What is a Lease?
After the Second World War, the only viable way to build was that of flats as it was more economical to build upward then outward through building houses. The Law of Property Act 1925 had abolished most of the legal estates in place at that time and kept only two: freehold and leasehold. The long lease as we know it was created by freeholders when they realised that if they wanted to keep their freeholds but sell their flats at some point in the future to raise outright capital (the rental market had dried up) they had to look at the possibiity of selling individual freeholds. In turn, the buyers would covenant (promise) to take on specific maintenance obligations.
There was however a big problem in that there were were distinct differences in the rules governing the enforceability of covenants (promises) in freehold law to those governing the covenants in leasehold law, 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:
- There had to be something attached to the land that could not be separated from it or sold without it, or;
- There had to be 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.
The real covenant also 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 variants 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.
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 then the equitable rules but early Engish 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 meant was that any landlord who owned a flat on a ground floor would be able to bind later 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 so didn’t have any specific land to run with so 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 keep up the maintenance on these areas that would be binding through multiple sales of the properties.
Freeholdes then turned to looking 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).
The Result? Equitable Leases
Landlords used the equitable system successfully in blocks of flats by creating equitable leases of 99 or 125 years, (with a long lease being defined as over 21 years). 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 and the deeds were translated into lease in the form of covenants, i.e. the rights and obligations of both freeholders and leaseholders. Few applied to freeholders so fundamentally they collected payment for the repairs and maintenance of the common areas (areas the leaseholds did not specifically own through service charges. The leaseholder entered into a series of ‘express covenants’ that were specifically written into the lease and there were also implied covenants which were not specifically written into the lease but implied by common law.
This new long lease created a new type of tenant, the ‘owner occupier’ because they actually fell between being a freeholder and being renting tenants. Successors in title would be both bound and burdened by the positive covenant which allowed it to be imprinted on the estate under the doctrine of ‘privity of estate’ which would a) run parallell to the contract that created the covenant and b) exist independently from it.
The positive covenant would always be enforceable by the current landlord, current tenant and their successors (in other words binding on third parties) by injunction relief, as it’s powers exceeded 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.
A LEASE TODAY
A lease is what is owned when a leasehold property (flat or house) is bought and sold, with a long lease being defined as over 21 years old when it was first written. Leasehold purchasing is far more complicated to that of freehold due to the amount of information that surrounds the tenure. Whilst some elements remain the same for both types of properties, such as checking the property title, and various searches, it is leasehold purchasing where efforts have been made to make information easier to get and 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.
Leasehold tenure is actually carved as an ‘interest’ from the dominant estate of freehold and the lease is simply a contract which the leaseholder enters into with the freeholder, and it is the freeholder who actually owns the bricks and mortar, not the leaseholder.
The lease allows the leaseholder to live in the property (or sublet it) for a predetermined number of years. A brand new leasehold flat or house usually starts with a term of 99 or 125 years and each time the lease is sold, the unexpired term (the number of years remaining) reduces. This is why leases vary greatly in duration with some having so few unexpired years left on them that they are difficult to market due to the criteria demanded by lenders. Others are of a duration of 999 years where the freehold has been purchased via collective enfranchisement, and other leases fall somewhere between the two where personal lease extensions have been granted.
At the heart of the lease lies the covenants (promises) and they are what the leaseholder contracts to do and what the freeholder landlord 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.
If the intent is that the flat should be when sublet, the lease will usually have some subletting covenants contained within it and the most important one will be ‘get permission from the freeholder’!