Freeholders Look at Equitable Law
Freeholders 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 injunction 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.
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 deed was translated into the lease in the form of covenants (promises) i.e.the rights and obligations of both parties, but fundamentally allowing the freeholder to collect payment for the repairs and maintenance of the common areas (areas the leaseholds did not specifically own. 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.
So what did long leaseholders get?
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 the following:
- The ‘right of occupation’ over the years;
- The freedom of interference from the landlord;
- They paid a lower rent.
Landlords did however have to find a way to differentiate between a true long lease of a flat, where 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 which was created when a freehold piece of land was sold on a long lease or leases. Regular payments were made to the freeholder (or a superior leaseholder), as dictated by the lease.
These payments would in turn provide an income for the freeholder.
Rent paying tenancies on the other hand had a large weekly or monthly rent.
The annual rent (excluding the service charge) was not to exceed two-thirds of the rateable value of the property but there were still some leases of more than 21 years which had annual rents equal to (or approaching) the rack-rent, where no up-front premium was paid but the rent included not only the full value of the property, but also the land and improvements should it have an immediate open-market rental review.
But who were the winners and losers of this new type of tenancy: freeholders or the long leaseholders?
WINNERS AND LOSERS
It probably came as no surprise that the new tenure turned out to be far more beneficial to the freeholders than the leaseholders who saw their asset (the lease) decrease in value as its term got shorter. Freeholders didn’t have to grant lease extensions and the really unscrupulous landlords would forfeit the lease (which meant they took the lease and also the property) if they didn’t purchase the freehold (reversion) at the price the landlord named. 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?
Most leaseholders were so poor that they would not have known that they already had rights 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 and freeholders were not about to tell them. They also wouldn’t know that even though these sections didn’t protect them if an action for damages was threatened instead, they did still 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!
It was the introduction of the Property Repairs Act 1938 which allowed leaseholders 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 freehold and allow them to apply for relief from forfeiture or actions for damage, whichever route the freeholder chose to take.
In 1948 official recommendations were made about the rights of leaseholders to acquire their freeholds but it was not until the Leasehold Reform Act 1967 that leaseholders of houses were granted the right to buy their freehold, a process termed enfranchisement.
The next main area of legislation came with the introduction of the Landlord and Tenant Act 1985 which was the platform for leaseholder rights according to the terms of their leases, especially those of service charges. The Landlord and Tenant Act 1987 built on this platform and was then followed by the Leasehold Reform, Housing and Urban Development Act 1993, which finally gave leaseholders of flats the right to group together to collectively purchase the freehold.
Then came the Housing Act 1996 which wasn’t a new Act as it only made amendments to the 1993 Act such as:
- Making it easier or leaseholders to challenge unreasonable service charges by taking their freeholders to the LVT (which is now the First Tier Tribunal). If they are ruled as fair then they are payable, if they stay in dispute then under s81 of the Act (restriction of termination of tenancy for failure to pay service charges), until it has been established that the charges are reasonable (by agreement, admission of the leaseholder or by the decision of a court or tribunal), the freeholder is prevented from forfeiting the lease. However, under s82 of the Act (notice under s146 of the Law of Property Act 1925: restrictions on and relief against forfeiture of leases and underleases) the landlord would be indicating that whilst he has elected to forfeit the lease, such a notice has to contain certain information drawing to the attention of the tenant the effect and provisions of s81.
- The Right of First Refusal (introduced in the Landlord and Tenant Act 1985) is strengthened by making it a summary offence to sell the freehold to a third-party without having first offered it to the flat owners and the rights of leaseholders to collectively enfranchise (buy the freehold) are further extended.
- Leaseholders are able to appoint a surveyor to get landlords to give access to buildings, accounts and other documents, in turn enforceable by court order. This is a direct follow-on from the right of leaseholders to get a management audit in the 1993 Act.
The most radical reform of leasehold legislation came with the introduction of the Commonhold and Leasehold Reform Act 2002, giving leaseholders the right to manage their block without having to prove the freeholder at fault, and a new way of buying property, that of Commonhold which sadly never took off.