12 hours ago
Four reasons why Labour will betray leaseholders
In a bid to win last year's election, the Labour party made a series of ambitious promises: build 1.5 million homes, slash NHS waiting times and crack down on antisocial behaviour.
But arguably, the pledge that the Government will find hardest to deliver on is the vow to overturn Britain's centuries-old (and tremendously complex) leasehold system. Homeowners on these contracts have found themselves locked in crippling contracts that include uncapped service charges.
By the time Britain went to the polls last July, Labour had already dropped an initial pledge to ban the practice within the first 100 days of taking office. The party's manifesto instead said it would 'bring the feudal leasehold system to an end'.
Almost a year in, it is becoming increasingly clear that it won't happen any time soon – if indeed during this Parliament.
In addition to banning new leasehold flats, the Government has promised to strengthen leaseholders' rights to buy their freehold, make commonhold the default tenure for homeownership, reduce ground rents to peppercorn and remove the threat of forfeiture – which can see leaseholders removed from a property if they do not pay ground rent.
Some reforms were made as part of the Leasehold and Freehold Reform Act (2024) by the Conservatives – but a ban on leasehold only applies to new houses, meaning it brings no value to the almost five million people who already own leasehold homes. The move has been criticised as little more than lip service by critics.
With property rights deeply entrenched in age-old legislation, has Labour bitten off far more than it can chew?
Developers don't like commonhold – and the Government needs them to build flats
Labour's plan to deliver 1.5 million new homes is already being derailed by a shortage of construction workers. If it axes new leasehold properties, it may remove an incentive for developers to build, explains Angelina Arora, a property solicitor for legal firm Osbornes.
'For developers, leasehold properties have been a reliable income stream – they know they can charge ground rent and have some kind of control. Commonhold will remove all those incentives, so what will motivate them to keep building?'
Commonhold, with which the Government intends to replace leasehold on new and eventually existing properties, gives homeowners the freehold title to their units, and joint ownership of shared rights.
The Government's white paper on leasehold reform suggests that for commonholds to become the standard, there must be market confidence in it first. However, this creates a vicious cycle, explains Harry Scoffin, founder of campaign group, Free Leaseholders.
'If you take that approach, commonholds will never have market confidence, as developers will always choose leasehold. You just need to bite the bullet and implement it.'
As well as developers, lenders are very sceptical of commonhold, says Reema Chugh, a partner at law firm Hodge Jones and Allen.
'Lenders are conservative by nature – they like precedent and risk modelling. There are fewer than 20 commonhold developments in the UK – there is no established market, there are very few commonhold sales, so there is no reliable resale value meaning a higher lending risk.'
Ms Churgh adds: 'With leasehold, lenders can step in if leases are forfeited due to a breach. Commonhold has no equivalent backstop. Lenders have less control in recovery scenarios.
'Until commonhold becomes mainstream, lenders will see it as risky, but it won't become mainstream until lenders support it – so it's a chicken and egg situation.'
Scoffin points out that if only new properties are required to be commonhold, this could create a two-tier system, with the gap between the prices of flats and houses at its highest level in 30 years.
'Everybody will rush towards new flats, and nobody will want to touch existing leasehold ones. So existing leaseholders will be even more disadvantaged by the reforms,' he says.
Removing marriage value and ground rents is incredibly controversial
Marriage value is the increase in a property's worth when a leaseholder buys the freehold, or extends its lease once there are fewer than 80 years left on it.
This makes extending a lease or purchasing the freehold much more expensive when there are fewer than 80 years left, with leaseholders paying 50pc of the increase in the value of their property to the freeholder – this can be tens of thousands of pounds, in some instances.
The Government has pledged to abolish marriage value, which would make it significantly cheaper to extend short leases – but to do so is incredibly complicated. Some freeholders have argued that it is incompatible with their private property rights as laid out in the Human Rights Act 1998, with a judicial review set to take place later in the summer.
'The 80-year rule creates a ticking time bomb – it causes stress, erodes property value, encourages predatory behaviour and hinders market function. It makes it harder to sell and remortgage flats with short leases, which creates market stagnation.
