent landlord exploitation had not worked and a further 12 Rent Acts were passed between 1920 and 1946. These not only limited the amounts by which the rents could be increased but also restricted the ability of the freeholder to evict. Whilst these Acts were not the only causes of the eventual drying up of the rental market they were nevertheless a major factor.
The idea of selling flats was pretty much unheard of, but as creating new feudal obligations was out due to the 1925 Act having abolished them and the rental market had dried up, it became an increasingly interesting possibility as a potential means of raising outright capital for landlords.
Although many landlords didn’t want to give up their freeholds, those that did looked at the possibility of whether they could sell their individual freeholds, with buyers covenanting (promising) to take on specific maintenance obligations.
However, the rules governing the enforceability of covenants in freehold law were very different to those governing leasehold covenants, particularly when it came to the use of ‘real covenants’ concerning land use. These ‘real covenants’ were said to either ‘run with the land’ or ‘touch and concern the land’ meaning that a) there had to be something attached to the land that could neither be separated from it or sold without it, or b) something inherent within the covenant itself. For example, covenants to pay rent or carry out repairs would ‘touch and concern’ the land but a covenant by the landlord to pay rates on other land wouldn’t. A covenant by the landlord to renew the lease would ‘touch and concern’ but not a covenant to sell the reversion at a stated price.
Note: A covenant does not ‘touch and concern’ merely because its breach may cause forfeiture of the lease.
Principles Of Real Covenants
In order to decide whether a real covenant ‘ran with the land’ there were two sets of principles – the common law rules which were always applied first and the equitable rules. Early English common land law restricted the use of the real covenant by not allowing the positive burden of freehold covenants between adjoining land owners to ‘run with the land’ in the same way a restrictive covenant did.
What this translated into was that any landlord who owned a flat on a ground floor would be able to bind subsequent buyers (successors in title) to any positive obligations because the covenant did ‘run with the land’. However, flats on the floors above were not on land and therefore didn’t have any specific land to run with. This meant that successive owners of those flats were not bound to abide by any positive obligations such as keeping a structure in repair. Whether these ‘flying freeholds’ were looked after well or badly depended on how each individual owner behaved and it was incredibly difficult to create a covenant to maintain these areas that would be binding through multiple sales of the properties.
Variants Of Real Covenants
To make it more complicated, the real covenant had two variants – the ‘positive’ covenant (meaning to ‘do’ something such as to pay rent or to repair the property) and the ‘restrictive’ covenant (meaning ‘not’ to do something, such as cause a nuisance to neighbors). Both of these covenants had in turn a further two aspects to them – the ‘burden’ to either perform or not to perform by one party and the ‘benefits’ received by the other party as a result, who could then enforce them if they were not complied with.
LANDLORDS LOOK AT EQUITABLE LAW
Not to be thwarted, landlords started to look at equitable law because those courts had devised the equitable servitude to address the perceived unfairness of the real covenant.
Equitable servitude was a promise that not only allowed the ‘benefit‘ of the positive covenant to run with the land but also the ‘restrictive burden’, (a promise to do or not to do something respectively). It didn’t fall within the traditional types of negative easements, and neither did it meet the traditional requirements of covenants that ran with the land. What it did do was to allow the enforcement of restrictions on land with the remedy for non-compliance being an injunction whereby the court ordered the promisor to comply with the promise stated in the equitable servitude. This was usually also preferable to a remedy for damages which a common law real covenant would provide.
Tulk v Moxhay (1832)
Additionally, equity not only bound the original parties to the promise but also that of their successors and could bind future purchasers of the burdened land. This is usually traced back to the decision in the landmark case of Tulk v Moxhay.
The background to this case is that in 1808 the owner of several parcels of land in Leicester Square sold a plot to another party that contained a covenant to keep the Garden Square free of buildings. Therefore not being able to build on the plot of land was the ‘burden’, whilst the ‘benefit’ was that the dominant land would remain as an open space.
The land was sold several times over and was eventually sold to a buyer who felt that he did not have to abide by the covenant as he was not one of the original parties to the contract that created the covenant.
The court however found in favour of the plaintiff and granted an injunction that prevented the new owner from building on the land. Before this case, in common law, the original agreement made by a landlord and tenant at the time they entered into the contract meant that there had to be ‘privity of estate’. So, had the agreement been a contract rather than a covenant, the new owner could have enforced it. So, the court decided that the covenant was enforceable at equity as the plaintiff sought an injunction, not damages. The case stood that whilst privity of estate was not required for the ‘burden’ of a covenant to run at equity, in order for the burden to run it must in itself satisfy certain requirements such as:
- It must ‘touch and concern the land’;
- The original parties must have intended that the burden run;
- The party to be burdened must have had notice of the covenant and;
- The party to be burdened must hold or acquire some interest in the property that the original promissor held.
As a result, landlords saw that they could use the equitable system successfully in blocks of flats by creating equitable leases. This would allow successors in title to be both bound and burdened by the positive covenant, allowing it to be imprinted on the estate under the doctrine of ‘privity of estate’.
The covenant would always be enforceable by the current landlord, current tenant and their successors – in other words binding on third parties. This would allow privity of estate to run parallell to the contract that created the covenant and exist independently from it.
Enforcing the equitable servitude was also made easier because there were no privity requirements – the equitable servitude was enforcable by injuction relief with the power of the injunction exceeding that of the common law courts. In equity, the ‘restrictive’ covenant was also recognised as a property right, and not just a contract between covenantor and covantee.
