2002 saw radical reform of leasehold legislation, with the introduction of the Commonhold and Leasehold Reform Act 2002, giving leaseholders the right to manage their block of flats without having to prove the freeholder at fault, and a new way of buying property was born, that of Commonhold, which sadly never took off.
Commonhold was the first new type of legal estate to be introduced in English law since 1925 and was widely hailed as the new and fair way to own a flat. It would give flat owners real ownership of their properties, rather than just a long lease. They would own the indefinite freehold tenure of part of a multi-occupancy building (their flat) with shared ownership of and responsibility for common areas and services.
It sounds ideal, yet only a handful of Commonholds have been created since the Act came into force 16 years ago, while hundreds of thousands of old-style long leases have been created. The “feudal” system of leasehold persists. What is its hold over us?
While developers may not be keen on change because they can profit from the sale of freeholds on leasehold blocks of flats, another possible answer is that no one wanted to go first. Better the devil you know.
Leasehold law can be complex and has been honed over the centuries, which may explain why leases still use such arcane language and can be such complicated documents. Besides, leasehold can work well for all parties, especially with new safeguards in place such as leaseholders’ rights to buy the freehold which, in turn, gives them the right to choose who they employ to manage their building, or manage it themselves.
How did leasehold become so entrenched?
Leasehold dates back to at least the 11th Century. Medieval ‘villeins’ or ‘surfs’ worked a plot of land, for a fixed period of time, while paying ‘in-kind’ by providing food and services to their feudal landlords.It wasn’t until the post-War 1920s that the balance of power started to shift, heralding the emergence of the long leasehold system that still dominates today. A long lease is defined as one of 21 years or more.
Rental landlords were faced with new laws holding down rents and restricting their rights to evict tenants. Many of them, faced with dwindling profits, started to sell longer leases, typically 99 or 125 years, to bring in more money. This was the beginning of the modern leasehold system that we know today. A fascinating and colourful summary can be read HERE.There was a boom in building flats from the 1950s onwards, on the basis that eventually, when the lease expired, ownership of the land and property would revert straight back to the landowner/freeholder. However, there was a public outcry in the 1960s when we began to see long-standing elderly tenants threatened with eviction, prompting further changes in the law.
It is still possible for a leaseholder to be evicted, owning nothing as the property reverts back to the freeholder at the end of a lease. These days, however, the leaseholder would have to be very ill-informed to be unaware of legislation introduced between 1967 and 2002 to create a more level playing field for freeholders and leaseholders. Key among these is the right to extend their leases for an additional 90 years.
Covenants and the all-important lease
Given that most larger blocks of flats are almost certainly going to be owned on a lease, then understanding your lease is important – yet it’s not always easy to make sense of it.
Covenants in leases define rights and responsibilities: they say what the freeholder must and must not do; and they say what the leaseholder must and must not do. They range from paying ground rent, insurance and service charges to building specific rules. In theory, they are the framework for everyone getting along well and living in a well-maintain building. But, oh, they can be confusing!
Try these:
“To do all such works as under any legislation are directed or required to be done on or in respect of the Property (whether by landlord tenant or occupier) not to do or omit to be done any act matter or thing in respect of the Property which shall contravene any such legislation and to keep the Corporation and the Management Company indemnified against all claims demands and liabilities in respect thereof”
“The Lessee paying the rent hereby reserved and performing and observing the covenants on his part herein contained shall peaceably hold and enjoy the premises for the term hereby created without any interruption by the Lessor or any person lawfully claiming under or in trust for it”
We are not going to try and unpick them here, but the key take-away message is that all parties have to stick to the covenants, so do make sure your conveyancing solicitor explains them to you in plain English.
It’s important to understand the charges you are taking on. It can be equally important to know, before you sign that, say, your favoured laminate floors are banned, you cannot park in the grounds, or that you cannot take your beloved pet to live in the building.
The evolution of the law on covenants has been a long and complex process. For instance, before long leasehold was introduced, property-related covenants ran with the land in law. So, flats on the floors above ground level would not be bound by obligations such as keeping a structure in repair.
So, freeholder landlords introduced equitable leases of 99 or 125 years and created a new type of tenant, the ‘owner occupier’. Leases are created by deed, and the deed is translated into the lease in the form of covenants (promises).
While there is no fundamental distinction in law between a lease and a tenancy, the long leaseholder enjoys the ‘right of occupation’ over many years, freedom of interference from the landlord and a lower rent (indeed, ground rent used often to be at peppercorn levels as low as £1).
“An Englishman’s home is his castle”, we say. That surely applies equally to Wales and Scotland. So, we are probably never going to think that the leaseholder has been the overall winner in the evolution of leasehold. Yet millions of us continue to live well and happily in flats, and successive laws are altering the balance with encouragement from lobbying groups that highlight apparent injustices.
The opinions and views expressed in the above articles are those of the author only and are for guidance purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage readers to rely upon more than one source before making a decision based on the information.
FP583-2018
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.