Leasehold contracts have had their day

As a feudal relic it was, perhaps, inevitable that Britain’s leasehold system of property ownership would lead to exploitation. Under these contracts, homeowners do not have full ownership of their property but long-term leases in which they must pay a yearly ground rent to whoever owns the “freehold”. Ground rents that in some cases double every decade and shockingly high service charges — the amount management companies charge leaseholders for maintenance, renovations, services and the like — have left many feeling trapped in apartments that are hard to sell. 

A recent Financial Times investigation demonstrated the extent to which this has left some owners of apartments from the Ireland-based developer Ballymore ruing their purchases — the builder will occasionally act as both managing agent and landlord too. Residents complain of “outrageous” increases in service charges, for which some feel dissatisfied with the group’s explanations. Tenants have taken it upon themselves to investigate and reckon they have found financial errors worth thousands in the company’s favour. Ballymore is in the process of investigating these claims for itself and says that any mistakes will be rectified.

Such problems, however, are widespread. Despite their medieval origins leasehold contracts have become more popular in recent years: the proportion of new homes sold as leasehold doubled from about 7 per cent in 1995 to 15 per cent in 2016. Property developers appear to have identified the arrangements as a potential source of long-term income. However, that share has since fallen dramatically following the revelation of scandals, hitting just 1 per cent in March 2020. 

This does little for those already on the hook for rising costs. It is time for root and branch reform. The government is planning changes, including making it easier for leaseholders to convert to a “commonhold” arrangement where tenants own the freehold collectively, as well as reducing the costs of extending leases with a zero ground rent.

These legal changes will not be quick: leasehold is deeply embedded in much of British property law and disentangling the mess will take considerable parliamentary time — the first consultations were launched in 2017. Many advocates of reform blame a combination of Britain’s departure from the EU and coronavirus for delays. The planned reforms also do little to address high service charges, focusing instead on ground rents.

There are more immediate steps that the government could take. The first would be to give an existing regulator responsibility for overseeing the contracts or appoint a new one. Leaseholders looking for restitution complain that no regulatory body takes responsibility, with complaints falling between different agencies. The government could also prevent developers from acting both as managing agent and freeholder — a situation that some tenants allege causes a conflict of interests.

Reducing the potential for freeholders and property managers to take advantage of tenants will hurt many good operators too: the shift in power that results from making it cheaper to usefully extend the leasehold contract may reduce the resale value of existing freeholds. But appropriate and affordable redress for that could no doubt be easily fashioned. Leasehold has become an inappropriate contract for modern Britain. Landlords can, however, reassure themselves that, historically, the end of feudal arrangements has been far less favourable to those at the top.


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