Historically the creation of the long lease came about to provide income for freeholders when the rental market dried up and when certain feudal obligations were abolished with the introduction of the Law of Property Act 1925.
This new long lease created the ‘owner-occupier’, a tenancy which falls between that of a freeholder and a renting tenant. The lease is an ‘interest’ carved out of the dominant estate of freehold, so owners of these leases are NOT owners of the bricks and mortar of their flats or houses. Instead the lease acts as a contract which allows the leaseholder to live in the property for a pre-determined amount of years.
Parties to a lease are bound by what are known as covenants (promises) that they make to each other to do certain things (positive), and not to do certain things (restrictive). For example, freeholders covenant to repair and maintain the common areas, and place buildings insurance. Leaseholders covenant to pay service charges to enable the freeholders to adhere to their own covenants but leaseholders also covenant not to keep pets, or make alterations to the property for example. How many covenants and what they are depend on how the lease is drawn. Covenants are either going to expressly written into the lease or implied and its important to be aware that the latter have just as much force in law as the former.
A lease of a new build property usually starts with a term of 99 or 125 years and each time the lease is sold, the unexpired term (how many years are left) reduces. Others can be very short, with some having so few left that they are difficult to market due to the criteria demanded by lenders. Others are of a duration of 999 years, and other leases fall somewhere between the two.
When drawing up new leases, developers create tangible and transferable investment value for freeholders by allowing ground rent to increase incrementally over time with greatly varying amounts.
The common features of modern residential lease clauses are:
- Lease Term: 125 to 999 years with the most commonly found lease length being 125 years;
- Initial Rent: £100 to £250 per annum in increments;
- Rent Review Frequency: 5 to 33 year intervals;
- Rent Review Type: Fixed uplift (the most common) a regular rise according to the Retail Price Index which allows the rent to track inflation, the House Price Index, or the percentage capital value of the property.
LEASEHOLDERS AS FREEHOLDERS
There is a major right granted to leaseholders that does allow them to become freeholders. The right is that of collective enfranchisement (the right of qualifying leaseholders to group together to buy the freehold and become the new freeholders). All leaseholders who take part in the process will own a share of nominal value in the company along with their leases. Subsequently those flats are marketed ‘share of the freehold’. The Articles of Association need to be drafted carefully so that when an individual sells their flat they also have to sell their share in the company to the new purchaser.
Another key right is that of compulsory acquisition of the freehold (when the freeholder fails in its obligations or is absent).