LABOUR’S LEASEHOLD PLAN LEAVES MILLIONS OF FLAT-OWNERS TRAPPED

Originally published in The Times

A pensioner with cancer lost her home due to unaffordable charges — will the government’s reforms truly help?

Labour announced “the beginning of the end for the ‘feudal’ leasehold system” last week. If you live in a flat, as more than three million households do in England, then it’s likely to be a leasehold.

This means that a third-party investor, or freeholder, owns the land and building and you only own the right to occupy your individual flat for a set time period.

Unless you manage the building with your fellow leaseholders, you have little control over how much it costs to run. Imagine: a landlord you cannot get rid of, that you are never likely to meet, can potentially collapse the value of the single biggest purchase of your life with runaway spending of your money.

That’s leasehold. Beyond England and Wales, forms of commonhold, where owners of flats collectively own and manage the building and land, are routine, with homeowners enjoying democratic self-rule without third-party landlords.

Last week’s commonhold white paper saw the strongest government commitment yet to ban leasehold on flats built in the future. In 1995 Labour promised to change the law so all new flats would be sold as commonhold. Instead, when it introduced commonhold in 2002, it made commonhold voluntary, so it wasn’t taken up by housebuilders.

Leaseholders are trapped and cannot afford another betrayal like this. The price gap between houses and flats is at its widest in 30 years, with more buyers refusing to buy flats due to growing awareness of leasehold’s exploitative nature.

Campaigning nationwide, I hear harrowing stories. Last week I learnt of a pensioner who bought 20 years ago and has cancer. Her freeholder-imposed service charges are now £22,000 a year. She has lost her flat because she couldn’t keep up with these costs and mortgage repayments. She’s declaring bankruptcy.

The government says it needs an entire parliament to deliver commonhold, even though the white paper recycles recommendations from a Law Commission report published half a decade ago that appeared in Labour’s manifesto.

There are few solutions to rescue the 5.3 million existing leaseholders needing commonhold and Whitehall acknowledges it doesn’t quite know how to do it.

Its proposals require that leaseholders acquire the freehold of their building from their investor landlords before converting to commonhold.

This is usually expensive, running into tens of thousands of pounds for each leaseholder. The Law Commission recommended government-backed loans to help them, but Labour has ruled these out.

Capping ground rents, a yearly charge that is an income source for freeholders, at zero is another way to slash the cost of freehold buyouts. The housing minister, Matthew Pennycook, endorsed this in opposition but it didn’t make Labour’s manifesto. There was a public consultation but the government still hasn’t published the results.

There is a risk that if commonhold and leasehold are permitted to coexist, there will be a harmful two-tier market where leaseholders who bought their flat in good faith are relegated to second-class flat-owners.

There are ways Labour can avoid this outcome. More leaseholders should be permitted to buy a freehold share.

In developments where residents have already bought the freehold, leaseholders who didn’t contribute funds or own their lease during acquisition have no right to buy a freehold share. This exclusion was crafted by lawyers, beneficiaries of the leasehold status quo, to prevent a critical mass of enfranchised units. This lack of a “right to participate”, lamented by the Law Commission, would be fixed by a government that truly wanted to rid the country of leasehold.

Similarly, “structural dependency” rules prevent leaseholders in mixed-use blocks from acquiring the freehold where there are “shared services” between residential and commercial units. The existence of “pipes” and “cables” that are used by both ground-floor shops and the flats above must not block leaseholders from obtaining commonhold.

Leaseholders can fear freehold purchase due to costs, so Labour should make it easier for them to take control by claiming Right to Manage, a scheme commonly used as a stepping stone to enfranchisement.

To take back control, at least 50 per cent of a building’s occupiers need to want to manage the building, which is difficult in bigger blocks and those with absentee buy-to-let landlords.

In the last parliament there was cross-party support for reducing this participation threshold to 35 per cent or one third.

By indicating support for mandatory leasebacks, the Law Commission’s least preferred commonhold conversion option, the government looks set to allow leasehold to persist in blocks, even where a majority of flat-owners support converting to commonhold.

The problematic freehold investor would remain, albeit with a new legal status. Operating commonhold and leasehold within the same building will become a costly nightmare, fostering disputes and litigation too, and it will have devastating consequences.

This could all be avoided if the government simply had the courage to be truly disruptive, but its timidity risks sacrificing existing leaseholders to juice the new-build flats market.

Harry Scoffin is a housing campaigner and the founder of Free Leaseholders, a pressure group promoting leasehold reform