Why can’t flats be freehold? They can. But the outcome would be disastrous.

In this post I explain why leasehold (or commonhold) is necessary for flats, but not houses, and why leasehold is a good option provided it is properly regulated (it isn’t).

Freehold

A purchaser of a domestic long lease pays over a large capital sum in return for what the layperson often sees as ownership. One reason the leasehold mechanism is (and indeed should be) used instead of freehold is because of a major flaw in English law: Freeholders cannot owe positive obligations to other freeholders. The Law Commission have proposed legislation to solve this problem (LC327), but unless and until it becomes law the facility will not exist.

Obligations

So what? It is because of one thing about flats that is not seen with houses. Houses are not horizontally divided. They are vertically divided from the other buildings that may be attached to them. The owner of a house owns the land from the soil up to the roof (and a little bit further in both directions). The ‘owner’ of a flat will not. Consider the ramifications of this. The house-owner must maintain the house. That owner has responsibility and indeed access to all of the land – the foundations, the walls, the roof. There is no need for there to be any mechanism to enforce the performance of another party’s obligations (there is the matter of the neighbouring houses supporting our owner’s, but that is settled and a complication too far for this post).

Consider the simplest system of flats: a lower flat and an upper flat. Both owners will want the foundations and the roof maintained. Taking a rough division of responsibility, the owner of the lower flat will want the owner of the upper flat to fix the roof, and the owner of the upper flat will want the owner of the lower flat to fix the foundations. If these flats are both freehold, and the other party refuses to do his or her duty, there is no way for the innocent party to enforce that obligation. A court would simply dismiss the claim as disclosing no cause of action. Disaster will result. The flats would be unsaleable and unmortgageable as a consequence. At worst, neglect could destroy the other party’s property. This is clearly a defect in the law.

Leasehold

Consequently (at least until the introduction of commonhold), all flats were made leasehold. In an era of mass short-term renting, it made conceptual sense for the landlord to have the freehold of the block, and to let the units in return for a rent on short-term leases. In the era of mass-ownership, people want permanent tenure of their unit and are prepared to pay a large capital sum for it. The leasehold still makes conceptual sense because the block will need central management. While in the simple two-flat arrangement described above this probably isn’t necessary, when the numbers go up right away it can be seen that central control is necessary. Maintenance changes are then divided between the different units. Recovering the maintenance charges through ground rent makes little practical and conceptual sense since the rent is fixed but maintenance costs may go up or down. In practice a service charge is imposed and a facility to recover maintenance charges exists. Regulation exists under statutes such as the Landlord and Tenant Act 1985.

It will be apparent from this analysis that there is no justification for long leasehold houses, except for the rather unpalatable one that the landlord may extract service charges, rents and eventually take the land back. The simplicity of this situation perhaps explains why legislation to allow long leaseholders of dwelling houses to purchase the freehold reversions came relatively early, in the Leasehold Reform Act 1967. The leaseholder still has to pay to compensate the landlord for the loss of his or her property rights, and the price can be high, especially if the term left on the lease is getting low.

Two-Unit Buildings

For flats, there are two options. For the simple two-unit arrangement, the division of responsibility is sufficiently simple such that no centralised management is required. An ingenious workaround, called the ‘Tyneside flat scheme’ is common in the Tyneside area where there are a lot of such buildings (I am not aware of the scheme being used for their London equivalent, the Warner house). The scheme makes the freeholder of one buliding the leaseholder of the other, and as such the ‘owner’ has the enjoyment of the leased unit rather than the freehold. This means each ‘owner’ can enforce the other’s obligations. The leases are then drafted without ground rents or service charges and with a very long term indeed (preferably thousands of years; there is a technical rule that says a lease cannot be of unlimited duration). The scheme is not without its complications (it is a workaround, after all), but is well established and local conveyancers understand it (the uninitiated conveyancer will be in for quite a shock). If the Law Commission’s proposals become law, the scheme will become obsolete and the scheme can be translated such that each owner is the freeholder of his or her own units and the relevant obligations are imposed over the other unit with the new facility of ‘land obligations’.

