Issue 174: 2018 10 18: Summer’s Lease

18 October 2018

Summer’s Lease

Adjust with care.

By J R Thomas


Best left to the freeholder to sort out

One side effect of Brexit is that the amount of legislation the government has been propelling through Parliament is much reduced.  This may or may not be a good thing, depending on the effect on whatever part of your life the government might decide to intervene in.  Enthusiastic eaters of chocolate bars (smaller) and, allegedly, pizzas (also to shrink) may think the bureaucratic hand is still too active.  And printers of legal text books may think it is not nearly active enough.

But one area Mrs May’s administration still has time for, is improving the law regarding leasehold interests in land.  If you think you detect a sardonic edge to our use of the word “improving” your ear does not fail you.  Leasehold is one of those things that many owners of leasehold property do not begin to understand.  Which is odd.  People would not drive off in a new car without a preliminary read of the handbook, or put the Sunday joint in the new oven without looking first at the operating instructions; but they seem quite prepared to spend vast amounts of money with only the barest grasp of what a lease is, and without considering, even in the most desultory way, the fine details.

Then when the neighbours upstairs turn out to be rock fans who prefer their music violent, loud, and at 2am; or next door acquire a noisy smelly terrier; or the roof blows off; or the ground rent trebles; then there is a sudden learning process as to what the lease means.  In the above instances it means that neighbours can usually force each other to keep quiet at night, often forbids the keeping of dogs, that the cost of that gale-force wind will fall on everybody and not just those immediately under the roof, and no negotiation is possible.  Shock horror.  Why where they not told?   They were of course; they just did not bother to read the lease and could not be troubled to hire a lawyer to read it for them.  Cue:  explosion of anger about leases and greedy rapacious uncaring profiteering (we can go on if you wish) landlords.

At which point arrives a politician who can smell lots of votes in advancing the grumbling of leaseholders, and very few in defending landlords.  In this case the seizer of opportunities is our current Tory administration, originally in the slightly unlikely figure of the former Housing and Communities Secretary of State, Sajid Javid.  Unlikely because Mr Javid is an intelligent former businessman of strong free market instincts who, had he not been in that particular job, would probably have had little sympathy for people who sign things they have not read and then grumble afterwards.  But he is a politician, and more to the immediate point, he was operating in the aftermath of the Grenfell Tower fire disaster.  After that terrible event, many dwellers in modern apartment buildings investigated what was on the outside of their buildings and some found the same flammable panels as at Grenfell.  They then assumed that their freeholders would be responsible for replacing them.  But under most leases that is not so; repairs to buildings, even those resulting from defective or inappropriate works, fall to the tenants, although sometimes insurable.  (On newer buildings such repairs might, only might, fall to the quality insurer of the original builder, such as NHBC).

All this of course is going to be painful, and for a young family mortgaged to the hilt in a flat now unsaleable, with no cash to do the works, it is a tragedy with no easy solution.  Surely it should be the responsibility of the freeholder?  No, say the courts in several cases decided since Grenfell, the leases are clear enough and were freely signed and the problem is with the leaseholders.  That is why there should be adequately resourced sinking funds to meet unexpected bills, but of course, few can afford a couple of thousand a year for such funds.

A rather different set of cries arose about a year ago.  Several of the major housebuilding firms had taken to selling new built houses (not flats) on long leases rather than by freehold.  In the lease the ground rent, the annual rent payable by the lease owner to the freeholder, starts at a nominal amount, maybe £100 per year.  Then every ten years it quietly doubles.  In year 70 the rent is thus £12,800 a year.  If we have 1970’s type inflation that might still be nominal, but then again it might not.  But in any case, sold by the builder to an investor at an equated yield of say 3% that is a nice capital sum for the builder – and the price of the house was probably the same, freehold or leasehold.  Multiply by a thousand houses a year and the financial attraction is obvious.  And the leaseholder shouldn’t complain – there it all is in the lease, needing only a pencil to work out the effect of compound pricing.

But no nervous government can let it rest there.  There are votes to be had.  Something must be done.  Last July the government announced that the sale of houses on leases would be banned.  Banned.  No matter what the parties agree, and however appropriate it is, it will be banned.  You can argue that there is no case for ground rents on free standing houses, certainly for ground rents that multiply in that ingenious way.  But there can be a strong case for leases, even for such houses.  Many complex things that apply to blocks of flats, or houses divided into apartments, can equally apply to close neighbours – and modern housing can be very close indeed.   Loud music, dogs, access for works, mutual support (of the structures, not the people down the street) can be dealt with by complex agreements between the parties – but are a lot easier dealt with by all enjoying the same rights and duties under a lease.  Plus a freeholder to compel the leaseholders to behave.  Indeed, the freeholder can be the leaseholders, owning their own reversions but using the tried and trusted structures of leasehold law to get things done.

Conservative governments have form interfering with lease law.  In 1993 the Major administration passed legislation which gave long leasehold tenants the right in some circumstances to buy their freeholds or extend their leases, giving them effectively perpetual leases, at prices determined in tribunals.  Landlords, led by the Duke of Westminster, the richest freeholder of all, but also a generous and thoughtful man of considered principles, strongly objected to this interference with freely made contracts and to a Conservative government effectively enacting retrospective legislation, but to no avail.

But twenty five years has passed, Mr Corbyn must be outmanoeuvred, and the Law Commission is looking at all this again.  It says it will recommend the government simplify leasehold law, and strengthen the rights of tenants, including rights to acquire and to lengthen.  Landlords know what that means, and do not expect to benefit.  The Commission is still sitting but it is rumoured that it may also produce recommendations to replace leasehold title with some form of commonhold title, replacing the carefully enacted legislative framework of how multi-occupied residential buildings are run and managed and the balance of rights between leaseholders and freeholders.  That could be as damaging to the rights of one as the other.  Time to think very carefully, dear Commissioners, not to rush towards throwing out babies with bathwater – even if the baths have to stay leasehold.


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