Leasehold: a feudal system?

For those who work in the residential conveyancing field, the meaning of the terms freehold and leasehold are known all too well. But how many of us know the history surrounding these terms?   

The term ’freeholder’ was used in the Doomsday Book of 1089, and means the permanent and absolute tenure of land or property with freedom to dispose of it at will or, briefly, the full, outright ownership of land.   

Land equated to power in the Middle Ages; powerful families wanted to retain ownership of their land while maximising their earnings from it. The first leasehold estates appeared a few decades after the Doomsday Book later in the Middle Ages. The concept of leasing was established to allow ’villeins’ or ’serfs’ to work a plot of land, for a fixed period, on the basis that they would pay ’in-kind’ by providing food and services to those further up the social order, principally the land owners.

Up until the 1920s, the landowners or freeholders still held a dominant position over their tenants. However, during this period, legislation was introduced to hold down rents and restrict the right of landlords to evict their tenants. Landlords who were facing dwindling profits began selling long leases which typically ranged between 99 and 125 years on their properties as a means of generating more revenue without losing ownership of their land – and this was the beginning of the modern leasehold system that we know today.

From the 1950s onwards, there was a significant increase in the number of flats constructed which caused leasehold ownership to rise. Freehold ownership couldn’t be applied to flats as leasehold was the only way that properties in a multi-occupancy building could be sub -divided and sold, because freehold property law requires a separate land boundary which can be seen on a map.

Leases were originally sold on the basis that eventually, when the lease expired, ownership of the land and property would revert back to the landowner / freeholder. However, there was a public outcry in the 1960s when long-standing elderly tenants, who had little understanding of the legal process, were threatened with eviction when their leases ran out. Naturally, people were wary of purchasing a leasehold property and this prompted further changes to the law to protect tenants from losing their homes.

Even today, leasehold is by far the most common form of flat ownership. However, some older houses are still leasehold, but surprisingly what we have seen over recent years is an increase in the number of new build leasehold houses. Why not have a 999 year lease with a peppercorn rent rather than a freehold? Such a long lease is not going to end during our lifetimes, let alone during the lifetimes of our children and grandchildren. What difference could there be between a freehold and such a long leasehold? The escalating ground rents in such leases is one concern and how this could potentially negatively affect the homeowners’ ability to sell their home. Doubling ground rents every ten years makes the rent unaffordable over a short period of time, hence Taylor Wimpey’s decision to set aside £130m to help negotiations with leaseholders who have such onerous ground rent provisions. The other side of this coin is that the potential growth in the amount of ground rent paid makes the freeholds of such properties more attractive to investors.    

In December 2017, the government issued its consultation response, entitled ’Tackling unfair practices in the leasehold market’. In it, DCLG stated that almost half of all new build registrations were leasehold in 2016 compared with 23 per cent in 1995 and fifteen per cent of all new build houses were sold as leasehold in 2016 compared to seven per cent in 1995. There could be various arguments advanced for why more houses were being sold as leasehold (perhaps to ensure long term investment by a landlord to fund the maintenance of common areas of a development) , but from the media interest in this story and the public involvement and perception, leaseholds are becoming a revenue stream for the freeholder. For an investment company, buying groups of freeholds is a safe long-term investment. Receiving regular payments for ground rents - over leases that number well over a hundred years - means safe, steady incomes, to fund things like pensions. 

The DCLG stated that leasehold should only be used to make multiple ownership more straightforward not as a means of extracting money from over stretched home owners. It asserted that many properties, including houses, were being sold as leasehold merely to create a revenue and income for whoever owns the freehold, with leases containing onerous terms, leaving homeowners stranded in the future, unable to find a buyer. This is not for the benefit of the homeowner but for the freeholder.  

To quote Sajid Javid: ’these practices are practically feudal’.