Second time lucky for leaseholders
The government tried to reform leasehold before - but failed. This Conservative Government is delivering - finally!
Tis the season for MPs to start a substack. Actually, I’ve been on this platform for a while, writing anonymously, which has been fun. But now I’m driven to celebrate and champion my fantastic colleagues in Parliament and Government who are working to deliver Conservative policies which benefit our whole United Kingdom.
People often ask me, why doesn’t the Conservative government promote its good news more and make a big deal when we deliver on our manifesto commitments? We don’t control what the media write about us. But here, I can, and so I will.
While Parliament and the country are gripped by the Post Office scandal, there is another contentious and deeply unfair saga with many parallels playing out alongside it. Like the battle of the giant post office against the small local postmaster, this one also involves interests of big players with deep pockets pitted against ordinary people who have done nothing wrong.
This time, its the property barons, who have turned the ownership of people’s homes from a foundation of freedom and security into an expensive and toxic trap.
As Housing Minister, I learned more than I ever had before about the personal tragedies that sat behind the dry detail of property law and solicitors paperwork.
Individuals and families who had worked hard to save up and buy their own home found themselves saddled with escalating ground rents, huge service charges, legal costs and fees for outrageous reasons (such as extending their own kitchens) and inexplicable clauses. This can add up to life changing impacts: people can’t sell their homes or move on with their lives, they struggle with their finances, and the ensuing damage to to their relationships, families and mental health is devastating.
As Katie Kendrick of the National Leasehold Campaign put it to the committee I’m part of last week, “it is as though some evil genius dreamed up a way to make a new asset class out of our homes, and its wrong”
I couldn’t agree more, which is why I am now spending several hours of my week in the public bill committee rooms taking part in line by line scrutiny of the Leasehold and Freehold Reform Bill.
This process, which you can follow here, is at the heart of our work as MPs- it is where the sausage is made. While it may seem terminally technical to the public, for any student of government it is essential viewing. This is how Parliament crafts legislation that will have an impact on millions of people.
I strongly believe this Bill is desperately needed and so I was thrilled when it was included in the King’s Speech. The scale of the problem is very clear.
In 1996, just 22% of new-builds in the UK were sold as leasehold, but this has doubled to 43% today. In London, nine out of 10 new-builds are now leasehold. 57% of people say they regret buying a leasehold property. Around a fifth of the existing housing stock - nearly 5 million homes are leasehold, the vast majority in London and urban areas. Shockingly, nearly 1.5 million leasehold houses are built each year. There is not even a fig leaf of a reason to build a leasehold house - they don’t have shared lifts or roofs that would necessitate residents joining together formally to maintain or service them.
The most egregious feature of the whole system is ground rent, which now, as a stable income stream, forms part of the investment strategy of many large funds’ portfolios. While the Conservative government has rightly abolished ground rent for new build properties, it still exists in existing leasehold stock. It has astonished me how outlandishly imaginative those who defend it have been. They sat in front of me and said, with a straight face, “leaseholders don’t mind paying ground rent”. Let’s bust this myth once and for all. Ground rent is extortion. It is not a payment for any service (that is what the service charge is for). It is rent from an asset that someone else thought they had bought and paid for, fair and square.
The Bill will provide for the removal of ground rent entirely (via reduction to a peppercorn amount) It will also provide millions with huge savings as well as clarity on enfranchisement and lease extension. And leaseholders will have security and peace of mind over service charges and the activities of their management companies.
The government is also addressing the issues that have plagued new build estates - sometimes called “fleecehold estates”, where residents find themselves battling a remote and unaccountable management company, charging extortionate sums for small jobs such as cutting the grass and changing the bulb on lamp posts. The root of this problem goes to the heart of the planning system. Sometimes, developers need to agree to provide communal facilities or green spaces as part of planning consent. Alternatively, they need to provide Section 106 funds to the local authority. These arrangements can get mired in conflict when the local authority and developer cannot agree terms for hand over of shared areas or roads (technically known as adoption). We have battled similar issues in Redditch in some of the new build areas like Brockhill- residents bought their homes on a promise of play parks, but 25 years later, their children long grown up and moved out, still no play equipment is anywhere to be seen.
