Today’s Long Lease
Historically the creation of the long lease came about to provide income for freeholders when certain feudal obligations were abolished with the introduction of the Law of Property Act 1925. The long lease created a new kind of tenancy, that of the owner-occupier which falls between being a freeholder and a renting tenant. What never changed then as of now is that when you become a leaseholder you NEVER own the bricks and mortar outright regardless of whether you pay off a mortgage or buy outright with cash. This is because you only own an ‘interest’ in the property in the form of a lease which is cut from the dominant estate of freehold. This lease acts as a contract which allows you to live in the property as for a pre-determined amount of years or sublet it.
Lease Terms and Provisions
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.
Leases should be the same throughout the block and contain the following provisions:
- Adequate rights of support and shelter from the other parts of the building;
- Rights of access;
- Right of entry to other parts of the building (including other flats) for the repair and upkeep of the property;
- Rights to use the services (water, electricity, gas etc) which cross other parts of the building;
- Contain the same covenants.
These are promises that the parties make to each other to do certain things (positive) and not to do certain things (restrictive) and they govern the relationship between freeholder and leaseholder. 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.
The main covenant freeholders are required to meet is the repair and upkeep of the common areas (which include risk assessments). These are all the areas that are not owned by individual leaseholders: the structure, the 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 things such as the plant rooms, lift motor rooms, and meter cupboards.
The main covenants leaseholders enter into are to pay service charges, (so that the freeholder can meet its repairing obligations), ground rent (which is not exactly what it says on the tin but is a financial asset for the freeholder) and buildings insurance.
Examples of the type of restrictive covenants leaseholders enter into are not to;
- Play loud music;
- Erect satellite dishes;
- Keep pets;
- Install laminate flooring;
- Make alterations to the property;
- Change the use of the property;
- Sublet (without freeholder consent);
- Hang washing in public view.
Up to the 1980’s there used to be only two parties to a lease: the leaseholder and the freeholder, but by then being a freeholder had lost much of its attraction due to the ever-increasing rights of leaseholders. So, in yet another game of ‘cat and mouse’, freeholders created the tri-partite (tri-party) lease consisting of the freeholder, the leaseholder and the resident management company which was itself comprised of leaseholders. This type of lease is the most commonly used by developers of new-builds today and the the main purpose of the company is to manage and maintain the common areas of the building on behalf of the freeholder (in other words, any areas that do not belong to each leaseholder). The idea is to give leaseholders the feeling that they are more in charge of how their buildings are managed. However, the developers/freeholders carry out minimal duties such as collecting ground rent (their investment income) and placing buildings insurance (where they make money on commissions). They leave the RMC to deal with the more complex and time-consuming elements such as service charge collection (under which the demands have to comply with statutory requirements), nuisance leaseholders, those who have breached their lease covenants and taking legal action to rectify those breaches.
Leaseholders have continued to get more rights in attempts by successive Governments to make freehold and leasehold more equal. These rights (in no particular date order) include collective enfranchisement (the right of qualifying leaseholders to group together to buy the freehold and become the new freeholders), the right to manage (a ‘no-fault’ process for leaseholders to remove the managing agent and replace them with one of their own choosing, commonhold (a new way of purchasing property which removes freeholders and leases), the right to a managing audit, and compulsory acquisition of the freehold (when the freeholder fails in its obligations).
Leasehold is still the only alternative option to purchasing freehold, with the latter being the nearest you can get to owning property outright in English common law. There are so many vested interests in leasehold tenure that it is highly unlikely that it will be abolished, rather the powers that be are looking to ‘improve’ some of the existing leaseholder rights. Nevertheless, because the lease was created by freeholders for their benefit, they are drawn by developers/freeholders to continue providing them ongoing income long after the premium is paid: those areas are lease extensions, buildings insurance, ground rent and granting various consents, such as subletting.