A Lease: What Is It?

When people purchase flats they always believe that they have actually purchased a property. They haven't. What they have actually purchased is the lease, a document that grants them an 'interest' that allows them to live in the property for a pre-determined number of years. For new leases this is usually 99 or 125 years and on older leases it is however many years are remaining (the unexpired term).

The lease states the rights and obligations of both parties, i.e what the freeholder is bound to do and what the leaseholder contracts to do. These are known as covenants (promises).

The landlord will usually covenant to:

1. Maintain, repair and redecorate the main structure and common parts of the building through the collection of service charges, which is fundamentally what the lease is created to do. There's no legal definition of 'common areas' but in England it will usually mean all areas that the individual leaseholders do not own, i.e. the structure, roof, foundations, load bearing walls, guttering, landings, watertanks, stairs, walkways, gardens etc.
2. Insure the building;
3. Collect and account for service charges to pay for the provision of services such as heating, lighting in common areas, cleaning, grounds maintenance etc;
4. Enforce covenants against other leaseholders;
5. Ensure the peaceful occupation of the property during the lease term (usually written on the lease as 'quiet enjoyment and if not written, implied anyway).

The leaseholder will usually covenant to:

1. Pay ground rent;
2. Pay service charges which the freeholder or managing agents will collect from leaseholders for the maintenance and repair of common areas. Service charges will also be used to create reserve and sinking funds. Reserve funds are created for day to day maintenane and repairs. Sinking funds are created to cover major expenditure as a building ages.
3. Pay buildings insurance;
4. Pay rates, taxes and similiar charges imposed by central and local government;
5. Not carry out alterations to the flat without the landlord's permission;
6. Pay all costs relating to notices served under s146 LPA 1925. This covers the area of forfeiture;
7. Provide the freeholder with notice of sale, mortgage or sublettings;
8. Repair and decorate internally;
9. Permit the freeholder (or his agents) access for repairs or inspection;
10. Not do anything that renders building insurance void or voidable;
11. Not cause a nuisance to other neighbours;
12. Observe regulations (usually referred to by the schedule within the lease).
13. Adhere to the 'use and occupation' of the flat, such as running a business, keeping pets etc.

OTHER COVENANTS

Implied Covenants

Implied covenants are implied by law, but there are no express covenants in the lease to categorically stating what these implied covenants actually mean. However, in a well-drafted lease those express covenants will override the implied covenants.  There are also repair covenants which a range from 'to keep in good tenantable repair', 'to keep in substantial' repair or 'to keep in perfect repair.'

Usual Covenants

The usual covenants is where an agreement for a lease only specifies essential conditions such as the payment of rent, and either mentions no other terms or provides that the lease  contains 'the usual covenants'. In such a lease the parties are entitled to insert other covenants that are specifically written in similar properties and character in the same area.

PRESCRIBED CLAUSES

There is no such thing as a standard lease, athough an attempt was made to make them more uniform by new registered leases granted after 19th June 2006 needing to have a set of prescribed clauses written at the beginning of the lease. These clauses apply to leases of more than 7 years and are an integral component of the lease.

If these details are not provided as per the requirements of the Land Registry then the lease might not be registered which could lead to ownership of the title not being guaranteed. It is the Proprietorship Register that confirms that the seller has the right to sell the lease and this register will also show whether there are any restrictions on the ability of the seller to sell or mortgage, such as a bankruptcy charge (previously known as an inhibition).

A sample lease with the prescribed clauses can be found here.

Older Leases

These prescribed clauses don't apply to the sale of existing leases, so there are still many leases that not only pre-date these requirements but are written in legalese with no punctuation. They can also be very lengthy, culminating in them being difficult to read and interpret. They are also usually considered defective because they have not taken into account the number of legislatory reforms that have occurred since they were written. The main elements of these older leases usually fall into 6 categories:

1. Premises Demised by the Lease - this section of the lease identifies precisely the property being leased and should also contain a floor plan of the unit and include ownership of party walls.
2. The Rights Granted and Accepted - this section should include all rights and restrictions including rights of access to the building and its common parts, and the right to run services such as gas or electricity through the building into the flats;
3. Restrictions relating to Noise or Pets
4. Repairs, Alterations and Decorations - this section identifies whether it is the landlord or the leaseholder that is responsible for carrying out repairs, alterations and decorations.
5. Insurance - this section defines which party is responsible for insuring the building and describes the required extend of the insurance:
6. Ground Rent and Service Charge - these are usually located in two separate sections of the lease, both of which are paid by the leaseholder.

DISADVANTAGES OF OWNING A LEASE

1. Leaseholders only own their lease for a pre-determined number of years, making them a wasting asset as their value diminishes over the years;
2. If they have less than 80 years remaining, it becomes more expensive to extend the term;
3. Developers can sell the leases but keep the freehold, often writing in a management company with the responsibility of the common parts.
4. Leases have to be thoroughly investigated by the buyer, and the conveyancer as they are specific to the property. Even if the lease is written in legalese, with a considerable number of pages, they all have to be read!;
5. Anyone can set themselves up as managing agents, despite any criminal background or tendencies and without any prior knowledge or experience being required. There is no attention drawn to them during the conveyancing process and as there is no Ombudsman service or general procedure for resolving disputes, leaseholders will usually be unaware of any existing problems.