As a landlord, you may have purchased a flat for the purposes of subletting, but are you actually allowed to rent it out? If you own a flat in England or Wales, the chances are you can't. The reason for this is that in England and Wales, the old, feudal system of leaseholds is alive and well. Many leasehold flats have restrictive covenants in place which don't allow you to sublet and many landlords are likely subletting without checking the lease, or knowingly breaching the terms by subletting anyway.
The background to leaseholds
Although the concept of leaseholds dates back hundreds of years, it only became a mainstay of the housing landscape in the aftermath of World War II, when the government not only had to replace houses destroyed in bombing raids, but also had to deal with the result of rapid population growth caused partly by immigration but mostly by the natural consequence of couples being reunited and wanting to have children together.
The solution was to build upwards, which was the start of the trend towards flat-living which continues to this day, especially in major cities. Since flats are a mixture of private spaces and shared spaces, the leasehold system was, at least in principle, a fairly reasonable way of ensuring that the cost of maintaining (and, when necessary repairing and upgrading) communal areas was shared between home-owners in a reasonable manner. It might not have been perfect but it was a quick and practical solution to an urgent problem.
Leaseholds in the 21st century
Concern about leasehold property has been growing since the start of the 21st century, when there was a flurry of news headlines reminding people that the (then) standard 100-year leases on property built during the construction boom of the 1980s was about to hit the 80-year-mark at which it becomes much more expensive to extend a lease (or by the freehold).
The reason this was a huge issue is because leaseholders, as the name suggests, own a lease on a property rather than the property itself and if that lease expires then the freeholder can simply repossess the property, leaving the former “home-owners” with nothing. Not only that, but if a lease runs down to below 70 years, it can be virtually impossible to get a mortgage on it. Since then, even though many leases are now initially issued for much longer periods (anything from 125 years to 999 years), the issues with leasehold properties have only increased as have the number of properties sold on a leasehold basis.
Not only are leases standard on new-build flats but they are also commonly used during the sale of new-build houses, even though the initial justification for the leasehold system was to manage communal areas in shared buildings. Unsurprisingly, the reports of complaints about the leasehold system have also been on the increase and while these complaints are many, they are not particularly varied, in fact they almost inevitable revolve around the fact that it is exploited to generate maximum value for the freeholders rather than maximum satisfaction of the leaseholders.
Hope may, however, be on the horizon, as politicians in England and Wales now seem to be taking a greater interest in the matter with London mayor Sadiq Khan leading calls for reform.
Mark Burns is the managing director of property investment firm Hopwood House.