LONG LEASES AND OWNER-OCCUPIERS ARE CREATED
So, landlords kept their freeholds and introduced equitable leases of 99 or 125 years, (with a long lease being defined as over 21 years). This created a new type of tenant, the ‘owner occupier’ because they actually fell between being a freeholder and being renting tenants. The leases were created by deed, binding the signatory to strong legal obligations, (such as the transfer of land), which would be signed, witnessed and sealed.
The fundamental function of the long lease lease was to allow the freeholder to collect payment from these new owner/occupiers for the maintenance and repair of common areas – areas that they did not directly own. So, the deed was translated into the lease in the form of covenants (promises) i.e.the rights and obligations of both parties, and because there was no legal definition of the common areas, what they actually covered depended on the wording of the lease. The leaseholder entered into a series of ‘express covenants’ that were specifically written into the lease and there were a few which obliged freeholders to carry out certain functions. There were also implied covenants which were not specifically written into the lease but implied by common law.
Whilst there was no fundamental distinction in law between a lease and a tenancy, by paying a large amount up front, the long leaseholder got a) the ‘right of occupation’ over the years, b) the freedom of interference from the landlord, and c) paid a lower rent.
Low Rent Test
Landlords did however have to find a way to differentiate between a true long lease of a flat, in which the leaseholder was considered to be the owner (a lease term over 21 years) and a rent-paying lease where the lessee was really a tenant and not an owner. To that end the low rent test was devised where the long lease typically had a low ground rent, whereas rent paying tenancies had a substantial weekly or monthly rent. The annual rent (excluding the service charge) was not to exceed two thirds of the rateable value of the property.
Note: The length of the lease alone was not always a sufficient indicator of this because some leases of more than 21 years had annual rents equivalent to or approaching the rack-rent, which was a property let at a rent that represented the full value of the land and buildings but where no premium was paid.
WAS THE LONG LEASE SUCCESSFUL?
For these new ‘owner occupiers’? No. For freeholders ‘yes’ because not only did leaseholders continue to pay for the upkeep of the common areas, but their asset (the lease) decreased in value as its term got shorter. Freeholders didn’t have to grant lease extensions and the really unscrupulous landlords would take steps to forfeit the lease (taking it back before its natural end) if they didn’t purchase the reversions (i.e. the freehold) at the price the landlord named. This would be a considerable loss to the leaseholder as they also lost their homes. Freeholders also served long schedules of dilapidations, i.e. repairs that leaseholders were under no obligation to carry out and even if they were, they were likely to be unnecessary. Freeholders would then allege breaches of covenants!
How could they do this? Because most leaseholders were so poor that they would not have known that they already had rights against this sort of practice under s146 and s147 of the Law of Property Act 1925 and that not only were landlords legally required to serve notice specifying the alleged breach but they could require it to be remedied if it was possible. Leaseholders would not know that they could apply to the Court for relief from forfeiture (and freeholders were not about to tell them). They also wouldn’t know that whilst these sections didn’t protect them if an action for damages was threatened (instead of forfeiture) they did have some protection under s18 (1) of the Landlord and Tenant Act 1927 (provisions as to covenants of repair) which meant that the damages recoverable could not exceed the decrease in the reversion value caused by the breach!
Leaseholders remained unprotected from this practice until the introduction of the Property Repairs Act 1938 which allowed them to serve a counter notice to the freeholder when they had been served with stringent schedules of dilapidations (to be served within 28 days of receiving it). This counter-notice would prevent leaseholders from being forced to purchase the reversion (freehold) and allow them to apply for relief from forfeiture or actions for damage, whichever route the freeholder chose to take.
The next stage of the evolution of leasehold was in 1948 when the government of time started looking at the two main areas of long leasehold that were causing major concern. One was that of third-party management that governed a) leaseholders’ expenditure, b) their ability to sell the house or flat, c) it’s market value and ultimately their right to remain in their property when the lease they had paid for expired. The other was that of wasting asset element, which meant the value of the lease decreased as its term got shorter. So their main objective was to consider leasehold enfranchisement to enable the lease terms to be extended.
This Leasehold Committee submitted its report in 1950 and the majority (under the Chairmanship of Jenkins LJ) recommended against any measure of leasehold enfranchisement. A minority though recommended that occupying ground lessees of dwelling houses should have the right of leasehold enfranchisement by compulsory purchase of the freehold and any intermediate reversion.
There was no more leasehold reform until the Leasehold Reform Act 1967 enabled the owner of a house held on a long lease to either purchase the freehold or acquire a 50-year lease extension on a house (flats were not included for some reason).
There was also a considerable number of qualifying criteria to meet, which included the condition of the house in question and its rateable value.
The next main areas of legislation were from 1985 onwards and were specifically concerned with that of leasehold block management, which can be read about here but has it made the tenure any fairer today?
Well, firstly there will always be an imbalance between freehold and leasehold tenure because a) owning freehold property is the nearest you can get to owning property outright in English common law and b) because leasehold tenure is ‘cut’ from freehold.
If you add to this the fact that property is an asset class and long leases were created for developers and freeholders to make money out of them, the rights of freeholders to make a profit from 4 main areas have far outweighed the cornerstone of leaseholder rights, that of ‘reasonableness’.
Any fairer? I leave you to form your own conclusions.