IF YOU are a wealthy Russian worrying about where to store your money, owning a flat in central London is not a bad option. As Boris Johnson, London’s mayor, says, the city is "now globally recognised as such a desirable city that its property is treated effectively as another asset class". Yet how many of those oligarchs realise that in many cases, they are technically not owners but rather tenants? Under English land law, most flats are sold as "leaseholds", which is technically a form of long-term tenancy. The buildings and land on which they stand are owned by the "freeholder". This divide confuses many home buyers—not just oligarchs—and it has odd repercussions for England’s cities. So what is the difference between being a leaseholder and a freeholder? The distinction between a freeholder and a tenant is a feudal one: from the 11th century, freemen owned land on which tenant farmers toiled. In the 18th century, aristocratic families such as the Cadogans sold long leases on their land to developers, allowing the development of London’s "Great Estates". Leases solve a legal problem. When someone buys a house, it is obvious that they own the land beneath it and should be responsible for the building’s upkeep. But when several flats are piled on top of each other, it is less clear who is responsible for the building’s structure. Hence the freeholder takes charge for the duration of the lease.

This has the consequence that many people have no idea who really owns their expensive flat. But it also doesn’t much matter. As Graham Winkley of Boodle Hatfield, a law firm, says, when a freeholder sells a long lease on land, "they’ve basically already taken their money." As the result of decades of legislation, leaseholders have firm legal rights. Any tenant who has been in a property for more than two years can renew his lease for another 90 years (albeit sometimes at extremely high cost). This means that few ever run out. In practice, owning the freehold of a building means owning the right to manage it—and charge a service charge. The developers of new flats tend to issue long leases—typically 99 years or 125 years—and farm out the freehold to management companies. Does the system work? Not really. The continual renewing of leases confuses property owners and generates money for law firms. Unless they own a share of the freehold, lease-owners cannot easily demand repairs or changes to a building. Freeholds are commonly traded by speculators, some of whom try to make money out of abusing service charges. In other common-law countries such as America and Canada, flats are sold as "condominiums", where a corporation owns the building in trust on behalf of residents. That is a simpler system, where owners' rights are clearer.

In London, perhaps the bigger problem is that leases never run out and freeholders are often difficult to find. Given the city’s housing crisis, it would make sense to demolish low-density homes in many areas and build new ones. In the 1920s and 1930s, many new flats were built on land where leases expired all at once. These days, that sort of redevelopment is all but impossible. Even if a single freeholder owned a plot of land, there is no way to deny leaseholders the right to renew or to force them to sell up their share. As a result, old housing is rarely demolished unless it is owned by local authorities (who can push out leaseholders). The only land available for building is ex-industrial land. Londoners are forced to pay ever greater sums of money for the right to be a "tenant", and never enough new housing is built.





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(January 2014)





How London's Great Estates are changing its high streets

(June 2013)