While the authority and developer are locked in conflict over who owes who what and who should pay for ongoing repairs and maintenance of these areas, residents are left paying the costs. This is wrong, and I would like to see us returning to the principle of all shared public spaces being under the council’s ownership from day one. That way, people don’t effectively pay council tax twice, which is what they are being compelled to do in some situations.
I’m enjoying scrutinising the legislation I worked in depth to prepare, standing on the shoulders of my predecessors. What many find puzzling is how we still have not addressed the fundamental problems in the leasehold system despite legislation being passed by the then Labour government in 2002.
I have asked this question in committee, and nobody seems to know. However, it has been suggested that it was the result of the then ministers bowing to pressure from sector lobbying. Commonhold was legislated for, but the measures were lacking in extent and detail, so the system was inadequate. And without it being mandatory, developers weren’t interested. The market did the rest.
To be charitable for a moment to the Labour government of the day, these organisations have deep pockets. And make no mistake, they will seek to bring legal challenges against this new legislation.
The argument usually deployed is that government should not risk tarnishing the leasehold tenure in any way, for fear of devaluing those existing flats and houses. But this assumes that it is not possible to find a way to improve the lives of those millions of leaseholders who are struggling right now, while we transition to a fairer system such as commonhold in future. I think it is possible to do both and that we should do both.
As a Conservative, I am not content to sit by and watch leaseholders wait forever. I believe in choice and property rights operating in a free market. But this is not a free market, it is a distorted system as the Competition and Markets Authority has already acknowledged. I’ve heard too many stories of blighted dreams, curtailed freedom, broken marriages and severe mental health challenges from ordinary men and women, who have seen their biggest asset, their dream home, turn into a total nightmare.
Buying your own home should represent the ultimate reward for sacrifice and hard work. It is a legitimate aim for Conservatives to aspire to offer a pathway to home ownership for citizens, to underpin our democratic settlement. A property owning democracy has always been our starting point.
Fortunately, after years of work, several Law Commission reports, multiple campaigns, assiduous dedication from parliamentarians and determination from Conservative housing ministers and secretaries of state, we now have a legal instrument going through its parliamentary journey.
I say to those who now serve in the government, and to those who come after us, if it should be your lot to decide on the future of this legislative process, do not cave in to those with deep pockets, no matter how many legal challenges they throw at you. Keep going, hold your nerve, you are on the side of millions of people in this country. Restore true home ownership to nearly five million people. That will be a Conservative achievement we can all be proud of.
Especial tribute and thanks goes to those who have taken the time to tell me their stories and share their hard won battle scars - you have touched my heart.
The National Leasehold Campaign
Well said Rachael! You have been brilliant - both as Housing Minister and a member of this Committee. Your constituents are lucky to have you.
The ground rent consultation poses a clear choice for those in power. Which is preferable - pension funds lose money (although they have <1% invested in ground rents, so within investing risk tolerances), or condemn hundreds of thousands of people (often young people) to financial ruin by having their properties valued at £0 and unsellable?
Let me explain why it is this binary. The freeholder lobby will say that the small number of doubling ground rents (some say 5,000 of these, some say 20,000) are the only onerous ground rents, but it’s not the case. Mortgage lenders – the real decision makers on what is onerous or not – are dragging more and more ground rent terms into that bucket, and hence valuing more and more flats at £0. Lenders increasingly state that any ground rent is deemed onerous if it is more than 0.1% of the property value, or soon will be. For reference, Nationwide became the first bank to reference 0.1% in their lending criteria, and The Law Commission report on ground rent reaffirmed it, and since then more banks have jumped on this. Conveyancers are also becoming more cautious (when previously asleep at the wheel) and are starting to demand a Deed of Variation if the ground rent will go above 0.1% in the near future, with freeholders then charging five figure sums for a change.
