22 March 2024

The free market case for leasehold reform


From obscure 12th century statutes to amusing judicial wigs, there’s much to admire in the gradual development of Britain’s legal order. However, the outdated leasehold system which plagues more than 5m homes in England and Wales is an altogether less charming anachronism. 

To cut a long story short, leasehold is effectively a form of quasi-ownership, in which a tenant buys a home for a set period of time, while a landlord – the freeholder – retains the legal rights to the property. 

As a condition of the lease, tenants pay ‘ground rent’ – this is, in the truest sense, money for nothing, and a classic example of rent-seeking. Ground rent is paid to freeholders automatically and for no clear reason; even the ordinarily cautious Competition and Markets Authority noted that it ‘saw no persuasive evidence… that consumers receive anything in return for ground rent in its response to the Government’s leasehold reform consultation. 

On top of this, leasehold tenants also pay service charges to their landlords. While these four-figure fees are theoretically paid in exchange for general maintenance and upkeep of the property, the reality isn’t always so rosy. The BBC recently highlighted the case of a high-rise block in Bethnal Green, where service charges were hiked by more than 35%, despite persistent leaks and overflowing drainpipes. 

This system might sound absurdly feudal, but about a fifth of homes in England are leasehold properties; for owner-occupied flats, that figure rises as high as 94%. 

In order to address the worst excesses of this arcane system, the Government’s Leasehold and Freehold Reform Bill is seeking to increase the standard lease term to 990 years, reduce ground rent payments to a peppercorn, and require greater transparency over service charges. What’s more, it will also ban the sale of new leasehold houses, meaning that most new homes in England and Wales will be freeholds.

Remarkably, this has proven controversial in some circles. Much has already been written about the Conservative case for leasehold reform, not least by the Telegraph’s Madeline Grant and Dr James Vitali of Policy Exchange. I won’t restate that case; instead, I want to engage specifically with the misconception that has emerged in some circles that leasehold reform is somehow contrary to free market principles. 

Many free marketeers instinctively bristle at the idea of interference with the property rights of freeholders. After all, what right does the Government have to void or amend the agreements made between leasehold tenants and freeholders? Isn’t this all a little bit socialist? 

In fact, this couldn’t be further from the truth; leasehold reform is entirely consistent with free market principles. Ensuring the continued vitality of markets is an active endeavour, and one which sometimes requires governments to remove or reduce distortive blockers like leasehold. Friedrich Hayek put it best, when he highlighted the difference between ‘creating a system within which competition will work as beneficially as possible, and passively accepting institutions as they are’.

Leasehold turns tenants into ‘captive consumers’ with little influence over the costs incurred by landlords and managing agents. In turn, we see significant distortions in the market for flats in England and Wales; according to analysis from the FT’s John Burn-Murdoch, flat prices have only increased by a marginal 0.6% between 2017 and 2020, in sharp contrast to steady growth in house prices over the same period. Burn-Murdoch lays the blame for this squarely at the door of these toxic leasehold tenures.

At the same time, leasehold tenants do not benefit from the stability and security traditionally associated with property ownership. When your use and enjoyment of a property is contingent upon the assent of a freeholder, are you really likely to feel that you have a stake in society?

To this end, the Government’s reforms are a step in the right direction; they will reduce the distortive effects of leasehold on the housing market, while strengthening the property rights of millions of tenants.

Nevertheless, there is still more work to be done; millions of leasehold tenants will still suffer from sky-high service charges. Here, there is an opportunity to take further action, whether through amendments to the existing bill, or through new legislation in the next Parliament. 

Of course, we should be wary of calls to address mounting service charges through more regulation and more red tape. Instead, we should ease the qualifying criteria rules for freehold purchase and Right To Manage, empowering leasehold tenants to take over management of their buildings if freeholders are failing to meet their obligations. At present, unlocking the hiring and firing powers of the Right To Manage requires agreement from half of residents, a threshold which can be near impossible to clear in larger developments and those with high levels of overseas ownership. Proposals to reduce that threshold to thirty-five percent are eminently sensible – again, this is about more freedom and more individual responsibility, not less. A long-term commitment to expanding commonhold would similarly enable leaseholders in apartment blocks to take back control. 

Properly handled, taking action to protect leaseholders from rip-off service charges would give practical effect to the property rights of millions up and down the country, affording them greater control over their own homes, and fortifying the stake in society that property ownership should deliver.  

There’s a cynical angle to this, too; there are votes to be won in leasehold reform. With the threat of opposition looming large, Conservatives of all stripes are slowly recognising the need to tackle Britain’s housing crisis. Younger voters in particular are exercised by our historically high housing costs, which make getting on the property ladder daunting, if not impossible. The result is a wholesale rejection of the status quo, and a profound scepticism of centre-right politics. If they want to return to Government following a likely Labour win later this year, the Tories will need to set out a vision for making the property-owning democracy a reality once again.

Planning reform will rightly be at the top of that agenda, but robust advocacy for leaseholders should be central to these efforts too. If we believe in extending property rights, giving citizens the stability and dignity of real homeownership, we must believe in an end to the unjust leasehold system which reduces those property rights to a mere technicality for far too many people. 

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Sam Bidwell is the Director of the Next Generation Centre.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.