Reforms needed on ASTs and overreaching – PBA student essay runners-up

It’s time to rethink the legal position on assured shorthold tenancies and overreaching, argue the authors of the second and third-place entries in this year’s Property Bar Association student essay prize. ASTs are the area of land law most in need of reform In the second-placed entry from the Professional Bar Association’s annual student essay competition, Andrew Martin makes the case for reform of assured shorthold tenancies. Landlord and tenant law is some of the most contentious land law. It is inescapably intertwined with discussions of economic, political and social values, thus making it fraught with complexity, as evidenced by the volume of legislation on the subject in the post-war period. In particular, the introduction of the assured shorthold tenancy (AST) in the Housing Act 1988 has been the subject of much debate. This essay charts its creation, the subsequent change in our society and, consequently, why this area of law is in such urgent need of reform. The history The government’s actions in the 1980s were broadly a reaction to the governmental and judicial trends of the 1970s. Street v Mountford [1985] 1 EGLR 128 and the Rent Act 1977 had swung the balance of power in favour of tenants, and, as a result, the private rented sector (PRS) had shrunk as landlords feared they would be unable to regain possession of their properties. In order to encourage the PRS, the Housing Act 1988 introduced ASTs, which are generally no longer than six months or a year, and guarantee that the landlord will be able to recover the property at the end of the fixed term. This was also thought to be beneficial to young people who did not wish to be tied down to a long tenancy. Under section 21 of the Act, no reason is needed in order to evict the tenant. This means that once the fixed term comes to an end, if the tenant continues to live in the dwelling-house on a periodic tenancy, they can be evicted with two months’ notice at any time. Since 1988, there has been a considerable change in the housing market. The Office for National Statistics reports that the number of first-time buyers and younger homeowners has decreased, and stocks of local authority housing have decreased while private rental stock has increased. Perhaps most critically, the number of homes being built per year has been on the decline too. This has meant that as demand for housing has mounted, supply has not matched it, resulting in a spike in rents and an increase in house prices every year since 1993 (apart from 2009). As a result, we see two concurrent cycles, one virtuous and one vicious. The former is generally found among the older generation, who were able to get themselves onto the property ladder early, and then invest in additional properties, with small deposits and big mortgages, which earned them money from both rents and the underlying capital appreciation. The latter cycle can be seen among younger people, even professionals. A large proportion of their pay goes towards high rents, leaving little for saving. The tighter regulations on mortgages and increases in size of deposits required make the leap from renting to first-time buying harder than ever. This is suggested by the statistics, which show that, in 2012, the 65-plus age group was the only one to have seen its percentage of home ownership increase decade-by-decade since 1981. The state of play While the market has changed, the legal framework has not, which has produced some unfortunate consequences. Increasingly, middle-aged people and families are having to rent on ASTs. These are people who want to settle down. Many people will have long-term jobs and will be hoping to provide a consistent and secure home, community and school for their children. This is a socially vital process, as communities are thus built and maintained, and these, when thriving and connected, are the bedrock of a cohesive society. Given the market and the current law, landlords’ power to evict people at short notice, almost with impunity, means that people are unable to settle down, which will have deleterious long-term social consequences. Moreover, the insecurity of tenure with ASTs has also driven down the quality of the housing as people have become victims of “revenge evictions”. The limited warning before eviction can have a disastrous effect on poorer families; the end of an AST is the greatest cause of homelessness, as Bob Blackman MP noted in 2017. Measured reform Sweeping reform would risk causing a collapse in the PRS; however, certain measures could be taken to redress the balance of power. Section 21 could be replaced by the rights to possession under the grounds in Schedule 2 of the Act. This includes granting possession if the landlord wished to live there, or if the tenant was in rent arrears, but, crucially, not arbitrarily with a view to hiking rents. This would balance the landlord’s right to possession of his property, an ancient and important English right, with the tenant’s desire to continue to live in the property, so long as this continues to be a viable business through the payment of market rent. The creation of asymmetric ASTs with a minimum tenancy length, as suggested by the government in the past year, could create greater security for tenants, even if landlords’ rights to possession on Schedule 2 grounds were maintained in that period. Finally, if renting is to become the new normal in the UK, then rent controls could be introduced. The rent review system from commercial property could be borrowed to ensure that landlords are receiving market rent, but that tenants are not being exploited. In Germany, where famously a large proportion of people rent, rent controls are commonplace and yet the rented sector operates effectively. None of these measures would be a panacea for the housing and homelessness crises, the solutions to which surely lie, crudely, in building more affordable homes where they are needed. They would, however, offer a corrective measure to the current balance of legal power between landlord and tenant that could have long-term social benefits. Ultimately, if British attitudes towards home ownership and renting fall into line with some of our continental neighbours, these measures will be important, if only as a starting point, for ensuring that our law adapts to the changing reality of how we live. Andrew Martin is a student at City, University of London Overreaching: a stretch too far In the third-placed entry from the Professional Bar Association’s annual student essay competition, Benjamin Cartwright argues that