In practice, two main types of estate in land encountered in practice have been an absolute freehold interest or leasehold estates for a term of years. After the 2009 land law reforms, they are the only type of legal estates that may now subsist.
A lease is effectively a contract which gives an exclusive right of possession of land to the tenant for a period, in return for rent. The landlord may be an absolute freehold owner or may be a tenant who gives rights a sub-lease grating exclusive possession to another.
At its most basic, a lease is a contract, which can be on whatever terms that that parties agree. However, legislation limits the terms that may be inserted in leases in relation to particular types of lease and particular types of clause. In particular, landlord and tenant laws provides differing protective rights for most residential and commercial tenant buildings, in relation to a range of issues, which overrule any contract to the contrary.
Where there is a lease, there are two persons with ownership rights or estates/interest in the land. There is a landlord who will usually have a right to receive income only. In a sense, a lease gives conditional rights or ownership in land. The tenant’s rights will be subject to and conditional on compliance with the terms of his lease.
The tenant has the right to exclusive possession of the leased land. The tenant can exclude the landlord from the premises, subject only such rights of access to the property, which the landlord may have (typically limited to inspection for the purpose of compliance with the terms of the lease). Subject to such rights that the lease may provide, the tenant may exclude the landlord and take proceedings for trespass, in order to do so.
The terms of the lease will determine the balance of economic rights or “ownership” of the land between the landlord or tenant. In the case of a typical commercial lease, the term is typically relatively short (less than 35 years), landlord charges the market rent and the tenant is entitled to the exclusive possession subject to payment of this rent and compliance with terms and condition. In this case, it might properly be said that the landlord is the true owner as he is entitled to the economic benefit of the land
Respective Interests of Landlord and Tenant
Each of the landlord and tenant has an interest in the land. Depending on the balance of rights, the landlord or tenant might be considered to be “owner”. It is possible in principle, (although unusual) that a lease might provide a balance by which the economic rights of the land are split 50-50. For example, there may be a shared ownership lease, at which the rent is half the economic market value.
The fact that leases can be structured (within limits) in whatever way desired, illustrates that there is no such thing as a single type of ownership as such in the land. It is more accurate and consistent with the legal position, to refer to estates and interest in land.
A freehold owner, free from restrictions, who hold his estate in possession, has the fullest rights and interest possible, so that he may be called “the” owner or the absolute owner. If his interest is subject to a long lease, at a low rent, or if the land is subject to a right of way in favour of a third party, then the effect those other rights and interests may be to dilute the freeholder’s rights to use the land so much that his ownership may be reduced or non-existent.
The interest of an owner can also be heavily diluted by the existence of other third party rights. For example, it is possible to create easements over land. These rights could be extremely extensive. A person may own, a laneway, but the ownership may be of no economic value because other parties have a right to use it for such purpose.
Long Leases I
A lease may be for a very long period, perhaps up to a thousand years, at a relatively low rent that is fixed. This may arise on a sale, where the sale is effectively subject to ongoing condition. In many older leases, which were typically granted before the middle of the last century, the rent might have represented the market value of the land at the time of its grant.
Many leases, dating from the 18th, 19th, and early 20th centuries did not have rent review clauses. In many such cases, the original lessee (or tenant) under such lease developed the land by the construction of buildings. Under such building leases, the lessee built the buildings themselves and paid a ground rent representing the economic value of the land.
Leases were often granted for long terms, typically for periods (or terms) of between 99 years to 999 years or more. Over time, the effect of inflation was that the lessee’s interest became more valuable. For example, a rent of £30 per year may have been an economic rent for land in 1830, but by 2010, it has become nominal. In this case, the landlord/freehold owner’s right is merely to collect £10 pounds a year and enforce compliance with terms and conditions. The tenant’s right in the lease of this nature, the tenant’s rights effectively become close to full ownership.
Long Leases II
Landlord and tenant law is complicated still because various types of leasehold interest developed for particular historical reasons. Landlord and tenant laws dating over centuries have created a variety of rights for lessees, including rights to acquire compulsorily, further rights and interests.
Many properties were sold in the 18th, 19th and early 20th century, by way of a long lease, reserving a ground rent. Modern legislation allows the tenant to “buy out” this ground rent under certain circumstances. In effect, the obligation to pay the annual rent is purchased out for a single capital sum, so that the rent is redeemed and the tenant obtains freehold ownership.
Many older long leases qualify for the purchase of the ground rent for a multiple of the rent based on the multiple which State bonds price bear to annual income. In some cases, a higher sum is payable. Broadly the price for the compulsory purchase of the freehold interest is relatively modest. The freeholder receives the capital equivalent of the ground rent. Even if the right is not exercised, the very fact of having qualified for the right gives the tenant under the long lease powerful right.
Commercial Rent Lease
A modern commercial lease typically for a term of 5 to 35 years, which provides for a full market rent together with rent reviews, creates a very different balance of economic rights in the land The landlord, being the person entitled to receive the market rent, is has the substantial benefits of ownership. The tenant must pay a market rent so is not the owner in any meaningful sense of the word.
A tenant occupier of business premises for five continuous years is entitled to a succession of new leases, effectively in perpetuity. Once such a property is leased for more than five years, the tenant generally has the right to new lease for a term between five and twenty-five years at its choosing, upon the termination of the initial tenancy period. However, he must pay a market rent, discounted for improvements and goodwill factors. Until recent law reforms, this right may be disclaimed in all cases.
It is possible for somebody to contract to give rights over land which are less than a lease. These are usually termed a licensee. An example would be a right to use part of a shop floor. The licensee does not have exclusive possession. The licensee has no right to go to court to exclude other persons from possession. If he is excluded, his right is generally to compensation for loss only. Under exceptional circumstances, some types of licence may come very close to being a lease.
It is possible to have multi-layers of leases in the one property. A person may hold land under a 99-year lease with 50 years left to run at a nominal rent. He may lease the land by way of a commercial lease for 25 years at a market value rent. That tenant may sub-let all or part of the land for a shorter term, such as 10 years, at a higher rent. That person may, in turn, share possession of the property with a licensee.
Licensees are persons who do not have exclusive possession or rights to exclude others from the land. They do, however, have a contract which gives them some economic use of the land.