A Long Lease To A Property: What Are You Getting?
When a leasehold property is purchased, and whether it is a house or a flat, it is not the bricks and mortar that are being bought. Why? Because leasehold tenure is an ‘interest’ carved from the dominant estate of freehold. This means buyers of this type of property only buy and own a document called a lease which allows them to live (or rent out) the property for a certain number of years. Each time leases are sold, the number of years left on them (their unexpired term) reduces.
A brand new leasehold flat or house usually means 99 or 125 years, whilst other leases have terms of 999 years (but buyers of these leases need to be aware that they are not ‘virtual freeholds’ despite being marketed as such). Other leases only have as little as 60 years or less. Other leases have unexpired terms of anything in between as they have likely been extended at some point.
So what is the dominant estate of freehold?
Being a freeholder of a block of flats or a house is the closest anyone can get to owning property outright in English common law. Everyone who has a freehold house knows that they are totally responsible for the upkeep of their properties. There is no such thing as a freehold flat (outside of commonhold and there are very few of those). Freeholders of blocks of flats come in a number of guises: individuals, finance companies, ground rent investment companies, mixed use companies (owning both commercial and residential properties in the same development), and in the social housing sector, local authorities. A resident management company can also be a freeholder.
Note: Some resident management companies don’t own the freehold, such as Right to Manage Companies and Resident Associations.
Some blocks of flats have more than one freeholder because whilst a freeholder holds what is known as a superior lease, they can choose to sell what is called an ‘intermediate’ lease to someone else, who is known a head-lessee. This then results in 3 different levels of ownership in the building:
- The freeholder who has the highest level of overall ownership;
- The head leaseholder (also called the head lessee) who is directly responsible to the leaseholder;
- The leaseholder.
It is the freeholders who own what are called the common areas of blocks of flats i.e. the structure, roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings. Inside they own plant rooms, lift motor rooms, and meter cupboards.
Covenants (promises) lie at the heart of all leases and they are what the leaseholder contracts to do and what the freeholder is bound to do. These covenants will either be expressly stated (written into a lease) or implied by law and it is important to note that if applied by law they are equally binding.
Leaseholders covenant to pay for the upkeep of the common areas through the payment of service charges, ground rent and to contribute to the cost of buildings insurance. So through these payments, freeholders covenant to carry out the repair and maintenance of those common areas and place the buildings insurance on behalf of the leaseholders.
Freeholders may not actually carry out repairs and maintenance themselves but instead use the services of a managing agent to comply with the freehold covenants on their behalf.
The role of the managing agent is wide-ranging and depends on the type and size of the property. It is the management agreement which is the contract between the managing agent and the leaseholders and all managing agents make their money from the fees they charge for their services. These are also paid for by the leaseholders and any management fee charged under a long residential lease is subject to s19 of the Landlord and Tenant Act 1985 (limitation of service charges: reasonableness). The RICS Service Charge Residential Management Code 3rd Edition states the basis of fee charging.
Because leases are created by a deed, as a binding contract, the covenants are not only binding on the original parties to the lease but to their successors when the lease is sold.
Leases must also contain the following:
- Adequate rights of support and shelter from the other parts of the building;
- Access rights;
- Rights of entry to other parts of the building (including other flats) to repair and maintain the flat in question;
- Rights to use the services (water, electricity, gas etc) which cross other parts of the building.
There should also be a landlord covenant confirming that all other leases in the development are essentially the same.
Because leases are created by a deed and as a binding contract, the covenants are not only binding on the original parties to the lease but to their successors when the lease is sold.
All this has made purchasing leasehold property far more complicated than that of freehold. There have been efforts to try to make this information easier to get and be more transparent, starting with prescribed lease clauses. There are also 2 forms: LPE1 for use from 1st October 2015 and which has questions asked on behalf of the buyer, and LPE2, the buyers leasehold information summary with the latter being introduced in response to the Competitions and Market’s Authority market study on Residential Property Management Services. This study looked to improve the information given to buyers of leasehold property about the financial obligations they were committing to.
Note: Both LPE1 and LPE2 forms can be downloaded here.
In short long leasehold is a glorified rental!