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A New English (Leasehold) Reformation?

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20th March 2015

Last time this column discussed the changes introduced to leasehold tenure in Scotland. Nicola Muir examined the long-term package of reforms designed to bring about the demise of the feudal and leasehold system north of the border. To recap, Scotland is about to implement the changes introduced by the Long Leases (Scotland) Act 2012, which follows the imposition in 1974 of a 20 year limit on the term of any new residential lease and the abolition of the feudal system of property ownership in 2004. In 2000 a limit of 175 years was imposed on the term of commercial leases. The final stage of reforms under the 2012 Act will convert qualifying leases into ownership.

The question posed at the end of that article was whether England & Wales could follow suit and convert residential long-leases into freehold title? Has leasehold had its day or is the system in need of radical reform?

The case for reform

In England & Wales the main reason leasehold title exists is because of the difficulty in making positive covenants run with the land. There is a growing body of opinion that the law of landlord and tenant is too complicated. Indeed, since 1925 there have been more than 10 Acts of Parliament concerning the regulation of long leases, all of which are still in force. Some argue that the time has come to either sweep away the regime altogether, or radically reform and consolidate.

Much of the criticism from proponents of reform of residential long leases is levied at landlords and their perceived exploitation of tenants, whether through exorbitant service charges, administration charges on assignments or sub-letting, high grounds rents, or the aggressive use of forfeiture for minor breaches or non-payment. So, when a market premium has been paid for a lease, why must there be ground rents and the need to pay a new premium for an extension? Is this not the same problem in a different guise that faced freehold tenures burdened by rentcharges until their abolition?

Difficulties with abolition

If we were to follow Scotland’s example there would be a number of practical problems. Firstly, it would be impossible to implement a system of enforced enfranchisement in one fell swoop because of the need to adequately compensate the landlord for his loss of income and capital. Anything less would almost certainly fall foul of Article 1 of Protocol 1 of the European Convention on Human Rights. Even in Scotland a blanket abolition of residential long leases has not been possible; lessees must pay their landlord compensation if they convert their title and can opt out if they are unable or unwilling to do so. What we can see from the Scottish programme of reform is that total abolition cannot be done quickly; it is a process that can take decades. In England & Wales the sheer volume of leasehold flats in existence would make wholesale conversion extremely difficult, if not impossible, especially if billions of pounds of property were to be valued and converted all at once. It may even prove impossible for the collective body of lessees in the country to raise that much capital from the markets. No doubt the First Tier Tribunal would also collapse under the weight of cases fighting over the premium to be paid.

Secondly, there is already a mechanism for the compulsory purchase of the freehold of residential flats in the Leasehold Reform Housing and Urban Development Act 1993. This merely replaces the landlord with the nominee of the participating tenants but leaves the existing title structure in place, giving the tenants ultimate control over the management and ownership of their building. Even if legislation for the conversion of leaseholds to freeholds were to be introduced, whether by the amendment of the 1993 Act or otherwise, it is difficult to see how it would take place without the participation of all, or almost all, of the lessees in a block. The alternative would be the conversion of all the leases to freeholds on enfranchisement, with the non-participating tenants continuing to pay an annual sum by way of an old style rentcharge. However, this is unsatisfactory because it simply resurrects the rentcharges problem raised above.

The third problem arises in relation to the maintenance and services of the building of freehold flats. As has already been identified, leasehold title allows positive freehold covenants to run with the land more easily than with freehold title. Without this the provision of services and maintenance in blocks of flats would be extremely difficult. In freehold estates this difficulty is addressed by the use of estate rentcharges but the system is more complex and does not have the same level of protection for the paying party as the service charge regime for long leaseholds. An added difficulty lies in who would be responsible for the enforcement of covenants between the owners of the flats. At present the parties can look to the landlord, RTM Company, or other management company and so one presumes a similar management structure would be required when converting leasehold flats into freeholds, begging the question, ‘why bother?’

There are a plethora of problems that would arise if leases were converted into freehold title for residential blocks and those are just three of them. It is not an exercise that can be carried out in a short space of time. As was said in this column last time, the system of tenures in Scotland was vastly different from that in England & Wales and reform was largely focussed on ridding itself of a feudal structure that England abolished with the Tenures Abolition Act 1660. All this leads one to the conclusion that it would be a monumental waste of legislative time and money to abolish leasehold and replace it with a system worthy of all that effort. Parliament should instead look at reforming the current system

Reform

A ban on the creation of terms between 21 and 999 years, or the abolition of terms altogether should be the starting point for reform. Only then could the slow process of conversion of titles begin. This could also be achieved by amending the 1993 Act so that lease extensions take effect with a term of 999 years.

The abolition of terms altogether was mooted by the Supreme Court in Mexfield Housing Co-op v Berisford [2012] 1 AC 955 at paragraphs 33-34, where the Court said that there was “no apparent justification for holding that an agreement for a term of uncertain duration cannot give rise to a tenancy.” In the case of residential long leases it is difficult to see the justification for anything other than a perpetual term (which is effectively what a 999 year term amounts to), when one considers that the lessee will have acquired the flat at the date of the lease for a period usually longer than their lifetime and at a significant premium. If the continued involvement of a landlord is necessary in order that positive covenants may run with the land, it is surely right that the involvement should not extend to the expectation of a premium for a lease extension after the lease term falls below 80 years, or for a continuing ground rent.

So let us not waste time re-inventing the wheel. It is surely better to hone and improve the existing wheel so that it is more efficient and dynamic.

Michael Walsh is also a Visiting Lecturer in the Law of Property at King’s College London and the co-editor of Megarry’s Manual of the Law of Real Property.

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