Whilst Brexit continues to dominate the UK’s political scene, it is easy to overlook other areas of policy which, in more historically normal times, would gain more attention.
For a real estate lawyer, the prospect of one of our major political parties looking at radical changes to land law is intriguing to say the least, but coverage has been limited. Understandably, commentary has been focussed on the major economic and political ramifications of the proposals, but the legal changes would, in their own way, be highly significant.
Land for the Many, recently published by a committee of seven authors under the editorship of George Monbiot, is a set of policy proposals put forward to the Labour Party for consideration as part of its preparation for the next general election. It sets out an avowedly radical programme of reform which, if implemented, would be the most significant change to the laws of real property since the 1920s. The authors acknowledge that a detailed legal report into the necessary overhaul of land law will be a necessary future step towards making the proposals implementable, but some initial comments can be made on the legal consequences of three of the key proposals:
- Transparency in relation to trusts and options
- Open ended tenancies; and
- The creation of a Common Ground Trust to acquire land separately from the buildings constructed on it.
The authors propose several ways in which data on land ownership and control could be made more widely available, including most simply (from a legal perspective) making it free to access information from the Land Registry. Two other proposals would, however, need substantial legal changes: widening registered information to include beneficial ownership of land held by trusts and compulsory registration of options over land.
Registration of Trusts
Opening up information on beneficial ownership is not a new idea in itself, having already started in relation to companies and other corporate entities. Companies registered in the UK have, since June 2016, been obliged to declare to Companies House, as part of their annual confirmation statement, details of persons having significant control over them. Such persons include anyone that holds more than 25% of the shares or voting rights in a company or otherwise exercises significant influence or control. Similar reporting obligations for non-UK corporate entities which own land in the UK are expected to be introduced in the near future. These are, however, functions of company law rather than land law.
n order for trusts to come under the same scrutiny, land registration law is likely to have to change. Currently, the only registration for trusts in the UK is administered by Revenue & Customs, which requires any trust which has a liability for UK tax to be registered with it. Whilst any trust which owns an income generating property would be caught by this requirement, many property owning trusts would not, so more would be needed than simply opening access to an existing register. It has always been a core principle of English land registration law that the registry concerns itself only with legal titles, so any extension of registration to include the interests of beneficiaries would need very substantial changes to be made.
Rules which are designed to improve transparency for formally constituted trusts will also have to accommodate the many other trusts which come into effect as a result of the operation of law, and which are often a form of protection for vulnerable people, for example, properties held on behalf of children or those who lack legal capacity through illness or disability. Trusts may also be implied to protect the victims of fraud or where planned arrangements have failed to comply with legal formalities. In these cases beneficiaries will need to be protected whether they are registered or not.
Registration of Options
Option contracts are a tool frequently used by developers to assemble sites – particularly for house building. Commonly, these options allow a developer, for payment of a comparatively small option fee, to require a landowner to sell them land in the future at a price that might either be agreed up front or be calculated at a later date. This then allows the developer to seek planning permission without either having to buy the land up front or risk having to agree to purchase at a much greater cost once planning permission is obtained (that uplift in value being a matter discussed at length in the report, but beyond the scope of this note). The report raises the concern that the use of options leads to lack of transparency, as it is not apparent who controls land. The solution proposed by the report is that options should be registered and be legally unenforceable if not.
Options are, however, already capable of being noted on title registers and already unenforceable against third parties if not registered. If a landowner grants an option to a developer, then in breach of it sells to a third party, the third party is not bound by the option unless the developer has registered a notice protecting it at the Land Registry (or Land Charges Registry, for unregistered land). That notice is discoverable by searching Land Registry data, so if that is made free of charge any transparency issue should be addressed.
If the authors of the report are proposing something further than this, we would be looking at a very fundamental change to contract law by essentially providing that two willing parties to an option agreement could have it made void between themselves through lack of registration. It is hard to see what public benefit that would have: if the parties were still willing to enter into a sale agreement, the land would still change hands under a new agreement – and if the landowner were no longer willing to sell, it would potentially give the windfall gain from grant of planning permission to it alone.
