‘Corporate Stitch-Up’ CondemnedGovernment ‘Must Defy’ Developers’ Calls to Drop Vital Leasehold Overhauls
Housing secretary Michael Gove is facing pressure to abandon popular plans to reform England and Wales’ feudal leasehold system, Josiah Mortimer reports
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If you buy a flat in a UK city, the chances are you don’t really own it. You are one of the 10 million-odd people leasing the right to stay there, from an often-faceless landlord. And in recent years, those landlords have spotted an opportunity to fleece their tenants.
With few limits on how much they can hike ground rents and service charges, it has offered a licence to print money amid the global economic slump. What offshore hedge funder could turn down the opportunity?
Levelling Up secretary Michael Gove has pledged to scrap England and Wales’ feudal leasehold housing system once and for all. But he now faces growing pushback from vested interests.
England and Wales are relatively rare among developed countries in how our housing system operates. The leasehold system has a long and typically-strange history that can be traced back to mediaeval times.
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Under the feudal system, most people were tenants who paid rent to a landowner in exchange for the right to live and work on the land. This system began to change in the 19th century, with the rise of the middle class and the growth of cities. As people began to buy and sell property, new forms of land ownership emerged, including the leasehold system.
Skip this if you know it, but under this setup, you own the right to use a property for a fixed period of time, typically 99 or 125 years. The leaseholder pays ground rent to the freeholder – who owns the underlying land – and who is responsible for maintaining the property. Typically there is also a service charge to cover the upkeep of communal areas in blocks of flats.
Sadly for some investors, the serfs have had enough.
Last February, Gove, who is Secretary of State at the Department for Levelling Up, Housing and Communities, said: “We hope, in the forthcoming King’s Speech, to introduce legislation to fundamentally reform the system. Leaseholders, not just in this case but in so many other cases, are held to ransom by freeholders.”
He added, with uplifting clarity: “We need to end this feudal form of tenure and ensure individuals have the right to enjoy their own property fully.”
The leasehold system has proven increasingly controversial, particularly amid a rising trend of new build homes being sold on leasehold rather than freehold terms. But whether the leaseholder is in a house or a flat, their uniquely weak status (freeholders can hold the land forever) means many face paying huge markups on repairs, or ramped-up service charges to give extortionate rates of return to landlords.
In response to pressure – including from homeowners who had faced huge fees from freeholders for taking down dangerous cladding – the UK government introduced a series of reforms last year. They are aimed at making the leasehold system fairer and more transparent, including by reducing ground rents to zero for new leases of houses and flats.
The government has promised that this is just the start and that future legislation will give leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”, among other reforms.
But property sector insiders are now briefing that they believe the next stage of legislation is unlikely to get off the ground.
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Jack Spearman of the Residential Freeholders Association told CityAM this week that leaseholds work well because it mediates between people who are very invested in the building and how it’s maintained, and people who don’t want any responsibility. “Freeholders can act as an arbiter”, he told the paper. He argued that the costs of repair would not disappear. That may cause a guffaw from leaseholders charged £100 to get a communal lightbulb changed.
Perhaps the most annoying argument, though, came from residential property firm Ringley Group. “To expect unskilled leaseholders to take the role of a commercial landlord is fraught with even more problems than the system that we’ve got”, their spokesperson said.
As the CityAM author thankfully noted, those “unskilled leaseholders” do in fact successfully manage land and communal areas directly in most advanced democracies.
Commonhold Now campaigner Joe Douglas says the patronising approach ignores the fact that commonhold owners can choose to appoint a managing company to delegate responsibility if they like – but they will collectively be able to sack them or hold them accountable.
Unfortunately for Douglas, there are four freeholders across his 1100-flat development, whom the developer sold the ‘freeholds’ on to. He tells Byline Times: “In our case, their only purpose appears to be the collecting of ground rents – on escalation terms favourable to them – e.g. RPI”, that is, property-price linked inflation.
Why was his development set up how it was? “Because it made more money for the developer…I do not know why the freeholders are there as they have served no practical function in seven years. [They do] nothing we couldn’t do for ourselves with more transparency. The consequence is that it has made these flats uncapped financial liabilities,” he says.
Currently, it is extremely difficult to buy-out a freeholder. In a block of flats, a majority of leaseholders need to get together, raise the funds – often around £10,000 each – and organise a vote that they win with more than 50%.
“So instead, the freehold gets bought by a faceless corporate entity that now has control over our finances via commissions. It is a one-way flow of money from leaseholder to freeholder. We didn’t stand a chance and we have lost control of our finances as a result,” Douglas says.
For him, the “corporate stitch-up” has led him to regret his flat purchase “every day”. But few know how the freeholder is going to behave. Rentier capitalism is an unpredictable beast.
Instead of wallowing in the consequences, Douglas is – like many others – now directing his efforts to make sure the leasehold system is abolished.
Frustrated leaseholders have now launched a “movement for change to real homeownership.” Commonhold Now: End Leasehold for Real Homeownership is a new grassroots campaign organisation committed to ending the “fundamentally unfair, costly and complex leasehold system in England and Wales” for flats and houses on privately managed estates.
The campaign is calling on the UK Government to deliver on the Conservative Party’s 2019 manifesto commitments on leasehold by including a Bill in the King’s Speech in Parliament this Autumn to deliver a “mass shift to Commonhold.”
They point out that England and Wales are outliers in the world for persisting with a “coercive tenure” for residential homeownership. Commonhold systems are widely used in other countries, including Australia and Canada. Scotland has also long enjoyed a more democratic and transparent form of ownership, called tenements. While not perfect, campaigners say it is a vast improvement on the leasehold system.
As things stand, many Commonhold Now supporters south of the border say they feel trapped, financially vulnerable and “robbed of autonomy and control” after being subject to rising fees from faceless landlords or their managing agents.
In the coming weeks, the campaign will highlight the “devastating impacts” on personal and mental health from “aggressive, money-grabbing freeholders” and the neglectful behaviour of their managing agents, spokesperson Harry Scoffin said.
As property interests ramp up their lobbying offensive, Gove has a choice to make. Does he listen to the leaseholders, or the landlords?
Update: An earlier version of this piece said Scotland uses the “Commonhold” system. It instead uses a system of resident-controlled tenements. We should also make clear that England has not yet banned the sale of new leasehold houses, as previously reported.
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