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| The leasehold system is a money-making racket. Reform is long overdue | The leasehold system is a money-making racket. Reform is long overdue |
| (5 months later) | |
| This week, the Law Commission fired the opening shot at the murkiest and most lucrative corner of the residential property market: the leasehold system. | This week, the Law Commission fired the opening shot at the murkiest and most lucrative corner of the residential property market: the leasehold system. |
| Leasehold simply means long tenancy and it is unique to England and Wales. When you buy a leasehold property, you own it for a fixed period of time: ownership of the property returns to the landlord when a lease comes to an end. Every other jurisdiction in the world, including those based on English law, have either never introduced it or, as in Australia and New Zealand, have virtually removed it. But it has endured and thrived here: indeed, in 2016, about 27% of residential property transactions in England and Wales were leasehold. It is growing as a form of ownership as our population increases and we have to build flats instead of houses and at higher densities, particularly in the south-east. | Leasehold simply means long tenancy and it is unique to England and Wales. When you buy a leasehold property, you own it for a fixed period of time: ownership of the property returns to the landlord when a lease comes to an end. Every other jurisdiction in the world, including those based on English law, have either never introduced it or, as in Australia and New Zealand, have virtually removed it. But it has endured and thrived here: indeed, in 2016, about 27% of residential property transactions in England and Wales were leasehold. It is growing as a form of ownership as our population increases and we have to build flats instead of houses and at higher densities, particularly in the south-east. |
| Radical plans to end huge costs of buying a freehold unveiled | |
| With leasehold there is a third-party landlord who nominally owns the building and land on which it stands, while the leaseholders pay all the bills: ground rents, service charges, maintenance, insurance and the rest. It has always been controversial, with predatory professional freeholders gaming the system at the expense of unorganised groups of leasehold flat owners. | With leasehold there is a third-party landlord who nominally owns the building and land on which it stands, while the leaseholders pay all the bills: ground rents, service charges, maintenance, insurance and the rest. It has always been controversial, with predatory professional freeholders gaming the system at the expense of unorganised groups of leasehold flat owners. |
| Developers have long been alert to the revenue streams of leasehold, building blocks of flats with high ground rents that double every so often, then selling off the freeholds to speculators. In an era of low interest rates, these ground-rent incomes are very valuable. Developers were so pleased with the result that they then decided to build leasehold houses, even when there was absolutely no reason to do so. | Developers have long been alert to the revenue streams of leasehold, building blocks of flats with high ground rents that double every so often, then selling off the freeholds to speculators. In an era of low interest rates, these ground-rent incomes are very valuable. Developers were so pleased with the result that they then decided to build leasehold houses, even when there was absolutely no reason to do so. |
| So, while new-build leasehold houses accounted for only 7% of transactions in 1995, they rose to 15% in 2016. Leasehold houses are particularly common in the north-west, where 32% of house transactions were leasehold in that year. | So, while new-build leasehold houses accounted for only 7% of transactions in 1995, they rose to 15% in 2016. Leasehold houses are particularly common in the north-west, where 32% of house transactions were leasehold in that year. |
| “There is some evidence that developers were opting to sell new-build houses on long-lease agreements as this can represent a lucrative future income stream,” says the House of Commons library report on the issue. Some housebuilders introduced eye-wateringly exploitative clauses into the lease, such as ground rents that doubled every 10 years. Taylor Wimpey was the main offender here, but it has put aside £130m to sort the problem. | “There is some evidence that developers were opting to sell new-build houses on long-lease agreements as this can represent a lucrative future income stream,” says the House of Commons library report on the issue. Some housebuilders introduced eye-wateringly exploitative clauses into the lease, such as ground rents that doubled every 10 years. Taylor Wimpey was the main offender here, but it has put aside £130m to sort the problem. |
