When is a homeowner not a homeowner? When they own their property on a leasehold basis.
There is so much at fault with the leasehold system, it has taken the Law Commission over 850 pages to address its shortcomings in a report published this week.
Property experts think the government will (eventually) enact many of the suggested reforms in what is said to be the biggest shake-up for residential property since Margaret Thatcher’s “Right to Buy” in the 1980s.
This sounds like great news for the 4m leaseholders in England and Wales — of which I am one — but property investors can console themselves that it’s likely to be many years before anything changes.
First, a history lesson. The laws concerning property tenure in England and Wales have their roots in the feudal system. As you might expect, this does not bode well for those at the bottom of the pile.
The freeholder has the legal right to own the land or property in perpetuity; the leaseholder merely owns the lease — paying for the right to occupy their home for a set period, typically 99 or 125 years.
The prices of leasehold properties aren’t exactly cheap, but you’re also liable to pay all kinds of extra charges to freeholders. If you live in a block of flats, having a mechanism for paying for the upkeep of the common parts makes sense. Yet over the past decade, housebuilders have routinely been selling new build houses on a leasehold basis; one of many ruses to wring more money out of leaseholders.
From a freeholder’s point of view, the best thing about granting a lease is that it runs out. They can profit again by charging to extend it. If there’s less than 80 years left to run, they can also make leaseholders pay half of the expected uplift in the property’s worth — known as the “marriage value” (possibly because it costs a fortune and makes people cry).
Freeholders also levy an annual service charge to pay for the management and maintenance of the development and its grounds. It is very hard for leaseholders to challenge the size of these bills (and trust me, they only ever increase). Leaseholders can also face one-off demands to fund specific works. After the Grenfell disaster, leaseholders of flats with flammable external cladding have been finding this out the hard way. Some face six-figure bills, or find their flats are unsellable.
Then there’s the ground rent. Traditionally, this was a nominal sum. But some greedy developers had been sneaking clauses into leases so the ground rents doubled every decade. A buyer of a new leasehold property might not quibble over an annual ground rent of £300, but after 50 years, they might face bills of £10,000 a year — a problem many leaseholders only discover when they struggle to sell their homes. Those stuck with such onerous terms are known as “leasehold prisoners”.
The housebuilders have been shamed into stopping the ground rents wheeze, but last year’s promised ban on selling new leasehold houses has yet to become law. In any case, says Graham Pack, a chartered surveyor who advises on leasehold issues, around 1.4m leasehold houses have already been built. As well as selling these at high values, developers get a second bite of the cherry by selling the freeholds and their lucrative income stream to investors.
Leaseholders report being charged excessive “admin fees” to obtain permission to carry out the most basic renovations. You might expect this for major works like building an extension — but not, as consumer group Which? has found, being charged £60 for permission to replace a doorbell, or £300 to erect a fence.
If leaseholders want to break free of these chains, they have the right to “enfranchise” — effectively buying out the freeholder. As with extending your lease, this is a complicated and expensive procedure.
Even if they can afford to pay, leaseholders will also be liable for all of the landlord’s legal and surveying costs — enough to put many people off trying.
So it should not surprise you that the Law Commission wants to sweep away the above excesses by recommending that for all future sales, leasehold is replaced by an existing but little-used alternative tenure called “commonhold” (think 990-year leases and no ground rents).
This leaves the problem of what to do with the 4m existing leasehold properties. The report essentially recommends making it easier and cheaper for leaseholders to enfranchise and buy out the ground rent, or extend their lease to 990 years.
Roarie Scarisbrick, a property buying agent, says this is not a “silver bullet” for existing leaseholders. He points out that around 50 separate pieces of legislation would need to be passed for these changes to happen, depending on whether government goes all the way and bans leasehold in favour of commonhold, or comes up with new incentives for commonhold while allowing leasehold to continue.
He and other experts believe there is the political desire to reform this ancient and clunky system — particularly as the government’s Help to Buy initiative has enabled the sale of billions of pounds’ worth of leasehold flats and houses to young families. The problem is the lack of parliamentary time.
It has taken two years just to produce this review. The government is now “considering” it, but how many more years will it take for any of this to become legislative reality? It doesn’t look likely in this parliament — and that’s before you consider the pressures of Brexit and coronavirus.
And what could any reforms mean for future property prices?
Depending on how cleanly this legislation is enacted, there are dangers of creating a two-tier system. If I sell my flat in the future, I foresee having to pay to extend my lease to 990 years as this it what buyers would get if they bought a new build flat next door.
Leasehold has been a nice little earner for the major housebuilders. Share prices slipped on the day the report was published (reflecting the threat to future profitability) but not by very much (reflecting the difficulty of unpicking the current legislation). I expect developers will make a lot of noise about future housebuilding targets being missed, and insist that prices of new build homes will have to increase. Good luck with that.
I have more sympathy for responsible freeholders (yes, they do exist). Making lease extensions and enfranchisement cheaper and easier means the value of their property assets will fall and they face a greater risk of losing control of them altogether.
The greediest developers may have triggered the issue of reform, but freeholders may end up hurting more. Crying “it’s not fair”, however, will only elicit wry smiles from leaseholders, who have been saying exactly that for years.