Stamping out the great lease fleece – an update

Back in December 2020, we highlighted the highly immoral practice [1] of housebuilders selling to new homeowners, but retaining the freeholds and selling them on to third parties who then charged a (seemingly innocuous) ground rent that doubled every ten years, building up over the years to terrifying amounts. At the time, we made it clear that while CapitalStackers is 100% pro-developer, we wanted no part of this pernicious practice, and would not lend to any developer factoring this into their business plans. 

Bear in mind that the people forced to pay these extortionate ground rents weren’t renters – they were people who had bought their own homes (usually taking on a big mortgage to do so), had not entered into any voluntary agreement with the companies charging them, but were (and still, for the most part, are) obliged to either pay the fees or hand over the keys. 

And not content to fleece innocent homeowners one way, they often proceed to turn them upside down and shake out their fillings – charging them fees for such ‘liberties’ as subletting, or making improvements to their own homes. Even householders who had fully paid off their mortgages faced the prospect of paying tens of thousands of pounds a year to these property parasites. 

At the time, this appalling practice was the subject of a long and bloody campaign by the National Leasehold Campaign (NLC) [2] and The Guardian, amongst others, and with Government legislation on the horizon, the game looked to be up. As Katie Kendrick of the NLC said, “England and Wales are among the last countries in the world where you can buy a property, but don’t ever own it. People’s homes should be theirs alone and not an asset for people to invest in and trade. That is the position elsewhere in the world”.  

So pernicious was the scandal that it prompted Michael Gove, Secretary of State for Communities and Local Government [3] (with the added responsibility of Housing in England [4]) to announce a Government crackdown [5]: “Enough is enough. These practices are unjust, unnecessary and need to stop,” adding that the methods used were “an unjustifiable way to print money”. 

Which uncharacteristically unminced words led those in the know to expect the capping or abolition of ground rents altogether. A government with a substantial majority, and 4 years remaining in office ought to be able to wave through a popular, vote-winning policy. The writing seemed very much on the wall. 

Thus, with their foot on the throat of these firms, we fully expected the Government to turn up the hose.  

So what happened? 

Dear reader, they bottled it. 

The Leasehold Reform (Ground Rent) Act [6] comes into force at the end of this month, limiting such fees to ‘a peppercorn rent’ on all new leases of over 21 years – enforced by penalties ranging from £500 to £30,000 per lease. The gov.uk publicity trumpets “an end to ground rents for new, qualifying long residential leasehold properties in England and Wales”, calling it “part of the most significant changes to property law in a generation”. 

And yes. Going forward, it will be. 

But unfortunately – and hugely disappointingly for millions of existing leaseholders – the Act is not retrospective. It doesn’t prevent Landlords holding current freeholds from continuing to fleece their Lessees. Owners of leasehold flats are still fair game to be mugged for service charges and other fees. The Government suggests that this is addressed by their wider leasehold reform scheme (of which the Act is only one part) and have promised a second bill to take care of existing ground rents – but given that no date has been set for this and an amendment to the current bill which would have taken care of them was heavily defeated, this looks like an empty promise. Particularly after the legislation was trumpeted in advance in such strong language.

The Shadow Cabinet (who supported the need for reforms) immediately spotted the omission, with Lisa Nandy demanding, “Where is it? He says legislation will be forthcoming in this parliamentary session, but it was not in the Queen’s Speech. There are five Bills from the Department for Levelling Up, Housing and Communities in the Queen’s Speech; surely time can be found to ensure that we deal with this problem once and for all.”

“How can we accept that these rip-off companies, on behalf of owners who we often do not know and do not have the right to find out about, are allowed to tell people whether they can change the doorbell on their own home or make minor changes that would make a big difference to their lives? How on earth is it right that we are siding with those rip-off management companies and opaque owners over people who live in their own homes, have a stake in this country and their communities, and deserve the right to something better?”

As Katie Kendrick summarises:

“While we welcome the Government’s commitment to this cause, they crucially haven’t delivered on the timing. The leasehold reform programme is a two part process and we were led to believe that Part 2 would be following hot on the heels of Part 1.