| Britain has had leasehold homes for hundreds of years, but only in the past few months has the ground rent scandal exploded. Now the government is proposing a complete ban on new houses sold as leasehold, and reducing ground rents to zero. Traditionally, houses have been sold as freehold, and the buyer has complete control over their property. When a house is sold as leasehold, the buyer is effectively only a tenant with a very long term rental, with the ground the home is built on remaining in the hands of the freeholder. The home buyer has to pay an annual “ground rent” to the freeholder, and has to ask the freeholder for consent if they want to make any changes to the property, such as building a conservatory or changing the windows. | Britain has had leasehold homes for hundreds of years, but only in the past few months has the ground rent scandal exploded. Now the government is proposing a complete ban on new houses sold as leasehold, and reducing ground rents to zero. Traditionally, houses have been sold as freehold, and the buyer has complete control over their property. When a house is sold as leasehold, the buyer is effectively only a tenant with a very long term rental, with the ground the home is built on remaining in the hands of the freeholder. The home buyer has to pay an annual “ground rent” to the freeholder, and has to ask the freeholder for consent if they want to make any changes to the property, such as building a conservatory or changing the windows. |
| In the past, leasehold property owners were generally charged just a “peppercorn” ground rent, sometimes as little as £1 a year, and many freeholders did not bother to collect it. But the picture changed earlier this century, when developers started to insert clauses into leasehold contracts where the ground rent was set at £200-£400 a year, doubling every ten years. Direct Line estimates the typical ground rent to be currently £371. Although unsuspecting first-time buyers were frequently told that 999-year leases were “virtually freehold”, the clauses meant that the ground rent would soon spiral to absurd levels. The government quotes a family house where the ground rent is expected to hit £10,000 a year by 2060. | In the past, leasehold property owners were generally charged just a “peppercorn” ground rent, sometimes as little as £1 a year, and many freeholders did not bother to collect it. But the picture changed earlier this century, when developers started to insert clauses into leasehold contracts where the ground rent was set at £200-£400 a year, doubling every ten years. Direct Line estimates the typical ground rent to be currently £371. Although unsuspecting first-time buyers were frequently told that 999-year leases were “virtually freehold”, the clauses meant that the ground rent would soon spiral to absurd levels. The government quotes a family house where the ground rent is expected to hit £10,000 a year by 2060. |
| The Leasehold Knowledge Partnership, which has vigorously campaigned on this issue, estimates that around 100,000 homebuyers are trapped in contracts with spiralling ground rents. There are many more people in leasehold flats, some of which also have doubling ground rents. | The Leasehold Knowledge Partnership, which has vigorously campaigned on this issue, estimates that around 100,000 homebuyers are trapped in contracts with spiralling ground rents. There are many more people in leasehold flats, some of which also have doubling ground rents. |
| No. Freeholders are able to extract other sums out of their leaseholders in a variety of ways. Homebuyers report being charged £100 even to have a letter answered by the freeholder, and as much as £2,500 for permission to build a conservatory. These are charges that are on top of obtaining planning permission. | No. Freeholders are able to extract other sums out of their leaseholders in a variety of ways. Homebuyers report being charged £100 even to have a letter answered by the freeholder, and as much as £2,500 for permission to build a conservatory. These are charges that are on top of obtaining planning permission. |
| The government finally woke up to this scandal last year and has pledged to end leasehold houses and set new ground rents to as low as zero. There are about 100,000 properties, flats and houses that are now unsellable because of onerous ground-rent terms: that is where ground rents double every 10 years or are higher than 0.1% of the sale price. | The government finally woke up to this scandal last year and has pledged to end leasehold houses and set new ground rents to as low as zero. There are about 100,000 properties, flats and houses that are now unsellable because of onerous ground-rent terms: that is where ground rents double every 10 years or are higher than 0.1% of the sale price. |
| On Wednesday a demonstration of leasehold house owners arrived at Westminster demanding an end to these exploitative practices. | On Wednesday a demonstration of leasehold house owners arrived at Westminster demanding an end to these exploitative practices. |
