Leasehold Today

When people purchase flats, whether as an owner-occupier or as a buy to let landlord, they more often than not believe that they have actually purchased a property and can do what they like with it. They haven't. What they have actually purchased is a long lease, a document that grants them an 'interest' that allows them to live in the property for a pre-determined number of years. This means that the freeholder, who grants this 'interest' to the leaseholder owns his own form of title known as a reversion because he has a continual interest in that he expects to get the property back at a future date.
Note: The reversion may be valuable in its own right and may be income-generating so it can be assigned as such.

For 'new build' properties the leasehold 'interest' is usually granted for 99 or 125 years. On older buildings it will be for however many years are remaining (the unexpired term). Because they are leases over 3 years duration they are created and transferred by deed. The deed is translated into the lease in the form of covenants (promises) entered into by the freeholder and the leaseholder. Covenants are the rights and obligations of both parties, i.e what the freeholder is bound to do and what the leaseholder contracts to do. They have two sides, the positive (to do something) and the negative (not to do something) and the resulting benefit and burden. These covenants pass down to each successive purchaser of the lease.

Covenants are broken down into the following:

1. An express covenant is one that is specifically written;
2. An absolute covenant is a complete prohibition against the doing of whatever is not allowed to be done. There are two types of lease that usually contain such a covenant meaning that the leaseholder is banned from assigning, subletting or parting with possessions (and only subject to its relaxation by the landlord). It is enforceable as it stands and applies to short-term leases for a period of a few months to a few years and a period tenancy which is an estate which exists for some period of time determined by the payment of rent, i.e. from year to year, month to month, or week to week, continuing until the landlord or tenant give notice. 
3. A qualified covenant states that the act is not to be done without the consent of the landlord;
4. A fully qualified covenant states that the landlords consent is not to be unreasonably withheld;
5. The usual covenants is where an agreement for a lease only specifies essential conditions such as the payment of rent, and either mentions no other terms or provides that the lease contains 'the usual covenants'. In such a lease the parties are entitled to insert other covenants that are specifically written in similar properties and character in the same area.

The LANDLORD will usually (expressly) covenant to:

1) Collect Service Charges

The fundamental purpose of the lease is to allow the collection of monies for the maintenance, repair and redecoration of the common areas (i.e. anything not owned by the individual leaseholders) via the collection of service charges.
The freeholder will also covenant to account for these monies.
Service charges are also used to create reserve and sinking funds.

2) Insure the Building

Buildings insurance is a legal requirement and is a condition of taking out a mortgage so flat cannot be sold without there being a block policy buildings insurance in place for the whole building. Buildings insurance covers the structure and the common parts. It can also cover gates, fences, drives and swimming pools as well as fixtures within the property although the latter must be carefully checked as it can be a somewhat grey area.

3) Collect Ground Rent

Ground rent is exactly what it says: rent paid to the freeholder for the land the building stands on. However, because there are a number of ways of setting ground rent, it can vary enormously, from a nominal rent to hundreds of pounds a year.

4) Ensure Peaceful Occupation

The freeholder also covenants to ensure the peaceful occupation of the property during the lease term (usually written on the lease as 'quiet enjoyment and if not expressly written, implied anyway meaning that even if the lease does not expressly state it, it is nevertheless implied by law. However, in a well-drafted lease the express covenants will override the implied covenants.

The LEASEHOLDER (expressly) covenants to:

1) Pay ground rent, service charges, buildings insurance and rates, taxes and similiar charges imposed by central and local government and pay all costs relating to notices served under s146 LPA 1925 covering the area of forfeiture (all under common law).

2) Repair and decorate internally (with covenants ranging from  'to keep in good tenantable repair', 'to keep in substantial' repair or 'to keep in perfect repair.'

3) Permit the freeholder (or his agents) access for repairs or inspection.

4) Observe regulations (usually referred to by the schedule within the lease).

5) Adhere to the 'use and occupation' of the flat, such as running a business, keeping pets etc.

6) Provide the freeholder with notices of sale and mortgages.

7) Adhere to the subletting covenants.

The leaseholder will also covenant NOT to :

8) Carry out alterations without the freeholder's permission.

9) Do anything that renders building insurance void or voidable.

10) Cause a nuisance to other neighbours.

ENFORCING THE COVENANTS

Any wording of a covenant has to be clear and leave no room for doubt. If the meaning cannot be established then it cannot be enforced. Any party that wants to enforce a covenant has to establish that it is contained within the lease and that its interpretation will stand up to examination by a court or a tribunal.

Leases Written Before 1996

Covenants in leases wrtten before 1996 are enforced through two main sets of enforcement rules: those of privity of contract (the relationship between the two parties that made the original contract) and privity of estate.

However, the introduction of the Landlord and Tenant (Covenants) Act 1996 not only classified leasehold covenants as being either 'landlord' covenants or 'leasehold' covenants but abolished the privity of contract on leases created after January 1st 1996 as well as all the old requirements of privity of estate.

What that means in effect is that as each subseqent leaseholder sells (assigns) the property, the privity of estate moves to the buyer because the assignee (seller) no longer owns it. Privity of estate now exists between the new leaseholder and the current freeholder. Parties to the relationship are liable for all breaches of covenants that "touch and concern" the land only during the period they hold the estate. They will not be liable for breaches committed before the lease was granted or assigned, nor for breaches after assignnment. So liability under privity of estate is limited to the period he or she holds the estate.
 
The applicable sections of the Act for leases written after 1st January 1996 are s3 (transmission of benefit and burden) through to s16 (tenant guaranteeing performance of covenants by the assignee), s21 (forfeiture or disclaimer limited to part only of demised premises) with s17 (restriction on liability of former tenant or his guarantor for rent or service charges etc meaning that landlords are required to serve notice on former tenants of both new and old leases of their intention to seek to recover 'fixed charges' such as rent within six months of the date on which the fixed charge falls due and a precondition to recovering such sums from former tenants or guarantors) through to s20 (overriding leases: supplementary provision) again applying to both old and new tenancies.

Note: By virtue of s28(1) (interpretation) "tenancy" is defined as including an "agreement for a tenancy" and the Act applies to equitable tenancies as well as legal tenancies, and avoiding the complexities of the old law in this area.