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The system of long leases for residential property in the UK has an intrinsic tendency towards abuse, due to the one-sided availability of forfeiture. There is limited parliamentary time available for reform, necessitating prioritisation. Some potential reforms are politically infeasible due to powerful opposition, but the detail of the opposition is often misunderstood by reformers.
The main claims in the debate about prioritisation are:
leasehold cannot be fixed, and therefore time should not be spent on fixing it
the preferred alternative to leasehold, "commonhold", will not be adequate or available for some time, and therefore the only improvements to commonhold that should be contemplated are those which also help existing leaseholders
However quickly commonhold may be reformed by Parliament, it will be unavailable for a significant section of the property market, due to the "residuum" of unenfranchisable flats which is detailed below. There therefore needs to be three approaches pursued in parallel:
create a viable alternative to leasehold for the "low hanging fruit"
adopt measures to phase leasehold out for the hard cases in the residuum
reform leasehold to alleviate the suffering of those stuck in the residuum while it lasts
The lifecycle of leaseholds is that they are created, they endure for more than 21 years, and then eventually they terminate either at the end of the lease term, or earlier for some reason. They might also be extended, or merge or split, etc, but those are corner cases.
Phasing leasehold out entails preventing the creation of new leases, and facilitating the termination of existing ones. In general, it means incentivising the reduction of the number of leases. In particular, it would be helpful to restrict the tenures on new blocks of flats to commonhold or share-of-freehold, as leasehold plus share-of-freehold lacks many of the toxic characteristics of general leasehold.
What this would look like is as follows:
implement the government's proposed ban on new leasehold houses
restrict creation of leases in new blocks of flats to share-of-freehold, with commonhold as the alternative
restrict the terms of new leases in existing buildings, to prevent the known abuses
once commonhold is viable, eliminate the creation of leases in new blocks of flats
replace leasehold forfeiture with forced sale
make leasehold enfranchisement easier and cheaper
deal with the residuum of unenfranchisable flats (see below)
It may take many years before the generality of leaseholders with third-party building owners or managers can convert to superior tenures.
In addition to the Law Commission's proposal to alleviate leasehold abuses,
which largely consist in improving access to the Right To Manage, the following mitigations will alleviate the impact of some of the worst abuses during this potentially lengthy transition away from leasehold:
abolish leasehold forfeiture in favour of forced sale
prevent the downgraded of long leases to Assured Shorthold Tenancies
prevent the abuses of the power to control insurance of blocks of flats
enable the protections for leaseholders in relation to service charges that were passed into law but never brought into force
fix the imbalance in costs when leaseholders face freeholders or managing agents in court and tribunals
regulation of property agents, without restricting the availability of court-based remedies
allowing much easier formation of Right To Manage companies and Recognised Tenants Associations
introduction of measures to fix defective property management arrangements where the defects are a matter of company law rather than landlord/tenant law
Leaseholders are often trapped with freeholders in "fleecehold" estate arrangements, and generally have better protections than the freeholders; nevertheless, both would benefit from:
the extension of leasehold protections on service charges to freehold houses on private estates
the removal of rentcharge owners' power to threaten freeholders with a lease being placed on their property
Some campaigners speak loosely of "abolishing" leasehold, without stating how they want to do this. This helps the opponents of reform, by implying that campaigners are open to confiscating some or all of the value of existing freeholds. A *charitable* view of "abolishing leasehold" would mean "phasing out residential leasehold, compensating freeholders for their legitimate property interests". But the reality of politics is that campaigners are portrayed as favouring the least charitable interpretation of their views.
The legitimate property interests of the freeholder are roughly:
the ground rent
the reversion when the lease ends
What is *not* legitimate is claiming, as part of the property right:
the equity in the leaseholder's own lease, e.g., on forfeiture
any excess above market-rate of event and permission charges (what economists confusingly call "economic rents")
It is a violation of the property rights of the *leaseholder* that a late payment of £300 should give the freeholder the right to repossess a flat worth more than £300,000. In many cases, this right can formally be exercised behind the back of the leaseholder's own mortgage lender! Such claims are rare in practice but create an extremely unlevel playing field in genuine disputes, giving rise to the "economic rents" extracted by freeholders and their managing agents.
Where a leaseholder ends up in debt to the freeholder or other party to the lease, the UK should adopt the system in other countries, which is a forced sale of the flat, with the leaseholder receiving the balance once the debts are settled, rather than the balance being transferred to the freeholder under forfeiture.
There is also a residuum of flats that cannot be enfranchised for various reasons; planned reforms will reduce but not eliminate this residuum. Enfranchisement is a prerequisite for commonhold conversion, so the persistence of the residuum is an obstacle to a full phase-out of leasehold. The residuum *might* be mitigated by some combination of commonhold sections on mixed-use buildings, leasebacks and specialised mortgage arrangements.
A loophole in the commonhold legislation permits the government in effect to ban particular types of flats from being converted to commonhold. This may affect the generality of flats built since 2010. This loophole potentially expands the residuum to a considerable proportion of the property market.
There is an emerging multi-tier residential property market emerging in England and Wales in the market sector:
genuine freehold houses
commonhold flats
fleecehold houses
leasehold houses
leasehold flats
Without reform, some of these tiers will be locked in, and all new tenures will be fleecehold houses and leasehold flats.
(The term "market sector" above is meant to connote those houses and flats which are sold at market rate, and to exclude social housing and affordable housing; the residents of that latter sector of residential property suffer a *different* set of problems from leaseholders.)
The main interest groups which might oppose various leasehold reforms are:
fixed income securities interests (i.e., freehold owners)
property developers
mortgage lenders
managing agents
Many block freeholds will be owned as part of a portfolio by investors; conventionally this includes those looking for a hedge against inflation. Freehold investors might be pension funds, some of whose pension scheme members might not even be rich enough to afford a leasehold flat of their own. Such market participants are usually investors rather than speculators, and it betrays ignorance to describe freehold investors, in general, as speculators.
Conversion to commonhold first requires enfranchisement. This entails compensating the freeholder for the legitimate property interests being transferred. It is not necessary, from the perspective of protecting, say, a pension fund's assets, for the freehold property interest to come with the right to take the remaining equity in a leaseholder's flat, or the ability to overcharge for routine services. But any reform which threatens not to compensate the freeholder for ground rents is completely unviable politically.
Mortage lenders are worried about the value of their collateral being damaged. Mostly, the reforms will be neutral or beneficial from their point of view.
Property developers and managing agents benefit from the "economic rents", that is, the amount that can be charged above the market rate for services. The reason such income streams exist at all is that some leaseholders have no choice but to deal with the monopoly provider of management services, and all leaseholders face a service charge regime that facilitates waste and makes fraud undetectable.
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