| What the new Law Commission proposals are trying to do is find an escape route for those families caught up in the scandal who own leasehold houses. There are currently two possibilities: you can either buy the freehold – “enfranchise” – or extend the lease by a statutory 90 years, which reduces the ground rent to zero (or a “peppercorn”). Both processes involve significant expense, and the leaseholder has to pay the legal and surveying fees of the freeholder as well as his own. Worse still, the mathematical formulae agreed by the courts to work out the price of the freehold were obligingly provided by household-name estate agents for the richest freehold owners in the country. So for years the courts have accepted a model commissioned by the Duke of Wesminster’s Grosvenor estate. Now Savills has stepped in with an equally landlord-friendly version. These valuations are then incessantly argued about in court, benefiting a terracotta army of solicitors and chartered surveyors at ordinary homeowners’ expense. | What the new Law Commission proposals are trying to do is find an escape route for those families caught up in the scandal who own leasehold houses. There are currently two possibilities: you can either buy the freehold – “enfranchise” – or extend the lease by a statutory 90 years, which reduces the ground rent to zero (or a “peppercorn”). Both processes involve significant expense, and the leaseholder has to pay the legal and surveying fees of the freeholder as well as his own. Worse still, the mathematical formulae agreed by the courts to work out the price of the freehold were obligingly provided by household-name estate agents for the richest freehold owners in the country. So for years the courts have accepted a model commissioned by the Duke of Wesminster’s Grosvenor estate. Now Savills has stepped in with an equally landlord-friendly version. These valuations are then incessantly argued about in court, benefiting a terracotta army of solicitors and chartered surveyors at ordinary homeowners’ expense. |
| The only way to end this racket is to end the valuation arguments and introduce a fixed formula for those looking to buy their freehold, of annual multiples of ground rent, as exists in Northern Ireland and Scotland. Only then will your leasehold home be truly yours. | The only way to end this racket is to end the valuation arguments and introduce a fixed formula for those looking to buy their freehold, of annual multiples of ground rent, as exists in Northern Ireland and Scotland. Only then will your leasehold home be truly yours. |
| Is this the worst leasehold block in Britain? | |
| Justin Madders, Labour MP for Ellesmere Port and Neston, is introducing a bill in the autumn to set the cost of freehold at 10 times annual ground rent. That would cause a shriek of pain among London’s richer landlords, but the Law Commission said this week that it was examining this model. It is also considering introducing longer lease extensions than the statutory 90 years. It comes down to this: do we really want anonymous speculators in residential freeholds to have an income stream embedded in family homes. Or should home ownership mean real home ownership in England and Wales? | Justin Madders, Labour MP for Ellesmere Port and Neston, is introducing a bill in the autumn to set the cost of freehold at 10 times annual ground rent. That would cause a shriek of pain among London’s richer landlords, but the Law Commission said this week that it was examining this model. It is also considering introducing longer lease extensions than the statutory 90 years. It comes down to this: do we really want anonymous speculators in residential freeholds to have an income stream embedded in family homes. Or should home ownership mean real home ownership in England and Wales? |
| This grisly leasehold sector has enriched itself at the expense of ordinary families’ wealth and security. The Law Commission needs to resist the considerable lobbying now being deployed and introduce a fixed multiple for ground rents, and an end to the interminable arguments over lease valuation. | This grisly leasehold sector has enriched itself at the expense of ordinary families’ wealth and security. The Law Commission needs to resist the considerable lobbying now being deployed and introduce a fixed multiple for ground rents, and an end to the interminable arguments over lease valuation. |
| But there is a risk to this: the anonymous speculators who own these residential freeholds, often through offshore entities with nominee directors, may challenge any reforms on the basis of their human rights. After all, they will be losing a property asset. I am not sure the public cares a monkey’s about the human rights of murky ground-rent speculators operating out of the British Virgin Islands. But the law might. We shall have to wait until the autumn to see what the Law Commission recommends. | But there is a risk to this: the anonymous speculators who own these residential freeholds, often through offshore entities with nominee directors, may challenge any reforms on the basis of their human rights. After all, they will be losing a property asset. I am not sure the public cares a monkey’s about the human rights of murky ground-rent speculators operating out of the British Virgin Islands. But the law might. We shall have to wait until the autumn to see what the Law Commission recommends. |
| • Sebastian O’Kelly is trustee of the Leasehold Knowledge Partnership | • Sebastian O’Kelly is trustee of the Leasehold Knowledge Partnership |
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