Open Ended Tenancies
Whilst the report proposes a number of reforms to the relationship between landlords and tenants, most of these are financial in nature rather than fundamentally changing landlord and tenant law – for example, proposing statutory limits on rental increases and changing the balance of taxation between landlords and tenants. One suggestion which would affect the law significantly is that residential tenancies should become open ended, rather than for fixed terms or periodic as they must be now.
It is a fundamental requirement of a lease under English law that it be granted for a period of time which is either fixed from the outset or which is calculated by reference to fixed recurring periods – for example, for one year or from month to month until terminated on a month’s notice. A lease which is purportedly granted for an uncertain or indefinite period will be void. If open ended leases are to be introduced, this rule will have to be amended and if the amendment is of general application, rather than just to tenancies granted under a specific new Act of Parliament, then the implications will be substantial. The report refers to the introduction of such tenancies in Scotland in 2017, but that was not done without legal controversy and is not a clear model for England and Wales.
Common Ground Trust
The Common Ground Trust and its suggested purpose of allowing houses to be sold separately from the land on which they stand would be one of the greatest changes to UK housing in modern history. It should be noted that the authors of the report put forward the proposals in relation to it with much circumspection and with good cause – the financial, economic and political effects of those proposals would be enormous and would require much thought and detailed planning to even become party policy. The legal consequences would be no less huge.
The policy proposal is fairly simply stated: when buying a house, part of the price payable is attributable to the bricks and mortar building and part to the land on which that building (and any garden and private outdoor space) sits. If a private buyer were able to only purchase the building, whilst the Common Ground Trust buys the land, the buyer would have to find less money for the purchase at the outset, and would pay the Common Ground Trust a ground rent for the land which would be more affordable than paying off a mortgage loan on the land had it been bought together with the building.
The fundamental legal issue raised by the proposal is exactly what sort of legal estate or interest in land would be acquired by the Common Ground Trust and the house buyers in this case. At present English law recognises only two estates in land – freehold (of which commonhold is a subdivision) and leasehold. The basics of the proposal do not fit comfortably with either. Freehold in the vast majority of cases means outright ownership of both land and all buildings on it. Although it is possible to have freehold ownership of different levels of land (indeed this is an essential part of commonhold ownership of flats) the relationship that would be required between the owners of the house and the Common Ground Trust do not really fit with how such freehold owners deal with each other. Commonhold would not be appropriate as that requires the owners of the various levels to have common ownership of structure and common parts, where the report seems to envisage that all physical structures and none of the land would belong to the house owner.
Leasehold would fit somewhat better, but again not perfectly. The report is clear that the owners of houses should have a permanent interest rather than the time limited interest in their property a lease would convey and should never be at risk of eviction, so a normal landlord and tenant relationship cannot be intended. The payment of ground rent as a critical part of the relationship between house owner and Common Ground Trust does look rather like a lease, however, and it is interesting to note that, at a time that new leasehold houses may be legislated out of existence, the Common Ground Trust is being put forward even tentatively as a proposed reform when, on its face, it may give even less control to house owners than current long leases do.
Assuming that some new kind of estate in land may be needed, or at least some new subdivision of freeholds, the knock on consequences for other areas of land law will be wide ranging and highly complex. For example, how will those aspects of land law which require the identification of different parcels of land, such as easements and restrictive covenants, be interpreted? Easements, such as rights of way, fall away by operation of law if the land benefitting from and subject to the rights, technically called the dominant and servient tenements, come into common ownership. Would that happen if the Common Ground Trust acquires both tenements, even if the houses on them are owned by different people? If the consent of a landowner is required to building work under a restrictive covenant, would it be the house owner or the Common Ground Trust which would have to give that consent? These are just a couple of the many details which would need to be worked out.
It would be unfair to expect an expressly political document like Land for the Many to contain fully worked out legal reforms. That is not its purpose. However, if even a small number of the policy proposals contained in the report were to become official Labour Party policy, it would certainly give rise to a lot of work for real estate lawyers.