How feudal leasehold contracts ruined homeownership for millions
Melissa Lawford
Mon, 30 January 2023
Leaseholds - Leon Neal/Getty Images
Housing secretary Michael Gove has said he wants to abolish the “feudal” leasehold system in a major overhaul of English housing.
In an interview with The Sunday Times, Mr Gove said: “It is an outdated feudal system that needs to go.”
Nearly five million homes in England are leaseholds. The people who live in them can find themselves at the mercy of their freeholders, subject to extortionate service charges and unable to sell up.
So what is the history of leasehold, and are there ways to escape this system if you are already affected?
Grenfell - Hollie Adams/Bloomberg
What options do existing leaseholders have now?
In theory, leaseholders have a right to buy their freehold and a right to manage it, but the process is difficult and expensive. First, blocks must be less than 25pc commercial, such as retail units. “After they introduced that in 1993, there was a surprising number of blocks with 26pc commercial units,” says Boyd. This was likely done in order to prevent leaseholders from being able to buy out the freehold.
It is also a decision for the whole building – at least 50pc must agree. For Barker, this would be incredibly logistically tricky. “I would have to get the people who own all of the other 41 flats in my building to agree. It is only me and three other residents who actually own our homes. The rest of the properties are let out, so I would have to contact the landlords. And I don’t want to be responsible for managing the property,” she says.
Then there is the question of cost – buying the freehold typically costs tens of thousands per leaseholder.
How much is changing?
In June 2022, the Government banned ground rent on new leases, meaning new leaseholders cannot be subject to more than a “peppercorn” charge. But this has done nothing to help existing leaseholders.
Ministers also committed to making it “easier, faster, fairer and cheaper” for leaseholders to buy their freeholds, but legislation to change this is still far off.
The Government opened a consultation on proposals to extend leaseholders’ rights to buy their freeholds in mixed-use buildings on January 11. This will address the issue that leaseholders do not qualify to buy their freehold if more than 25pc of the building is commercial units. The consultation will close on February 22.
In 2021, it also launched the Commonhold Council – a panel that is exploring commonhold as an alternative tenure to leasehold.
Commonhold tenure would be better than purchasing a share of a freehold because it means homeowners would be free of lease terms, such as restrictions on making changes to the building, says Boyd.
Introducing a commonhold system would be straightforward for new properties but shifting existing leases to this system would be very difficult, says Peaker. “Effectively it would mean depriving freeholders of their property rights. It is doable, but that usually raises the issue of compensation,” he says.
Melissa Lawford
Mon, 30 January 2023
Leaseholds - Leon Neal/Getty Images
Housing secretary Michael Gove has said he wants to abolish the “feudal” leasehold system in a major overhaul of English housing.
In an interview with The Sunday Times, Mr Gove said: “It is an outdated feudal system that needs to go.”
Nearly five million homes in England are leaseholds. The people who live in them can find themselves at the mercy of their freeholders, subject to extortionate service charges and unable to sell up.
So what is the history of leasehold, and are there ways to escape this system if you are already affected?
‘We are at the mercy of everyone’
When Evie Barker’s adult children left home in 2010, she decided to downsize to a new-build flat in Kent. Now, she is trapped.
Barker, who spoke using a different name, has learned that her housebuilder sold on her building’s freehold. Now, her costs are soaring and the property is unmortgageable.
When she moved in, Barker, 65, was charged ground rent at £100 per year. This has since tripled to £299, and will jump again to £350 next year. Her annual service charge is £1,800 – an 80pc increase since she first moved in.
She is desperate to move but is unable to sell because banks will not lend on properties in the block because of the rising ground rent. To make the property mortgageable, she must extend the lease, which would cost her £20,000.
“I feel we are at the mercy of everyone. What was the point of me purchasing a property if I can’t sell it? I thought that was the whole point of a Tory government – a free market,” she says.
This is a problem for the whole market. Giles Peaker, of Anthony Gold solicitors, says: “This isn’t just entry-level properties. It is not uncommon to see disputes in the first tier tribunal [over properties] that are worth a couple of million. An awful lot of buy-to-let properties are affected, and in the end it affects the entire market if a lot of flat owners can’t move.”
What is leasehold and how does it work?
A fifth of England’s homes are leasehold – 4.86 million properties. Of these, 58pc are owner-occupied while 37pc are buy-to-lets.
The leasehold structure means that leaseholders do not own their homes outright – they own the right to occupy them for a fixed period of time, determined by the lease. It is their freeholder who owns the land and has ultimate ownership of the property. This applies to both houses and, more commonly, flats.
In the three years from 2017-18 to 2020-21 alone, the size of the leasehold sector swelled by 560,000 homes. This is because it is the typical tenure for flats, which means a huge proportion of new-build properties are leasehold – despite the fact that this is a tenure system that evolved in the Middle Ages.
