The difference between being a freeholder and a leaseholder is the same today as it’s always been: being a freeholder means you are as close to owning property outright in English common law as possible but as a leaseholder you only own what is termed an ‘interest’ in the property, which is ‘cut’ from the dominant freehold estate. This ‘interest’ takes the form of a document (a lease) which acts as a contract allowing those who purchase it the right to live in the property (or sublet it) for a pre-determined number of years.
Owners of a long lease also don’t acquire the whole estate because the freeholder gets the property returned to them when the lease expires. This is known as the reversion.
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. Other leases in older buildings 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.
However, because the long leaseholder didn’t acquire the whole estate (this is because the freeholder retained an interest by way of the reversion), there remained major differences between the two with many problems still being experienced by the owner occupier.
A long lease brings obligations for both freeholders and leaseholders in the form of the covenants (promises) they make to each other. In other words, what the leaseholder has contracted to do and what the freeholder is bound to do. There have always been 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 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 freeholder will usually covenant to:
- Quiet enjoyment (this is implied anyway);
- Provide buildings insurance;
- Repair and maintain 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;
- Provide services such as heating, lighting in common areas, cleaning, grounds maintenance etc: caretaker, scheme manager or porter services;
- Keep the service charge accounts.
The freeholder recovers the outlay for abiding by these covenants through the mechanisms of the lease by which the leaseholders covenant to pay service charges, buildings insurance and ground rent which is not exactly what it says on the tin but is instead an investment mechanism for the freeholder.
The tenure has been the subject of campaigns for change for many years with MP Barry Gardiner chaining himself to railings back in December 1998 to emphasise the restraints on leaseholders. This time around it seems that Government may actually be listening. This is due in part to the efforts of a recently established campaign group, the National Leaseholder Campaign and the longer established Leasehold Knowledge Partnership. Particularly highlighted at the moment is the issue of onerous ground rents, with freeholds being sold onto other parties without the knowledge of the leaseholders and impacting on whether lenders will lend or not.
There have also 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 experiended by those who have already purchased leasehold properties.
I suppose the real question at the moment is will any amount of forms make leasehold conveyancing and ownership any easier? Leases aren’t the same from development to development and even today, they can be badly written and therefore defective. And what about the knowledge of conveyancing solicitors who are more than likely not very well versed in leasehold? Buyers of new build properties are being kept in the dark on key issues such having to pay for road maintenance and estate services in addition to paying their Council tax and many of them find their ground rents sold to parties without their knowledge. As a result their ground rents have raised to such a degree as to make their properties unsellable!
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.
Leasehold reform (including unfair terms) has however been announced as being included in the Law Commission’s 13th Programme of Legal Reform where it recognises that there is an extensive list of highly significant problems with residential leasehold law. The Law Commission will also review why Commonhold has failed and consider what reforms are necessary to the law to enable it to operate successfully.
So will Commonhold really take off and provide the third option for owning property, or will it eventually replace both leasehold and freehold? Only time will tell but considering the vested interests in the two tenures, I doubt it.