Grounds for concern: Leasehold reform and the future of home ownership
7 January 2021
SUGGESTED
Research
Monetary Policy
Tax and Fiscal Policy
19 November 2024
https://iea.org.uk/wp-content/uploads/2021/03/Grounds-for-Concern-Final-PDF.pdf
Summary
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- Home ownership in the UK comes in two main varieties: freehold and leasehold. ‘Freehold’ is ‘home ownership’ in the way most people probably understand that term: undivided, unconditional and permanent ownership. ‘Leasehold’ denotes a more limited form of ownership, which is not permanent (although typically very long-term), and which is shared with an ‘ultimate owner’ (the freeholder, who retains residual property rights).
- Leasehold can be a way to manage interdependent properties (e.g. a block of flats), which benefit from common rules (e.g. because structural alterations to one unit could affect other units) and which share communal facilities (e.g. gardens, hallways, stairways). In such cases, it is the freeholder’s responsibility to lay down and administer those common rules and to manage the maintenance of communal spaces.
- Leaseholders have a statutory right to buy the freehold to their property (‘enfranchisement’), or to extend their leasehold, in such a way that it is guaranteed to outlive them. The leaseholders of a block of flats have a statutory right to collectively take over the management of that block.
- While leasehold can have its uses, various studies of the sector have documented a number of common problems and shown a high level of dissatisfaction among leaseholders. Service charges and administrative charges are often perceived as excessive and opaque. Many leaseholders believe that they have not been properly informed about the nature of their arrangement, which later leads to unpleasant surprises. The statutory processes for enfranchisement, leasehold extension and collective self-management have been described as costly, time-consuming and overly complex.
- Freehold is by far the most common type of property ownership in the UK, accounting for more than four out of five housing units, but the leasehold sector has been growing over the past two and a half decades. Successive governments have been worried about the rise in leasehold sales and the problems reported in the sector. After a long-running process of public consultations and expert commission inquiries, the government is currently rolling out a far-reaching reform package.
- These reforms are an attempt to improve the functioning of the market by increasing transparency and strengthening leaseholders’ rights. But there are also grounds for concern. For example, under the new system, there is a blanket ban on ground rents (the residual rents leaseholders have to pay to their freeholders) for new leaseholds. Ground rents, however, are a perfectly legitimate charge. They are a recognition of the fact that the freeholder is the ultimate owner.
- For houses (as opposed to flats), there will be a ban on new leasehold sales altogether, on the grounds that the government does not see a case for the existence of leasehold houses. This is a strange approach: we do not normally ban products on the grounds that politicians do ‘not see’ why those products should exist. If a product has willing buyers, then that is justification enough.
- The government itself recognises a legitimate role for leasehold houses under some circumstances, which it why it has created a series of exemptions from its leasehold ban. However, the exemptions from the ban drive home the problems with the ban itself, because the exempt cases are often not that different from the non-exempt ones.
- Ultimately, the rise in leasehold sales cannot be viewed in isolation. It is just another response to the UK’s overall housing crisis. Since 1995, UK house prices have increased by a factor of 2.8 in real terms, compared with an OECD average of 1.5 and a Eurozone average of 1.4. Under these circumstances, homebuyers will naturally lower their sights in various ways. This can mean settling for a less desirable property or neighbourhood, but it can also mean settling for a downgraded form of ownership, which does not come will all the rights and benefits of full ownership. That is what leasehold is. If the government wants to solve that problem, it has to think more holistically and address the causes of the overall housing crisis – not try to regulate every detail in any one specific subsector.
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