In theory, in blocks of flats, this should provide a system of responsibility for maintaining the building as a whole and communal areas. In reality, the system has been widely abused.
Where did leasehold go wrong?
A sea change in the leasehold system began in the 1990s. Martin Boyd, of the Leasehold Knowledge Partnership, a charity, says: “About 25 years ago, we got a new breed of ground rent investor in the market. They realised that you could leverage the system.”
A group of companies started buying up freeholds, which come with ground rent charges – annual fees that are paid to the freeholder. In addition to making money from building and selling homes, housebuilders could earn twice by later selling on the freeholds too, says Boyd. In turn, developers started changing the terms of the lease contracts to make them more profitable.
“We started seeing developers introducing clauses that meant the ground rent would double every 10 years. This meant that they could sell on the freeholds for much more money,” Boyd says.
This went largely unnoticed – but years down the line, leaseholders suddenly found that their ground rent charges were becoming enormous. Lenders clammed up and refused to grant mortgages on properties with so-called “doubling” charges. Hundreds of thousands of homeowners became trapped.
Extortionate charges
In addition to ground rent, the leasehold system provides two other money-making channels.
Freeholders typically employ a managing agent to handle the maintenance and day-to-day running of leasehold blocks. Leaseholders pay for this via a service charge.
“Developers will often artificially suppress the service charges when they are advertising the building,” Boyd says. Then, when the freeholds are later sold on, the new building owner may raise the service charge dramatically. Leaseholders have little recourse when they do.
Either the freeholder or the managing agent will also arrange the building’s insurance plan, which is paid for by the leaseholders. The insurance provider will pay a commission fee for this; in theory this is to cover administrative costs. But these commissions can often be huge, as high as 50pc – and they are part of the freeholders’ business models, Boyd says.
Expiring leases
Separate to the abuse of the system, an intrinsic problem with the leasehold system is that the value of a property declines as the lease gets closer to its expiry date.
Jonathan Achampong, of Wedlake Bell solicitors, says: “A lease is a wasting asset. Its value erodes with time. If the lease expires, the leaseholder doesn’t own it anymore.”
This means that leaseholds may need to pay to extend the lease – this gets very expensive if a lease has less than 80 years remaining. This is becoming a more widespread problem among former Right to Buy properties, adds Boyd.
The cladding crisis
The cladding scandal and building safety crisis that has unfolded in the wake of the 2017 Grenfell fire mean the insidious problems with the leasehold system have become desperately urgent issues for leaseholders.
Not only did it become apparent that hundreds of thousands of homes are unsafe, but it was almost impossible to hold someone accountable to cover the costs of fixing them.
When Evie Barker’s adult children left home in 2010, she decided to downsize to a new-build flat in Kent. Now, she is trapped.
Barker, who spoke using a different name, has learned that her housebuilder sold on her building’s freehold. Now, her costs are soaring and the property is unmortgageable.
When she moved in, Barker, 65, was charged ground rent at £100 per year. This has since tripled to £299, and will jump again to £350 next year. Her annual service charge is £1,800 – an 80pc increase since she first moved in.
She is desperate to move but is unable to sell because banks will not lend on properties in the block because of the rising ground rent. To make the property mortgageable, she must extend the lease, which would cost her £20,000.
“I feel we are at the mercy of everyone. What was the point of me purchasing a property if I can’t sell it? I thought that was the whole point of a Tory government – a free market,” she says.
This is a problem for the whole market. Giles Peaker, of Anthony Gold solicitors, says: “This isn’t just entry-level properties. It is not uncommon to see disputes in the first tier tribunal [over properties] that are worth a couple of million. An awful lot of buy-to-let properties are affected, and in the end it affects the entire market if a lot of flat owners can’t move.”
What is leasehold and how does it work?
A fifth of England’s homes are leasehold – 4.86 million properties. Of these, 58pc are owner-occupied while 37pc are buy-to-lets.
The leasehold structure means that leaseholders do not own their homes outright – they own the right to occupy them for a fixed period of time, determined by the lease. It is their freeholder who owns the land and has ultimate ownership of the property. This applies to both houses and, more commonly, flats.
In the three years from 2017-18 to 2020-21 alone, the size of the leasehold sector swelled by 560,000 homes. This is because it is the typical tenure for flats, which means a huge proportion of new-build properties are leasehold – despite the fact that this is a tenure system that evolved in the Middle Ages.
In theory, in blocks of flats, this should provide a system of responsibility for maintaining the building as a whole and communal areas. In reality, the system has been widely abused.
Where did leasehold go wrong?