overreaching is the area of property law crying out for reform. Overreaching, while a convenient tool to ensure the alienability of land, is disproportionate and establishes an unconscionable imbalance between equitable and legal interests. Reform is needed to better protect those with equitable interests; notice on the register and consent by beneficiaries in actual occupation ought to be necessary for overreaching to occur. When trustees of a legal estate in land make a conveyance, and two or more of those trustees receive the proceeds of sale, any equitable interests affecting the estate are said to be “overreached”. Through application of the procedure, equitable rights that would otherwise bind a purchaser will no longer do so; pre-existing equitable rights in land are expelled. Even overriding interests, which typically bind disponees, are swept off in favour of the purchaser. Conceived in the Law of Property Act 1925 and developed in subsequent legislation, overreaching has been defended as essential to promote the alienability of land, replacing equitable interests in an estate with an equitable interest in the purchase money instead. It is submitted, however, that overreaching is both conceptually and practically problematic. The problems First, the conceptual problem with overreaching. Although its principal justification is to maintain the alienability of land, it is submitted that overreaching is a disproportionate process to guarantee an unencumbered legal estate in land. The consequence of most overreaching cases is that those with an equitable interest, many of whom live in the property, are evicted by their trustee in favour of the disponee; recasting their equitable interest in the property with a financial equivalent does not improve their circumstances. There are more appropriate and proportionate methods to promote the alienability of land which do not cause such harshness to homemakers; the process of land registration is a good example of this. An expansion of this, rather than overreaching, would better achieve the same aim. The first practical issue of overreaching can be illustrated by City of London Building Society v Flegg [1988] AC 54. Here, four people lived together, two with legal interests and two (the Fleggs) with equitable interests in the property. The legal owners placed a mortgage on the property, without the knowledge of the Fleggs. Upon default on the mortgage, the building society successfully overreached the equitable interests of the Fleggs, taking possession of the property. This unfairness, and the arbitrariness of overreaching, is emphasised further when one considers Williams & Glyn’s Bank Ltd v Boland [1979] Ch 312, a case with similar facts to Flegg, but with only one trustee who received the capital money for the charge. This meant that overreaching by the bank failed, so Mrs Boland relied on her overriding interest based on actual occupation to maintain possession. The mere presence of a second trustee in Flegg caused a completely different result, to the detriment of the unprotected beneficiaries. The second practical problem can be demonstrated by State Bank of India v Sood [1997] Ch 276. There, the court held that overreaching can occur even where no capital money is paid on the transaction, provided that the conveyance is properly executed. Thus, the section 27 of the 1925 Act requirement for capital money to be paid to two trustees is cast aside. Given that an important justification for overreaching is that a monetary equivalent is paid to compensate the beneficiary for their lost equitable interest, it begs to be answered what protection or benefit there is for beneficial owners when no money is paid. The supposed safeguard to the beneficiary of having two or more trustees becomes redundant when no capital money is paid (see Sood). Where no money is paid, it is uncertain whether multiple trustees must consent for a disposition to occur; an extension of Sood risks single trustees gratuitously disposing of legal estates to third parties without the knowledge of the beneficiaries. Possible reform It is in light of the flaws of overreaching that the following reforms are suggested. First, beneficial interests under trusts should be encouraged to be protected with a notice on the register. To do so would run counter to the “curtain” policy promoted in the Land Registration Act 2002; however, the blatant unfairness that overreaching has led to ought to lead to a change of priorities. Notice would ensure that beneficiaries were protected, preventing dispositions contrary to their interests: if the Fleggs were able to “flag” their equitable interest on the register, the mortgagee would be aware of all cohabitees prior to entering the charge. The natural corollary of this is the requirement of the consent of beneficiaries who are in actual occupation of the property for dispositions of the legal estate to occur. By approving the overreaching of their interests, beneficiaries would be able to endorse the process, keeping it effective in ensuring unencumbered land. Implicitly, consent will limit the liberty of trustees to dispose of the legal estate, ensuring that they act in the interests of their beneficiaries. Beneficiaries in actual occupation of the estate would therefore be protected from overreaching without their consent; results such as that in Flegg would not occur. Indeed, the requirement of consent was recommended by the Law Commission in 1989 but has not yet been enacted by parliament. Moreover, the requirements of notice and consent could practicably lead to the doing away with the arbitrary payment to “two or more trustees” rule. If beneficiaries consent to a disposition to an estate, it ought not to matter how many trustees receive the money, as the beneficiaries will have already consented, and the trustees will hold the money on trust for the beneficiaries. While overreaching is conceptually and practically problematic, with suitable reforms it could succeed as an equitable method of guaranteeing alienability. Notice and consent would remove any barriers to overreaching by third parties, whereas a lack of consent would invalidate the disposition. Beneficiaries would be protected from unwanted dispositions, and disponees safeguarded against unknown beneficial interests preventing their unencumbered acquisition of the land. Benjamin Cartwright is a student at University College London And the winner is… Click here to read Henrietta Boyle’s winning entry from the Professional Bar Association’s annual student essay competition, on reform of the Landlord and Tenant (Covenants) Act 1995.