Leases

The leasehold is one of the two estates identified in section 1 of the LPA 1925 as capable of existing as either a ‘legal’ or ‘equitable’ interest. As we shall see, whether any given lease is legal or equitable will depend primarily on the way in which it has been created. However, irrespective of whether a leasehold is legal or equitable, there is no doubt that it is one of the most versatile concepts known in the law of real property. Even the terminology of leases reflects the many purposes to which they may be put. The ‘term of years’, ‘tenancy’, ‘sublease’ and ‘leasehold estate’ are all terms in common use, and all of them describe the existence of a ‘landlord’ and ‘tenant’ relationship. For example, a ‘lease’ or ‘term of years’ is most often used to describe a commercial or long-term letting, whereas the description ‘tenancy’ is often used for residential or short-term lets. This variety does not mean that different substantive rules apply to different types of lease (although this may be the case where a statute applies only to one kind of lease), but it does indicate the importance that the leasehold plays in the world of commercial and residential property management and investment. In this respect, three fundamental features of the leasehold should be noted at the outset. First, the leasehold allows two or more people to enjoy the benefits of owning an estate in the same piece of land at the same time: the freeholder will receive the rent and profits, and the leaseholder will enjoy physical possession and occupation of the property. Indeed, if a ‘subtenancy’ (also known as an ‘underlease’) is created, being where a shorter lease is carved out of the ‘headlease’, the number of people enjoying the land or its fruits increases further. For example, if a freeholder (A) grants a 99-year lease to B, and B grants a 50-year subtenancy to C, then A receives rent from B, B receives rent from C and C enjoys physical possession of the land. In theory, there is no limit to the number of underleases that can be created out of a freehold estate, and each intermediate person will be the tenant of their superior landlord and the landlord of their own tenant. It is the ability of the leasehold to facilitate this multiple enjoyment of land that gives it its unique character. It allows the landlord to generate an income through rent (thus employing land as an investment vehicle), while at the same time the tenant is a ‘purchaser’ of an estate in land through the payment of that rent. Second, it is inherent in the leasehold estate that both the landlord and the tenant (and all subtenants) have a proprietary right in the land.1 Thus, the tenant owns the lease, and the landlord owns the ‘reversion expectant on the lease’ – that is, the right to possession of the property when the lease ends. Importantly, both of these proprietary rights can be sold or transferred while the lease is in existence. The tenant may sell his lease to a person who becomes the new tenant (an ‘assignee’ of the lease), and the landlord may sell his reversion to a person who becomes the new landlord (an assignee of the reversion). Likewise, the assignees of the lease and reversion may assign (i.e. sell or transfer) their interests further. The result is that the current landlord and current tenant under a lease may be far removed from the original landlord and tenant who actually negotiated its creation. Nevertheless, as explained below, the landlord and tenant currently ‘in possession’ may well be bound by the terms of the lease as originally agreed. Figure 6.1 represents this diagrammatically.