Long Leases Today and the Parties To Them
‘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
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). This process is known as forfeiture.
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.
Whilst this is an overview of leases there is an enormous amount of information and questions that need to be answered before a leasehold property changes hands. These can be read here.
In 1948 the Government of the time was concerned about bad management of blocks of flats. Because builders didn’t want to be landlords as they had made their money from the sale of long leases, so up sprang unscrupulous property management companies to exploit leaseholders by imposing exorbitant and unfair management charges. Even if the lease made no provision for financial gain, it occurred anyway.
In 2000, 100,000 very angry leaseholders and their organisations were so fed up with bad management that they campaigned for a national statutory regulator to oversee landlords and freehold owners. They also wanted a strict licensing scheme for managing agents.
The rationale behind those demands was that without their implementation, there could be no meaningful legislative reform.
Were they right?
Fast forward to 2011 and despite the introduction of a number of rights such as Right to Manage, collective enfranchisement, lease extensions to flats, and recourse to the LVT (now the FTT) etc, unscrupulous freeholders and property management companies remain as problematic as ever. Leaseholders can only react to transgressions once they have been committed and these rights involve time, energy, no financial reward and can even tie them up for years in court!
There have been many calls for leasehold tenure to be abolished and replaced by Commonhold which was introduced as the third way of purchasing property in 2002 but has seen very little take-up. Even if it were to become mandatory for new builds (which is also being called for), it would not negate any of the problems continuing to be experienced by those who have already purchased leasehold properties.
As of 2019, managing agents are not licensed and the long leasehold sector still allows the unscrupulous to commit fraud, deception, flout the law and yet be allowed in many instances to continue operating unchecked, hiding behind other companies in order to deny any wrongdoings. In no other sector would people on the receiving end of such transgressions be expected to jump through so many legal hoops (sometimes over a period of years) to get any redress. Nor would any other sector expect consumers to fight to get every piece of information the law says they are entitled to have.
There has been some good news in terms that new-build leasehold houses are banned and the National Leasehold Campaign group have persuaded Rightmove to promise that they will encourage estate agents to give more information about leasehold sales. There is however still a very long way to go with the Law Commissions Report on Leasehold Enfranhisement being no clearer now than at the start of their consultation 18 months ago and so is immensely complicated and confusing. There is also the issue of the human rights of landlords many, of whom have been allowed to flourish by a deeply flawed leasehold system that not only fails to balance the cornerston of the rights of leaeholders, that of ‘reasonableness’ against the right of freeholders to make a profit.