A sea change in the leasehold system began in the 1990s. Martin Boyd, of the Leasehold Knowledge Partnership, a charity, says: “About 25 years ago, we got a new breed of ground rent investor in the market. They realised that you could leverage the system.”
A group of companies started buying up freeholds, which come with ground rent charges – annual fees that are paid to the freeholder. In addition to making money from building and selling homes, housebuilders could earn twice by later selling on the freeholds too, says Boyd. In turn, developers started changing the terms of the lease contracts to make them more profitable.
“We started seeing developers introducing clauses that meant the ground rent would double every 10 years. This meant that they could sell on the freeholds for much more money,” Boyd says.
This went largely unnoticed – but years down the line, leaseholders suddenly found that their ground rent charges were becoming enormous. Lenders clammed up and refused to grant mortgages on properties with so-called “doubling” charges. Hundreds of thousands of homeowners became trapped.
Extortionate charges
In addition to ground rent, the leasehold system provides two other money-making channels.
Freeholders typically employ a managing agent to handle the maintenance and day-to-day running of leasehold blocks. Leaseholders pay for this via a service charge.
“Developers will often artificially suppress the service charges when they are advertising the building,” Boyd says. Then, when the freeholds are later sold on, the new building owner may raise the service charge dramatically. Leaseholders have little recourse when they do.
Either the freeholder or the managing agent will also arrange the building’s insurance plan, which is paid for by the leaseholders. The insurance provider will pay a commission fee for this; in theory this is to cover administrative costs. But these commissions can often be huge, as high as 50pc – and they are part of the freeholders’ business models, Boyd says.
Expiring leases
Separate to the abuse of the system, an intrinsic problem with the leasehold system is that the value of a property declines as the lease gets closer to its expiry date.
Jonathan Achampong, of Wedlake Bell solicitors, says: “A lease is a wasting asset. Its value erodes with time. If the lease expires, the leaseholder doesn’t own it anymore.”
This means that leaseholds may need to pay to extend the lease – this gets very expensive if a lease has less than 80 years remaining. This is becoming a more widespread problem among former Right to Buy properties, adds Boyd.
The cladding crisis
The cladding scandal and building safety crisis that has unfolded in the wake of the 2017 Grenfell fire mean the insidious problems with the leasehold system have become desperately urgent issues for leaseholders.
Not only did it become apparent that hundreds of thousands of homes are unsafe, but it was almost impossible to hold someone accountable to cover the costs of fixing them.
Grenfell - Hollie Adams/Bloomberg
Leaseholders were sent repair bills, in some cases of £100,000, to fix problems that were not of their making, with no say in how the money was being spent. Millions more were unable to prove that their buildings were safe and were met with a wall of silence from their managing agents and freeholders, who are often uncontactable.
Of the three major freeholders, who each own 100,000 to 200,000 homes, two are based offshore, says Boyd.
Of the three major freeholders, who each own 100,000 to 200,000 homes, two are based offshore, says Boyd.
What options do existing leaseholders have now?
In theory, leaseholders have a right to buy their freehold and a right to manage it, but the process is difficult and expensive. First, blocks must be less than 25pc commercial, such as retail units. “After they introduced that in 1993, there was a surprising number of blocks with 26pc commercial units,” says Boyd. This was likely done in order to prevent leaseholders from being able to buy out the freehold.
It is also a decision for the whole building – at least 50pc must agree. For Barker, this would be incredibly logistically tricky. “I would have to get the people who own all of the other 41 flats in my building to agree. It is only me and three other residents who actually own our homes. The rest of the properties are let out, so I would have to contact the landlords. And I don’t want to be responsible for managing the property,” she says.
Then there is the question of cost – buying the freehold typically costs tens of thousands per leaseholder.
How much is changing?
In June 2022, the Government banned ground rent on new leases, meaning new leaseholders cannot be subject to more than a “peppercorn” charge. But this has done nothing to help existing leaseholders.
Ministers also committed to making it “easier, faster, fairer and cheaper” for leaseholders to buy their freeholds, but legislation to change this is still far off.
The Government opened a consultation on proposals to extend leaseholders’ rights to buy their freeholds in mixed-use buildings on January 11. This will address the issue that leaseholders do not qualify to buy their freehold if more than 25pc of the building is commercial units. The consultation will close on February 22.
In 2021, it also launched the Commonhold Council – a panel that is exploring commonhold as an alternative tenure to leasehold.
Commonhold tenure would be better than purchasing a share of a freehold because it means homeowners would be free of lease terms, such as restrictions on making changes to the building, says Boyd.
Introducing a commonhold system would be straightforward for new properties but shifting existing leases to this system would be very difficult, says Peaker. “Effectively it would mean depriving freeholders of their property rights. It is doable, but that usually raises the issue of compensation,” he says.
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