A Lease, What It Is And The Parties To It
‘Owning’ a leasehold flat is such a misleading term because whether it is paid for by mortgage or cash, you never get ownership of the bricks and mortar or the land the building stands on. The same applies to leasehold houses. On the other hand, if the tenure is that of freehold, then you do own everything! The first thing to understand is the fundamental difference between the two.
In English common law, freehold tenure is characterised as ‘not being derived from, or conditional on, the estate of another’. It is known as ‘fee simple in absolute possession’ and it is the closest anyone can get to owning property outright.
Long leasehold tenure on the other hand is characterised as ‘an estate carved out of freehold’ and known as ‘terms of years absolute’. This means that it is a lesser tenure to that of freehold as it is an ‘interest’ cut from the dominant estate.
So, freeholders are the dominant party and as such they make the rules through the covenants (promises) contained within all leases. In other words, what the leaseholder contracts to do and what the freeholder is bound to do. There are two types of covenants: positive, which is a promise to do something, and restrictive which is a promise not to do something.
How many covenants (and what they are) depend on how the lease is drawn and they are either going to be 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.
But who are these freeholders?
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 developers devised a new lease, that of the the tri-partite (tri-party) lease consisting of the freeholder, the leaseholder and a resident management company, a company made up of leaseholders.
It is the most common form of lease written by developers today and usually starts with a term of 99 or 125 years.
Note: Leases in older buildings can be very short, some can be of a duration of 999 years and other leases fall somewhere between the two.
The tri-party lease provides a direct relationship between the leaseholders and management from the ‘build phase’ with the RMC managing and maintaining the common areas of the building on behalf of the freeholder. Whilst leaseholders have a share in the management company (historically RMC’s are companies limited by shares) and have more of a say in how their building is run, the developer keeps the freehold.
If the RMC is party to the original lease then it’s obligations will be expressly set out according to the lease terms, which makes a contract between itself and the freeholder unnecessary. This is because its contractual rights lay directly with the leaseholders. On the other hand, if the RMC os directly responsible for performing the landlord’s covenants (promises) but another party carries out the maintenance duties then that other party is merely be the agent of the landlord. If the tri-partite lease says that the freeholder must also appoint a managing agent, then that will also have to be complied with.
Freeholders can also take many other forms; they can be individuals, finance companies, mixed use companies (owning both commercial and residential properties in the same development) and ground rent investors. Another type of freeholder is where the resident management company has been established to enable leaseholders to collectively buy the freehold from their current freeholder, becoming the new freeholder themselves.
As if that weren’t complicated enough, a block of flats can also have more than one freeholder if the freeholder who owns the ‘superior’ lease sells what is known as an ‘intermediate’ lease to another party. That party becomes the ‘head lessor’ who can then grant ‘under leases’ to the leaseholders of each flat, making the head lessor their landlord.
This then results in 3 different levels of ownership in the building:
- The freeholder who has the highest level of overall ownership;
- The head lessor (also called the head lessee) who is directly responsible to the leaseholders;
- The leaseholder who has purchased a lease which acts as a contract between the parties whilst only granting the right to live in the property (or sublet it) for a pre-determined length of time. Each time the lease is sold, the unexpired term (how many years are left) reduces.
Note: Freeholders are also known as landlords in common law but this is not to be confused by a landlord subletting a property.
Whatever type of freeholder a block of flats has they will usually covenant to the following:
- The provision of quiet enjoyment (this is implied anyway);
- The placing of buildings insurance;
- Carry out the repairs and maintainance of the common areas which include the structure, roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings as well as anything inside the building such as plant rooms, lift motor rooms, and meter cupboards. These are all areas that are owned by the freeholder;
- The provision of services such as heating, lighting, cleaning, caretaker, scheme manager or porter services;
- The sending out of service charge demands;
- Manage the accounting cycle and present the year-end accounts.
However, freeholders don’t actually pay for any of the above. Instead they recover their outlay through the mechanism of the lease which not only requires leaseholders to covenant to pay service charges, buildings insurance and ground rent but contains the mechanism of controlling these charges:
Over the decades, leaseholders have been granted a large number of rights in attempts by successive Governments to make leasehold tenure more equal to that of freehold. From the Leasehold Reform Act 1967 which gave leaseholders of houses the chance to buy their freeholds, and extend their leases, to the 5 main Acts of Parliament specifically concerned with the management of blocks of flats, which can be found here.
The introduction of the tri-party lease (see above) was supposed to give leaseholders more say in how their developments are managed but the reality is somewhat different because the developers keep the freehold and carry out minimal duties such as collecting the ground rent (their investment income) and placing buildings insurance (where they make money on commissions). The rest of the more complex and time-consuming elements they offload onto the RMC such as collecting service charges, (under statutory requirements) and lease breaches which are many and varied!
Today the calls for leasehold to be abolished in favour of Commonhold continue. The efforts of a recently established campaign group, the National Leaseholder Campaign have led to massive interest from both the press and Government and the longer established Leasehold Knowledge Partnership has long been highlighting the massive problems cause by the tenure. At the heart of the current issues are freeholds being sold on without the knowledge of the leaseholders and onerous ground rents, ultimately impacting on whether lenders will lend or not.
Personally I can’t see the abolition of leasehold because of the number of invested interests in the tenure. In the meantime, the campaigns continue and leaseholders still struggle!