Small Blocks

This really will not work for multi-unit blocks because the obligations cannot be divided so easily. Perhaps the most attractive arrangement for small blocks (such big old converted houses) is for the freeholder to be a management company comprised of the leaseholders of the units. Each leaseholder holds one directorship, owns one share and consequently has one vote on maintenance and other decisions. The ‘owners’ run the building themselves and have control over their own (collective) destiny. This is leasehold enfranchisement.

There are broadly two issues with this. First, human nature being what it is, no-one may want the job or the other unit-owners may not cooperate. There are tales aplenty of one leaseholder doing the work of all the others, who sit back and enjoy the benefits without taking on any of the burden. The second is how to create this arrangement. Most converted houses started out with a separate freeholder (or perhaps the freeholder did not lease one of the units, which he or she treated as his or hers). There is much legislation, the details of which are beyond the scope of this post. It is enough to say that there are intermediate steps (such as a Right to Manage company), but ultimately it is possible, if the conditions are right, for the leaseholders to force the freeholder to sell the freehold to them (Leasehold Reform, Housing and Urban Development Act 1993). Again, they have to pay. Not all may be willing or able to do so. If, however, this is done, the leases can then be extended to as long as the lessees please, and, assuming equal rights between them, for nothing. It would be pointless for them to charge themselves. Any other onerous terms such as high ground rents can be modified for the same reason.

This arrangement could be applied to the two-unit block, but has an obvious disadvantage. There are two votes, and if the two parties cannot agree, there will be deadlock. It makes sense to divide the obligations and leave it at that.

Larger Blocks

If managing a block of five is like herding cats, imaging managing a block of 50. Such informal arrangements just would not work. While a dedicated leaseholder might voluntarily take on a relatively small job such as that, a big block will require paid management. Agreement is likely to be shorter supply as will be a more informal outlook. Such a block is inevitably professional in outlook and operation. Imagine the complexity of maintaining a big block constructed more like a commercial building with a complex roof, fire escapes, lifts, sprinklers and suchlike. Imagine the impossibility of getting sufficient unit-owners to agree to the kind of enfranchisement – at least half of the leaseholds must qualify and agree.

‘Professional’, of course, does not mean doing the right thing. Consequently, such arrangements need regulation. There are requirements for consultation and limits on fees: again, see the Landlord and Tenant Act 1985. But they have their limits. They certainly do not extend to restraints on ground rents, as many people have found to their peril.

If the unit-owner of a large block or small block without a friendly arrangement wishes to improve his or her lease, there is a statutory facility to extend the lease by 90 years, once only: Leasehold Reform Housing and Urban Development Act 1993. Again, the leaseholder has to pay, and it is often a large sum.

Commonhold

Commonhold was held out as the solution to the problem of using the leasehold device as the ownership structure for flats. The Commonhold and Leasehold Reform Act 2002 introduced a new type of tenure, commonhold, to go alongside freehold and leasehold.

Conceptually, it is not as different to the long lease structure as one might think. A management company of sorts is still required (the commonhold association), no doubt for the same reasons adumbrated above. Not putting too fine a point on it, commonhold is leasehold with added regulation – no ground rent and unlimited term. That sounds good. So why didn’t it take off?

There are some fairly sophisticated reasons why commonhold is a little tricky to operate (see here). For me, the most convincing one, especially given the recent ground rent scandal, is the lack of compulsion. Greedy developers (and those they sold the freehold reversions to) did not like the absence of a ground rent, nor that the unit did not eventually revert to them. The other reason, I suspect, is the conservatism of the developers and especially the laywers. Why learn a new system when the old one will do? That conveyancing is usually done by persons other than practising qualified solicitors must only exacerbate this factor.

None of this would matter if the leasehold of flats were adequately regulated. It isn’t. ‘Long’ leases of 99 years that are not truly long and that vicious ground rent escalator is possible. They should be regulated out of existence. Mandatory commonhold is one possibility. Once mandatory, the lawyers will have to read the books and learn how it works, which doesn’t sound like too onerous a problem. Then as it grows in number, people won’t feel so nervous about purchasing an unknown.

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