As I imagined in an article published here last year, abolishing leasehold is far from the easy process some of our politicians would have us believe – there are some powerful forces ready to counter the move.
Leasehold is a means by which a property - most commonly a flat – is owned, but only for a fixed term. The ownership of the land it stands on is retained by a freeholder. Leasehold is really a long-term tenancy but unlike a short-term rental, the property is actually purchased with a lump sum, and the lease is a right to occupy the property for a term of years – usually 99 to 120 years. It can be bought and sold in the meantime, but ultimately the freeholder retains ownership.
Almost unique to Britain in the 21st century, long-leasehold harks back to the Middle Ages. The legal concept allowed powerful landowning families to retain ownership of land, while maximising their earnings from it. Leasehold is now used by wealthy city landowners when monetising their city residential developments, allowing them to retain ownership and a long-term income stream. More recently, it provides a safe investment vehicle for investment funds and pension funds where they need a guaranteed return to offset the riskier investments they hold in the stock market.
There are many anomalies with leasehold that detract from its desirability for leaseholders (owner-tenants). Ground rents that can increase over time, repair cost that are shared through service charges, often inflated through inefficient management, charges when permission is sought for carrying out improvements or to let-out a flat, and “marriage value”* - compensation paid to the freeholder when the lease length is extended.
Michael Gove is said to be fighting to save his promised reforms of what he called an “outdated” and “feudal” system of property ownership. Millions of property owners own their homes through leases in England and Wales – estimated to be around 10 million - now almost the only two nations in the world where the system exists.
Only 12 months ago Gove said he wanted to abolish leasehold altogether, but was forced to lower his sights and opt for reforms to the existing system, which would make it easier for leaseholders to buy their freeholds.
There’s a fundamental issue with multi-occupied blocks of privately owned flats: to maintain the value and safety of the block it must be well managed and maintained. Whether the freeholder does this directly, through a managing agent, or it’s done by a company owned and managed jointly by the leaseholders (they have a legal right to take over management) everyone must pay their share. Otherwise, the value of a building would deteriorate as inevitably some leaseholders would resist paying for regular maintenance.
More recently still it has become a trend for big housing developers to sell single dwellings as leaseholds. By tying people into leases with exorbitant service charges, they are being trapped in them, a long lease commitment. which no one in the right mind would buy. Many young families who bought houses in ignorance of what they were buying into, cannot move. Gove’s revised plan would limit ground rents to a “peppercorn” amount, an amount that would encourage freeholders to sell the freehold title to the leaseholder.
Gove’s reforms would have built-on a long line for reforms, the most recent being the 2022 Leasehold Reform Act, but it seems these latest reform proposals are meeting fierce resistance form the Treasury, and could be quietly shelved by this Tory Government.
The stumbling block, it seems, is that the pension funds, many of which own billions of pounds worth of freeholds in blocks of flats, particularly those in expensive parts of the capital, have been lobbying hard against such a move.
It has been estimated that if the reforms were carried through as they are proposed, up to £40 billion could be wiped off the value of pension funds, having a significant impact on the value of individual pensioner’s savings.
Those supporting the changes, namely the housing campaigners and charities and many in the opposition parties, are livid that the reforms may not see the light of day, an increasing prospect given that a general election could be just months away.
According to a report in the Sunday Times, “Gove has given instructions to officials to keep fighting but they know they are fighting on losing ground” and sources close to the Government have told the newspaper that neither the prime minister, nor the chancellor seem to be willing to progress the issues.
The fear is that by trying to bring about his major reforms, Gove could fail to implement the urgent more minor ones, that’s to stop the sale of individual homes with exorbitant escalating service charges, trapping families in unsaleable properties.
Gove’s back-stop, it seems, is an attempt to save his plan failing completely, that’s to seek a compromise that would cap all ground rents at a fixed £250 per year. This would potentially free those leaseholders trapped in their homes and it would encourage more freeholders to sell the freeholds to their leaseholders. But at the same time, the diminution in value due to lower ground rent income would have freeholders looking to their leaseholders for compensation.
With the housing market in chaos one way or another, with rents going through the roof, landlords leaving the sector and a severe shortage of rentals, the Conservatives' handling of these issues is looking increasingly inept.
The problem for the Conservatives, as is the case for Gove’s Renters (Reform) Bill, currently progressing through Parliament - facing major delays, numerous amendments and also possible failure - all these reforms were part of their 2019 manifesto commitments.
*Marriage value is the increase in the value of the property when the lease length is extended. So, given that the longer lease has more value, due to the leaseholders’ legal right to extend, a share of this uplift must be paid to the freeholder. That’s on top of the other costs of extending the lease, which is important to the leaseholders as a lease below around 70 years loses value quickly – it becomes difficult for a new buyer to obtain a mortgage.
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