“I have every confidence from my conversations with Ministers that reforms will happen, but the devil will be in the detail of what those reforms will look like and we are yet to see any action that will help existing leaseholders.  I am in no doubt those that make huge profits from the existing exploitative system of leasehold will be lobbying government voraciously to water down the reforms.”

“So in the meantime we’ve just created an even worse 2-tier system, with thousands of homes remaining unsaleable.”

“Which means these leaseholders who have been desperately waiting and waiting for support – in fighting practices the Government openly admits are unjust and indefensible – are still being failed, and there’s only one parliamentary session before the next general election. We have waited long enough, we need urgent legislation to help the existing leaseholders trapped in limbo.”

So in short, the Government’s half-cocked blunderbuss leaves most of the target untouched.

For one thing, the ground rent issue is deterring banks and building societies from lending on these homes [7], which is why many have become unsaleable. And since the estimated 4.6 million leasehold dwellings in England [8] amount to 19% of the English housing stock, and 68% of these are flats, this is a big blockage in the housing market – and could cause huge knock-on effects in the faltering wider economy. Has the Government considered this? And when they finally realise, will it be too late?

The bill also excludes business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases. And it sets different rules for other categories of leases. For some reason, the provisions won’t apply to retirement properties until 1 April 2023 and in the case of voluntary lease extensions they only apply after the term expires, even where there is a “deemed surrender and regrant due to a change in the demise of the lease.”

The logic behind these minor distinctions is baffling, but has the whiff of vested interest groups about it. It’s like passing a law against street robbery, and saying if that goes well, they’ll consider making highway robbery, burglary, looting and grand larceny illegal as well…at some point in the future.

The vaunted ‘wider reforms’ also have a touch of the velvet glove about them. Rather than simply pass a law making it illegal to retain freeholds or sell them on, the Government has simply unleashed the Competition and Markets Authority (CMA) to put the frighteners on them in a protracted mopping-up operation [9]. In September 2020, the CMA launched enforcement action against four housing developers – Countryside and Taylor Wimpey for using possibly unfair contract terms, and Barratt Developments and Persimmon Homes over the possible mis-selling of leasehold homes. 

While this has already seen 15 associated companies voluntarily release over 3,400 leaseholders from their onerous terms, it feels like an unnecessarily slow cure for the agony of millions of innocent homeowners. A bit like stopping a dog attack by writing to the dog owner and sending them a voucher to buy a muzzle.

Andrea Coscelli, Chief Executive of the CMA, put a positive spin on it, but you can tell he isn’t holding his breath: 

“We welcome the commitment from these businesses to do what is right by their leaseholders by removing these terms, and we will hold them to it. 

“While this is a huge step forward, our work here isn’t done. We will continue to work hard to free leaseholders from these problematic terms and will now be putting other housing developers under the microscope.” 

The ongoing operation will see the CMA continuing to investigate two investment groups – Brigante Properties and Abacus Land/Adriatic Land. Both have agreed to cut the doubling ground rent terms from leases they bought from Countryside, but the CMA wants them to do the same for leases they bought from Taylor Wimpey.  

And it assures us that we can expect further updates “in due course”, although it’s at pains to point out that none of these companies has breached the law. But of course, their legality has not been in question – only their morality. 

So, brick by painful brick, leaseholders are being released from ground rent jail. Countryside, Taylor Wimpey and Aviva have already undertaken to remove these terms. Barratt is still under investigation and can be expected to follow suit, and where the big boys lead, the rest will surely have to follow.  

But after all the bold, tub-thumping words, this bill is a huge letdown for those who’d pinned their hopes and their futures on it.

Lisa Nandy, however, is not giving up: “Surely, in the midst of a cost of living crisis, it is a no-brainer to crack down on unfair fees and contract terms by publishing a reference list of reasonable charges, by requiring transparency on service charges, and by giving leaseholders the right to challenge rip-off fees and conditions or poor performance from service companies”. So it’s not an issue that will go away quietly. And if the NLC and the Opposition don’t have teeth enough, that logjam in the housing market could come back to bite the Government, and by then the legislation needed to free it will have to be dynamite.