Freeholders vs long-lease homeowners:

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Will UK reform fundamentally solve existing problems or create new ones?

What is a freehold and long-lease you may ask?

In the UK, unlike most other countries, owing an interest in real estate can come two forms. First the right to own the land (a freeholder) who may lease it to another person on a long lease which can be anything up to 999 years (the second form of ownership termed a “leasehold”) This lease is granted in exchange for what’s called a peppercorn rent. An annual rent that is not intended to be onerous and a simple form of compensation for the landlord.

This regime is an archaic remnant of feudal law in medieval times where land equated to power. Back in those days poor folk needed land owned by the rich folk to survive. Instead of giving the land to the poor the rich folk devised a scheme to retain ownership while giving rights to the land in exchange for a “peppercorn” or termed, in modern times, annual ground rent. The reason, at least initially, why the peppercorn or ground rent was next to nothing was, simply, because the poor labourers in medieval times had nothing to give in return, essentially therefore, being a quick-fix solution to a more complex problem of inequality.

Surprisingly, this practice is still enshrined in law today which results in many property owners in the UK being unable to own their properties outright despite having to be entirely responsible for the maintenance and risk associated with owning property.

Landlords, despite being well within their rights, have taken advantage of this situation for a number of years and in recent times some ground rents have been set at onerous and unaffordable levels (some increasing exponentially in cases to sums of £8,000 per year) forcing our administration to consider changing the law.

Given often the freeholder also retains the compensated obligation to maintain the freehold on behalf of all the leaseholders (entirely paid for by them), the unfair situation is compounded by opportunistic managing agents working for the freeholder by overcharging for services, which they have no reason to mitigate the cost of.

What makes matters worse is that in many cases because the agents simply mark-up the costs with their fees, the higher the maintenance cost, the greater the fee for the agent, putting the leaseholder entirely at the mercy of the freeholder and managing agent. This, simply explained, means often the leaseholder is bearing the cost of the agent as well as all maintenance of property that is, at least, party owned by a freeholder who owes no responsibilities. If there ever was a one-sided unfair contract this is it.

In order to address the unfairness, the UK has historically offered a mechanism (termed collective enfranchisement) whereby leaseholders can force the freeholder to sell the freehold back to them. However, to fairly value this purchase, given the lack of prescription in this area by the legislature, remains wholly uncertain. 

Landowners and landlords have argued, fairly reasonably, that simply reducing or fixing the compensation might infringe their humans rights to fair compensation. However, the unfairness of the enfranchisement process is sustained given the leaseholders must often pay, in full, the legal and administrative costs incurred by the freeholders in arguing their case, as well as the adjudicated value of the freehold. The UK Law Commission, appreciating the unfairness on both sides, has recently published a report on proposed changes to the enfranchisement process. 

The changes, quite simply put, propose that the debatable variables in the enfranchisement process, which are costly to argue, and which are based on the financial present-value calculation of the landlord’s future rights to the land and annual ground rent, are set at specific levels. Landlord’s argue this creates an arbitrary mechanism but this argument, the Commission submits, holds no value.

The Commission hopes that doing this will, at the very least, speed up the process and give certainty to the cost of purchase, essentially doing away with the legal and expert costs which invariably are paid for by the poor leaseholders.

As we all know, history lends itself towards repetition and,  establishing what may seem to be a fair solution, may controversially result in a quick-fix to the more complex problem of inequality, perpetuating the dilemma, rather than addressing the core fault in the design of the system. Perhaps it’s time for the freeholders to share in the costs, at least partially, of maintaining an asset in which they have a long term interest.

John Stocker is a property lawyer and specialist construction, engineering and major projects lawyer with 18 years of experience advising in the field and who speaks regularly at conferences and seminars and has published several articles. John is admitted to practice in England and Wales (2003) and in the High Court of South Africa (2002).

The information in this article is not to be taken as legal advice and is for information purposes only. Detailed legal advice should be taken on all matters before relying on any statements made herein.

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