A Lease and the Parties To It
‘Owning’ a leasehold flat remains a deeply misleading term because whether it is paid for by mortgage or cash, leaseholders 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 purchase is that of freehold, then buyers 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’ and legally known as ‘fee simple in absolute possession’. This 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 legally 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. Ownership takes the form of a lease, a contract which allows the purchaser to live in the property (or sublet it if the lease allows) for a pre-determined number of years. Each time the lease is sold, the unexpired term (how many years are left) reduces.
There used to only be two parties to a lease: the freeholder and the leaseholder but in the 1980’s being a freeholder had lost much of its attraction due to the ever-increasing rights of leaseholders. So developers devised the tri-partite (tri-party) lease for all their new-builds, which added a leasehold resident management company (RMC). This leaseholder-comprised company provided a direct relationship between 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 got a share in the management company (historically RMC’s are companies limited by shares) they also have more of a say in how their building is run. However, 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, making 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 is 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.
These tri-party leases are the most common lease written by developers today and usually start with a term of 99 or 125 years.
There is another type of RMC where the original freeholder keeps the freehold but where the leaseholders have used a process known as ‘right to manage’ where they can remove the managing agent and replace it with one of their own choosing. They gain no further interest in the building.
Other types of freeholders are individuals, companies who have a mixed use building of both residential and commercial units, finance companies, ground rent investment companies and freehold-owning resident management companies sold as ‘share of the freehold’ where one of two mechanisms have been used:
- The freehold is owned jointly by a number (up to four) of the flat owners in their personal names which will be noted on the title deeds;
- Leaseholders have exercised the right under s1 of the Leasehold Reform, Housing and Urban Development Act 1993 to collectively buy the freehold and become the new freeholders.
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 ‘intermediary’ lease of the whole building to a party (company or individual known as a head lessor). This head lessor will then grant ‘under leases’ to the leaseholders of individual flats, becoming their landlord.
It is the freeholder who grants the lease and retains the right to have it returned after it has expired. This right is known as a ‘reversionary interest’.
They also have the right to take the lease back (and therefore the property) before its natural expiration if the leaseholders breach any of their covenants (promises). See below. This process is known as forfeiture.
LEASES WRITTEN BEFORE OR AFTER 2006
There are key differences between leases written before 2006 and those written after. Leases written before 2006 are usually very long in length, written in legalease and requiring reading all the way through to find the relevant parts. The main elements of these leases usually fall into 6 categories:
- Premises Demised by the Lease – This section of the lease identifies precisely the property being leased and should also contain a floor plan of the unit and include ownership of party walls;
- The Rights Granted and Accepted – This section should include all rights and restrictions including rights of access to the building and its common partsn and the right to run services such as gas or electricity through the building into the flats;
- Restrictions relating to Noise or Pets;
- Repairs, Alterations and Decorations – This section identifies whether it is the landlord or the leaseholder that is responsible for carrying out repairs, alterations and decorations;
- Insurance – This section defines which party is responsible for insuring the building and describes the required extend of the insurance.
- 5a and 5b) Ground Rent and Service Charge – This information is usually located in two separate sections of the lease and both are paid by the leaseholder.
Leases written after 2006 have what are known as prescribed lease clauses, which not only summarise the details of the lease but contain all the information that the Land Registry needs to allow it to faster and more efficiently complete registration.
The details must be supplied correctly, in the format set out by the Land Registry and attached to the front of the lease where they can easily be found.
The lease binds all the parties to it through the use of the covenants, (promises) that it contains. In other words, what the freeholder is bound to do and what the leaseholder contracts 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.
Freeholders of blocks of flats will usually covenant to the following:
- The provision of quiet enjoyment (this is implied anyway);
- The placing of buildings insurance;
- The carrying out of the repairs and maintainance of the common areas
- The provision of services such as heating, lighting, cleaning, caretaker, scheme manager or porter services;
- The sending out of service charge demands;
- Managing the accounting cycle and presenting the year-end accounts.
Leaseholders covenant to do the following;
- Pay service charges (in order for the freehold to abide by their covenants);
- Pay ground rent;
- Pay buildings insurance;
- Keep the flat in good repair.
Leaseholders also covenant not do certain things such as to:
- Not sublet the property without freeholder consent;
- Not to alter the property without freeholder consent
- Not to change the use of the flat;
- Not to cause a nuisance to neighbours.
The decades of attempts to balance the rights of leaseholders with those of freeholders have led to long leasehold tenure becoming more complicated than ever, not just in purchasing but in ownership as many leases are actually defective. leasehold 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. Pressure groups like the Leasehold Knowledge Partnership and the National Leasehold Campaign have been campaigning for leasehold tenure to be abolished in favour of Commonhold, which although it has been on the statute books since 2002 has seen pitiful take-up as it would remove freeholders and leaseholders altogether!
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!