'[Abolishing marriage value] would represent a major power shift, which is why it's hotly contested. Reforming it is essential to making the system fairer,' says Chugh.
Almost a million leases have escalating ground rents, according to the Competition and Markets Authority (CMA) regulator. This means the annual charge increases over time and experts have warned that these clauses are turning flat owners into 'mortgage prisoners'.
The Government has also made the ambitious pledge to cap ground rents – but in doing so may have offered millions of leaseholders false hope. As with marriage value, freeholders are fighting ground rent changes on human rights grounds – and modifying rights enshrined in law is likely to be no easy or speedy feat, adds Chugh.
'Retrospectively removing contractual rights is likely to be very challenging… the mechanisms to do it are really unclear.
'Ground rents are also often tied up in investment products [such as pensions]. If they retrospectively remove it, compensation schemes could be required, at a huge cost to taxpayers.'
Samuel Hughes, of think tank Centre for Policy Studies, is critical of the plan to retroactively change contracts.
'[This is an attempt to] let leaseholders buy freeholds for less than they are worth. Some freeholders are charities, so you're giving people the right to buy charity assets at below market values,' adds Samuel Hughes of think tank Centre for Policy Studies.
'There is such a lack of clarity from the Government – it hasn't been well thought out'
Legal professionals bemoan a lack of guidance and clarity around what would constitute a seismic change to the foundations of property law in this country.
'So many people are affected – leaseholders, developers, lenders, freeholders, legal practitioners,' says Arora of law firm Osbornes.
'When people come to us, we just don't know the answers. Rather than advising our clients, in order to protect ourselves we can only give them the information we have and tell them they need to take a view. Ultimately, we just don't know.
'Regardless of the Government [in power], this is not something that can change overnight. There are so many practical things to think about before anything can come into effect. All UK Finance lending regulations will have to change. We deal with lease extensions on a daily basis – what's going to happen when leases effectively don't exist? There's such a lack of clarity.
'Normally there are seminars held with legal practitioners to assist with reforms, discussing what is potentially going to happen. We've had nothing. How long can people wait?'
Another of the Government's many leasehold reform promises is to ban forfeiture, which gives freeholders the right to evict a leaseholder if they break a condition of the lease, such as not paying ground rent.
'Forfeiture is deeply embedded in leasehold,' adds Chugh. 'There is no clear legal remedy which allows freeholders to take a flat back over minor arrears – so it will require a longstanding rewrite of landlord rights.'
'Is there the political will from Number 10 to make these changes?'
Scoffin, a leasehold reform campaigner, is sceptical of the political drive to make this happen. He points out that Labour promised leasehold reform in 1995 in a document called 'The End to Feudalism'. Yet there has been little progress since.
Scoffin says: 'The history of leasehold reform is that if there isn't a strong steer from Number 10, it's not going to happen. The Conservatives made some promises to leaseholders in 2019, but then it was dragged through the whole of the course of the Parliament.
'We're really concerned that we're going to have a repeat of where we were with the Conservatives, where there are a lot of great announcements, and then there isn't the progress that we need – and then suddenly we're at the end of the parliament, and they haven't got it through.
'The [Ministry of Housing, Communities and Local Government] says there is a bill coming later this year, but that's not strictly correct – it's a draft piece of legislation. The Government could sit here for a year or two analysing responses, and then we're back here at the general election.
'Is Number 10 really giving [housing secretary] Matthew Pennycook full backing? Are they bringing in more brilliant brains and getting a crack team assembled to bring this through?
'Successive Governments haven't prioritised this – they leave it too long to bring in major reforms, and it falls on the next Government. Leaseholders cannot wait until the next election to stop being looted in their homes – if they do, voters will not thank [Labour].'
Arora concurs that leaseholders may be waiting some time before any meaningful changes occur.
'We're looking at late 2025 for the draft Bill, but that doesn't mean it will come into force – it will still need to become a fully fledged bill. I don't think the commonhold will come into effect for another few years.
'It just hasn't been well thought out. I think these issues are coming up, and they're realising they're way over their heads.'
