About Leasehold Law
The Law of the Land
The UK concept of a lease is embedded in the world of land law. Whilst several of our European counterparts have a land law system that permits the ownership in perpetuity (for ever) of air space, the guiding principle in the UK is that the Freeholder owns the physical ground upon which property is built.
All units on the land pay rent for the ground upon which they sit (ground rent). To develop land the Freeholder would usually either grant a building lease perhaps to a development company with rights for them to create sub-leases once individual units are created, or he may undertake the development himself and directly grant the under leases.
What is a Lease?
In its simplest terms a lease demises or grants the ownership of the accommodation (often called the demise) to a named party. This grant is for a term of years (i.e. it is finite) and the lease gradually expires throughout its term until there are no more years of the originally granted term left. At the end of the term the rights to the land revert back to the Freeholder.
In theory the lease can be granted for any term of years as agreed between the parties. However, what is generally known as a 'long leasehold flat' is a lease granted initially for more than 21 years. Until relatively recently leases initially granted for 99 years were customary, albeit the modern lease now tends to be 125 years, and on higher value flats leases of 999 years are not uncommon.
Whilst at the end of the lease the ownership of the flat reverts to the Freeholder (usually called the Freeholder Version), the Landlord & Tenant Act 1954 protects the Leaseholders' rights and grants them security of tenure i.e. they are permitted to stay in the property even after their lease has ended but on the basis of a tenancy agreement at a market rent.
During the lease, the Lessee (person holding the lease) pays ground rent, in recognition of the fact that the Freeholder retains the ownership of the land on which the building containing flats stands. Ground rent normally rises during the lease. Typical intervals are on a 25 or 33 yearly rent review, fixed and stated in the lease, although there are some more unusual methods of rent review such as derivatives of development or capital values as at the date of review.
Since 1967 the right to force the Freeholder to sell his interest to lessees has been provided for in various forms. Generally legislation has been moving in favour of the Lessee with various groups voicing the plight of leaseholders with unscrupulous landlords and urging the government to legislate further in favour of lessees.
Some recent changes include:
- raising the Rateable Value limits of the properties that can enfranchise,
- reducing the length of time one must have owned the flat before rights can be claimed,
- making it non-compulsory to actually live in the flat, and
- not precluding companies from participating.
Relevant legislation includes:
- The Commonhold (Leasehold Reform) Act 2002
- The Leasehold Enfranchisement Act 1993
- The 1996 amendment
- The Leasehold Reform Act 1974
- The Freehold Purchase Act 1967.
Generally the law sets out the criteria to be followed for a valuation leaving it up to the valuer to establish market evidence to:
- support the yields they choose (a yield is the investment multiplier applied to the income to derive the capital value)
- derive the marriage value, (difference between the value of a lease unextended and the value of an extended lease or virtual freehold)
- assess the value of any accompanying property/development rights
- establish future loss of income to the landlord such as insurance commissions