Leasehold homes are unique to England and Wales. In both countries, almost all flats and some homes are bought and sold by leaseholders who do not own the property outright. Instead, the freeholder of the building, or land in the case of houses, leases it to them for a set number of years. Freeholders can charge their leaseholders a service charge, a fee for maintaining common spaces, and ground rent.
The system has been open to abuse for years. In 2017, a government consultation on leasehold attracted over 6,000 responses and found that freeholders had been price gouging leaseholders on service charges, ground rents, lease extensions, and buying the freeholds to their properties, as well as making arbitrary rules about what leaseholders could and couldn't do to their homes. In some aspects, the problem has only worsened since then, as freeholders push eye-watering post-Grenfell flat recladding costs onto leaseholders. It is not just flats under scrutiny: in 2019, the government competition watchdog launched a probe into housebuilders selling homes as leaseholds.
As a result, the value of some leasehold properties has slumped, their insurance has skyrocketed, and in some cases mortgage providers have refused to lend against them.
This could all be about to change. The Leasehold and Freehold Reform Bill is making its way through Parliament, and campaigners say it could be the biggest shake-up for the system in a century. Among a variety of measures, the government wants the bill to reduce ground rent on all existing freeholds to a ‘peppercorn’, a nominal amount with no real monetary value; increase the standard lease extension term for leaseholds to 990 years from 90 years; remove the 'marriage value' (ie, the increase in property value) seen when a leasehold is extended; and ban the sale of new leasehold homes.
If the bill passes, leaseholders could be thousands of pounds better off, and the value of their investments could soar. But it’s a big ‘if’, and the bill faces many challenges.
Pledges, promises, and proposals
The government is currently running a consultation on the proposals in the bill. Originally scheduled to end on 21 December, it has been extended to 17 January. Meanwhile, its progress through Parliament is at the committee stage. Many worry about the lack of parliamentary time that a government which could be on its last legs has given itself to get the bill over the line before the next election. A November reshuffle that saw Lee Rowley appointed as the 16th housing minister since 2010 does not help, either.
These delays frustrate those who have been awaiting reform for years. As early as 2017, then housing secretary Sajid Javid pledged to end the sale of new leasehold homes and reduce ground rent to a peppercorn. The proposals received cross-party support, but Brexit complications and the pandemic meant the reforms got pushed back. Lobbying from ground rent investors has also been blamed.
Progress has since emerged. The Leasehold Reform (Ground Rent) Act 2022 effectively banned attaching ground rents to new leasehold properties by reducing them to a peppercorn. And the Building Safety Act (BSA) 2022 moved the bulk of recladding responsibility from leaseholders to freeholders.
However, some leasehold cladding disputes still arise even following the BSA, such as one involving Grainger (GRI) at Tiltman Place (see boxout). Many leaseholders are also still on the hook for major ground rent and service charges on existing properties, as the reduction enforced in 2022 only applies to new properties. The government wants the current bill to fix this by reducing ground rents on all existing properties.
“If the government goes for peppercorn ground rent, then this bill is transformational,” says Sebastian O’Kelly, chair of the Leasehold Knowledge Partnership. Harry Scoffin, founder of the campaign group Free Leaseholders, agrees, describing it as the biggest change to the system in a century – but only if the government is bold on ground rent reduction.
That is no guarantee. The consultation may water down the government’s proposal on this front, or others. And campaigners assert there are other problems with the bill as it stands. First, it contains nothing about moving property ownership towards ‘commonhold’, a version of which exists in almost every other legal jurisdiction, where individual flat owners also collectively own and share the legal responsibility of managing the shared building.
The bill also does not address forfeiture, where leaseholders can lose their flats over unpaid service charges and which is more aggressive than mortgage foreclosure because there is no balancing payment. There are also frustrations over how difficult it will remain for leaseholders to take control of their blocks under right-to-manage legislation. Current rules require that no more than 25 per cent of any such building is used for non-residential purposes. The bill will raise this to 50 per cent but not all are satisfied.
Others say the bill does not do enough to regulate service charges, where leaseholders pay hard-to-dispute fees for building management, levied either by the freeholder or by a management company hired by the freeholder. There is a plan to standardise these fees, but Scoffin says the charges could still be gamed without stricter regulation. If the government abolishes ground rent, he also thinks that some freeholders may pass that loss on to the service charge instead.
Yet, despite its shortcomings, O’Kelly believes that simply enforcing a peppercorn ground rent may effectively solve all the problems connected with leasehold. Removing ground rent, he suggests, would kill off the investment case for freeholds. He thinks this will encourage a move towards commonhold without legally mandating it.
Unsurprisingly, freehold investors are not pleased about this potential outcome. The Residential Freehold Association (RFA) describes the reforms as “a totally unjustified interference with the legitimate property rights of freeholders and the pension holders who have invested in the sector”. It claims the government may need to pay out £31bn in compensation for erasing the value of their investments, says pension funds are at risk as they own £15bn in freehold investments, and argues that the freehold system helps leaseholders by removing the responsibility of managing the building from them.
The compensation issue could prove thorny. The government said in the consultation document on the bill that “freeholders would not receive financial compensation for lost revenue" if it introduced peppercorn ground rent. Legal experts have told the Financial Times this could amount to “expropriation, daylight robbery or somewhere in-between”, paving the way for a standoff between the government and freeholder groups.
For pension funds, the £15bn the RFA says they own amounts to 0.54 per cent of their collective £2.76trn in gross assets, excluding derivatives. At greater risk are specialised, publicly traded property funds, such as Ground Rents Income Fund (GRIO), which has lost over 78 per cent of its value since April 2017, and Time Freehold, which suspended trading in November due to “material uncertainty” over the value of the fund’s assets as a “direct result” of the consultation.
Many also argue against the notion that freeholders are better custodians of a building than leaseholders. "It works perfectly well in the rest of the world because what happens is [the leaseholders] appoint professionals [managing companies], but the professionals are actually answerable to the people whose money they're spending," says Liam Spender, senior associate at Velitor Law.
And while freeholders’ investments will likely tank in value, leaseholders’ home values could increase. According to an analysis from the FT, house values and flat values in England and Wales have diverged since Grenfell. The tragedy highlighted the problems with both countries’ leasehold system, as leaseholders faced large cladding bills, which meant flat prices failed to rise as much as house prices. In every other jurisdiction that the FT measured over the same period, including Scotland, which has a commonhold system, house and flat prices rose in tandem.
If the English and Welsh system begins to resemble other countries because of the bill’s reforms, flat values could catch up with house values, a boon for the leaseholders who own them. But, as with everything else about the bill, it's still a big ‘if’.