If flat prices were growing exponentially, then this becomes less of a concern, but since Grenfell and the cladding scandal, and now widespread media coverage of “toxic leasehold”, flat prices are dropping and the gap between freehold house and leasehold flat prices is increasing, where they used to grow in unison (the FT reported in May last year that London house prices are up 17% since 2017, but flats are down 1%). Estate agents will back this up – I’ve heard many tell me that if you bought a new build flat in the past 10 years, you’ll be lucky to sell it for the same price you bought it. Flat prices trending downwards, and ground rent trending forever upwards, creates a car crash for flat marketability and valuations.
Let’s do the maths. After a typical 10 year RPI linked review, of which there are hundreds of thousands of these leases, the average £298 ground rent (government calculated national average) will start getting over 0.1% of the typical leasehold property value at the first or second rent review, if it is not already (average flat in the UK is around £250,000). To compound this, banks do not like to lend if a leasehold is an Assured Tenancy liability, or AST (many will become an AST after the first or second RPI review, especially outside London when AST kicks in at only £250). And some RPI reviews calculate this on an annual compounded basis. Those actually work out as worse than a doubler anyway (which often stopped doubling after 60ys) – someone with compounded RPI will end up paying more in ground rent over the length of a typical 125-year lease, than they paid for the property in the first place – clearly onerous. This is why freeholders saying “RPI is fine” is dangerous and untrue.
This has popped up as a national issue now because the first tranche of these toxic leases have come up for their first ground rent review in the past two or three years, and people are now finding it had to remortgage or sell. It’s the cladding scandal 2.0.
The other misleading narrative from the freeholder lobby is their claim that the initial leasehold sale price “reflected the ground rent terms” and was often below true market value because of it, which any buyer knows is not the case. Leasehold flats, especially new builds, were sold at prices that were broadly the same as a Share of Freehold flat and at a full market value.
Policymakers knows they can’t stand by and watch hundreds of thousands of flats slowly become worthless over the next 20 years, due solely to escalating ground rent clauses, when we already have a chronic shortage of housing stock for first time buyers. Hence why a cap is being suggested. That’s the basic economic argument, let alone the moral/social argument. Freeholders are incapable of self-regulation (cladding showed that), so the government has to step in.
Freeholders and developers need to accept that they got a bit too greedy when packaging up ground rent as a new asset class about 15 years ago (ground rents were a nominal “peppercorn” amount for generations don’t forget), exploiting the hot property market for flats that that (before all these scandals) had high demand, and allowed them to set whatever terms they wanted to gouge out more profit, in the knowledge that enough desperate buyers would sign up (and conveyancers were completely missing the implications of escalating ground rents and not pointing it out). Pension funds need to accept that they invested in something unfair and immoral, and was already being heavily debated as far back as 2017, so was always a big risk.
A peppercorn rent for all is the fair conclusion, but power freeholders will no doubt try their luck in the courts and seek to delay its implementation for as long as possible – causing new paralysis to an already sclerotic flat market.
Knowing history is not on their side, you’d think freeholders would be smart and, at the very least, voluntarily introduce a retrospective ban on escalating rent reviews, with ground rent staying at the amount initially set out in the lease. A proposed 0.1% cap, whilst also suitable in theory, would cause too many arguments on the fair flat value (freeholders, left to themselves, would inflate) and using an independent surveyor could prove expensive for leaseholders. A cap to the original amount would see pension funds still get money, and leaseholders can sell.
It would, however, create a two-tiered flat market and lead to flats built before the 2022 Leasehold Act losing even more value – and potentially putting people into negative equity.
The right answer is clear, and hopefully the government has the fight in it to make the change needed – otherwise we are headed into a housing abyss.