What a lease is and typical lease structures

What is a Lease?

A lease is essentially an agreement whereby one party agrees to lend something to another party in return for some form of payment. It can relate to anything – a car, machinery, a television. This article deals with leases in the context of property, specifically flats.

Flats in England and Wales are usually owned on a “leasehold” basis.  “Leasehold property” ownership in simple terms means that a lease owner or lease-holder has a right to use and enjoy the property for a definite period of time.  The terms by which the leaseholder may use the property are governed by a legal contract called a “lease”. As a leaseholder, YOU DO NOT OWN YOUR FLAT. You are merely renting it for a very long time; Lease terms in England and Wales are usually 99 years or longer.

A lease of land (and any building or part of a building, such as a flat or maisonette, which stands upon the land) is a form of tenancy agreement. The terms “tenancy agreement” and “lease” are really interchangeable so a lease could be for a short term, say a 6 month assured shorthold tenancy, or for a longer term, say 99 years. Usually however the term “lease” is used to describe a “long lease”, which is a lease originally granted for a term of at least 21 years.

Typical Lease structures

Up until the introduction of the Landlords and Tenants Acts of 1985 and 1987, it was standard practice for there to be only two parties to the lease: the leaseholder (or lessee) and the landlord (or lessor).

Prior to these two acts, landlords to flat leases typically had carte blanche to deal with property as they wished.  Thus, landlords could impose unreasonable prices for lease extensions or freehold interests or impose other unreasonable requirements when leaseholders came to sell their leasehold flats. Additionally, managing agents appointed by the freeholder were more motivated to keep the freeholder happy with leaseholders having little say in the management of the building. Poor standards of management was the outcome.

The balance of power was almost exclusively in the favour of the Freeholder. Leaseholders had the greatest interest in a building (being their home in most cases) but little power to influence affairs. The Landlords and Tenants Acts of 1985 and 1987 was the first step to re-dressing the imbalance. Further powers were granted to leaseholders via the Leasehold Reform, Housing and Urban Development Act 1993 and the Commonhold and Leasehold Reform Act 2002.

These changes in legislation lead to the onset of the tri-partite lease.

Tri-partite lease

A tripartite or tri-party lease is, quite simply, a lease made between three parties: (i) the landlord (ii) the leaseholder and (iii) a management company.

Under tripartite leases, historically, management companies are companies limited by shares with its main objective is to manage and maintain the common parts (entrances, lifts, car-parks, gardens as well as the main structure of the building itself) for the general benefit of the leaseholders.  The full responsibilities of any management company will be set out in its Memorandum and Articles of Association, as well as being contained within the tripartite leases themselves.

Tripartite leases are now commonly used by developers in new-build blocks.  It is also now more usual for leaseholders, by virtue of being a lessee in the block, to have a share or membership in the management company – more commonly known as “resident management companies” or “RMC’s”.

The tri-partite lease, in theory, gives leaseholders the ability to manage their own estate. This has been subject to abuse with the “management company” often being a named managing agent rather than a Residents Management Company. In many cases, the effect of this is literally to turn the clock back to pre-1985 with the only way to remove the “Management Company” is for all leaseholders to sign Deeds of release and novation. In practice, this is extremely difficult to execute, especially on large developments.

A good tri-partite lease benefits leaseholder and Freeholder in the following ways;

• Leaseholders can dictate the management. They can either self manage or appoint their own managing agent.
• Lessors don’t have responsibilities for day to day management.
• Lessors obligations are now generally limited in scope and usually often only extend to the collection of ground rents (landlord’s investment income) and the placing of insurance (and often the receipt of insurance commissions). In effect, the lessor has a revenue stream for very little effort.