Winners and Losers
It probably came as no surprise that the new tenure turned out to be far more beneficial to the freeholders than the leaseholders who saw their asset (the lease) decrease in value as its term got shorter. Freeholders didn’t have to grant lease extensions and the really unscrupulous landlords would forfeit the lease (which meant they took the lease and the property) if they didn’t purchase the freehold (reversion) at the price the landlord named. Freeholders also served long schedules of dilapidations, i.e. repairs that leaseholders were under no obligation to carry out and even if they were, they were likely to be unnecessary. Freeholders would then allege breaches of covenants!
How could they do this?
Most leaseholders were so poor that they would not have known that they already had rights under s146 and s147 of the Law of Property Act 1925 and that not only were landlords legally required to serve notice specifying the alleged breach but they could require it to be remedied if it was possible. Leaseholders would not know that they could apply to the Court for relief and freeholders were not about to tell them. They also wouldn’t know that even though these sections didn’t protect them if an action for damages was threatened instead, they did still have some protection under s18 (1) of the Landlord and Tenant Act 1927 (provisions as to covenants of repair) which meant that the damages recoverable could not exceed the decrease in the reversion value caused by the breach!
It was the introduction of the Property Repairs Act 1938 which allowed leaseholders to serve a counter notice to the freeholder when they had been served with stringent schedules of dilapidations (to be served within 28 days of receiving it). This counter-notice would prevent leaseholders from being forced to purchase the freehold and allow them to apply for relief from forfeiture or actions for damage, whichever route the freeholder chose to take.
In 1948 official recommendations were made about the rights of leaseholders to acquire their freeholds but nothing happened for 6 years when the first legislative reform to benefit leaseholders came with Landlord and Tenant Act 1954. Although it was introduced primarily for commercial properties it allowed leaseholders to remain in their property as a protected tenant on expiry of the lease instead of being evicted.
It was not until the Leasehold Reform Act 1967 that partial solutions to the landlord/tenant imbalance were provided by giving leaseholders of houses the right to buy their freehold, or extend their leases, both processes known as enfranchisement. Anyone wishing to purchase their house had to meet a number of required qualifications with the main one being the low rent test, devised because it was necessary to find a way to differentiate between two things:
- A true long lease (for a terms of over 21 years when written) in which the leaseholder was considered to be the owner (a lease term over 21 years) with a typically low ground rent;
- A rent-paying lease where the lessee is really a tenant and not an owner with substantial weekly or monthly rent.
The annual rent (excluding the service charge) was not to exceeds two thirds of the rateable value of the property but sometimes the length of the lease alone was not always a sufficient indicator. This was because some leases of more than 21 years had annual rents equivalent to or approaching the rack-rent, which was a property let at a rent agreed by the owner of the property and the person renting it rather then being fixed or controlled by law. It represented the full value of the land and buildings but where no premium was paid.
This right to purchase did not however, extend to flats because it had been reasoned that as there were different considerations of equity that applied, it meant that there would be many practical difficulties in providing for the enfranchisement of flats. However, there was never any satisfactory explanation as to what those considerations of equity actually were that Government were relating to and flat owners would have to wait 23 years before this particular right was granted to them.
The Act also gave landlords of leasehold houses the right to apply to keep their management powers for the general benefit of the area in the form of estate management schemes.
Then came decades of leasehold reform, intended to further balance the rights of leaseholders with those of freeholders. The first one, that of the Landlord and Tenant Act 1985 provides the framework for the rights of leaseholders under the terms of their leases especially those of service charges. The Landlord and Tenand Act 1987 builds on this with the Leasehold Reform Housing and Urban Development Act 1993 providing the right of leaseholders to collectively purchase their blocks of flats. It is also the second primary statute governing leasehold reform. Then came the Housing Act 1996 which wasn’t actually a new Act, but instead made amendments to the 1993 Act as it was considered by many to be poorly drafted. This was followed by the Commonhold and Leasehold Reform Act which was the most radical reform of leasehold legislation, giving leaseholders the Right to Manage (replacing the managing agent with one of their own choosing) and introducing Commonhold as a third way of buying property which failed pretty miserably. The primary legislation under the 2002 Act was only amended by the Housing and Regeneration Act 2008.
The year is now 2019 so where is leasehold now?
Leasehold tenure has been seriously under the spotlight for the last couple of years, resulting in a consensus that legislative reforms are needed to bring the tenure into the 21st century. The main driver in this has been the contentious issue of onerous ground rents which pressure groups like the Leasehold Knowledge Partnership and the National Leasehold Campaign have been trying to address. Of course there are two sides to the reform coin, ranging from calls for the end of ground rent and ultimately abolishing leasehold altogether, to the commercial freeholders who believe that removing ground rent is going to have a detrimental effect on both leaseholders and investors.
It is difficult to say at this point how it is all going to pan out but an overview of freeholders and leaseholders today can be read here.