How is it possible to buy something and yet still not own it? Leasehold estate is one of the earliest inventions in land law, under which land or property is sold on a long lease of many decades or even centuries, but where the ultimate ownership, or freehold, does not change hands, and the property is returned to the freeholder if the lease expires. But its continued existence in Britain has proved increasingly controversial, as freeholders extract considerable sums from leaseholders during the process of lease renewal.
Exorbitant lease renewal fees and spiralling ground rents – as demonstrated in the recent controversy about leasehold houses – have left leaseholders in England and Wales feeling increasingly exploited. Now, a long-running case due before the Court of Appeal could curb the power of freeholders, some of which include centuries-old aristocratic estates.
Remnants of a feudal Britain
Land law in Britain owes much to the feudal system that developed following the Norman Conquest. The ability to grant inferior interests in land and to take income from these – like rents – remains an important feature of the law. By the 16th century, the law of leases in England and Wales had evolved into a system once described by lawyer and legal historian A W B Simpson as a “very confused body of law”. The most comprehensive attempt to tackle this in the modern era was the Law of Property Acts 1925, which limited the legal estate to either freehold or leasehold. While these remnants of the feudal system appear unfair, it has proved almost impossible to separate our land law from its history.
In Scotland, the feudal structure existed but with other features, including a feuduty to be paid by land owners to their feudal superior, similar to the ground rent payable by leaseholders in England and Wales. Often set long ago, they can be insignificant sums today after decades of inflation, but are still legally enforceable. The feudal structure of land-holding was predominant in Scotland until steps were taken to remove it: no feuduty could be created after 1974, no residential lease for more than 20 years could be created, and the feudal structure was finally abolished in Scotland in 2004. Further laws since have converted long leases over 175 years into straightforward ownership.
There has been no such sweeping reform in England and Wales, however. Feudal remnants such as manorial rights still remain, largely unnoticed by industrial and urban development.
The Victorian age of building
The popularity of the modern leasehold estate owes much to Victorian property developers. During the late 19th and early 20th centuries, it was common for a builder to develop land under an agreement with the landowner, who would sell the land to the builder on a long lease, typically 99 years. There was little in the way of planning controls and regulations at that time, and land owners were free to do almost anything they liked with their property. Sellers who wished to keep some control over their land could only rely on private legal covenants drawn up in the sale agreement, which might for example prevent a landowner from using the land for business, or from extending property by an extra storey.
A series of legal decisions in English courts established that freehold covenants could only stipulate what was not allowed, while leasehold covenants allowed the freeholder to enforce positive covenants – for example, requiring the property to be maintained. This became an obvious advantage of leasehold – the grandeur of London’s Georgian squares owes much to the burden of upkeep placed on leaseholders, for example – and as English towns grew, leasehold was commonly used.
But the opposite happened in Scots law, where a new type of property rights known as “real burdens” provided the means to impose positive and negative obligations on land ownership. As this removed the major benefit of leasehold, it never had the same appeal or use in Scotland.
Change on the horizon?
Leaseholders gained the right to remain in their homes at a regulated rent under the Landlord and Tenant Act 1954 and to renew their lease or buy the freehold under the Leasehold Reform Act 1967. But the right to buy or extend the leasehold is not free, and leaseholders may find themselves facing significant charges, fees and ground rents. In some cases, long leases may even be forfeit if fees and ground rent are not paid: one leaseholder faced the forfeiture of his £800,000 flat for non-payment of service charges.
Demands for reform have been growing, with a battle fought on two fronts. The first of these is new build developments with exploitative leasehold terms. The second is legal relief from onerous terms for existing leaseholders, and this is what the pending case at the Court of Appeal, Sloane Stanley Estate v Mundy, is concerned with – specifically how the lease is valued and therefore how much the leaseholder must pay to extend it. Mundy will hope that the traditional valuation method will be set aside as overly generous to the freeholder, in exchange for a new method of valuation that significantly lowers costs paid by leaseholders.
Many would argue that the most effective way to address the injustices of leasehold is to abolish it altogether, as in Scotland. In practice, the heavy reliance on leasehold estates in England and Wales – and the vested interests that this has created over centuries – makes this very difficult. One fact undisputed by either side is that any reform of the law would mean considerable loss of income for freeholders: whether this is a benefit or a drawback depends on which side of the line you stand.