William Prescott is a researcher at Bright Blue.
After many years of debate, a Leasehold and Freehold Reform Bill is finally winding its way through Parliament. However, despite Michael Gove’s promise that it would “squeeze every possible income stream that freeholders currently use”, the draft legislation falls short of that ambition.
The Government is conducting a consultation to cap all existing ground rents, which are imposed on leaseholders even though freeholders provide nothing in return. The Government will then amend the Bill to include a ground rent cap. Given that ground rents can cost up to £8,000 per year and have left some properties unmortgageable, such moves are most welcome.
However, not enough is being done to address another major freeholder income stream: service charges. Service charges, which are fees leaseholders pay to freeholders to cover the cost of maintaining communal areas, have surged well beyond the rate of inflation in recent years.
At the core of the problem, as the Law Commission pointed out in 2020, is that “landlord and leaseholder have opposing financial interests”. Because they do not live in the properties under their management, nor have to pay for the upkeep, there is no “obvious financial incentive for freeholders to work in the interests of leaseholders or promote the long-term condition of a building”. Instead, the incentive is to extract as much revenue from leaseholders as possible.
The consequences of this are sadly predictable. As far back as 2011, it was estimated that leaseholders in England and Wales were being “overcharged by £700 million a year because of excessive fees and hidden costs contained within their service charges”. Today’s figure is likely to be substantially higher, with the leasehold sector having doubled in size between 2011 and 2019. In 2023, it was estimated that leaseholders were being overcharged by over £100 million per year in insurance charges alone.
Even housing associations, whose purpose is to provide affordable homes, have been guilty of this. In 2022, Peabody, the third-biggest housing association in the UK, was harshly criticised by the independent Residents Scrutiny Panel for the “shocking” number of mistakes in calculating service charges and the “difficulty, even misguided resistance” in addressing those mistakes.
In theory, leaseholders can challenge unreasonable service charges at the First-tier Tribunal (Property Chamber). But in practice, the “huge amounts of power, time and money” required to bring a case before the Tribunal means that this is not a practical option for most leaseholders.
Regrettably, while the Bill includes provisions to improve transparency around service charges and insurance, these do not address the core problem that leaseholder and freeholder interests are inherently conflicting.
Fortunately, several further steps could protect leaseholders from unfair service charges.
First, the Bill should lower the threshold for existing leaseholders to take over the management of their buildings, which would remove the conflict between those who manage the building and those who live in it. Currently, 50 per cent of all leaseholders in a building must agree for this to happen. The problem, as Nickie Aiken has pointed out, is that because many flat owners live abroad, it is often difficult to contact enough owners to achieve the 50 per cent threshold. Lowering that threshold to 35 per cent, as proposed by Philip Rainey, may go some way to addressing this problem.
Second, to protect future leaseholders, the Bill should require that all newbuild flats be sold as a share of freehold. Unlike other forms of leasehold, this means that in addition to having a lease over their own flat, leaseholders also own a share of their building’s freehold and thus have a say in its management.
Although falling short of the commonhold system that many campaigners want, it would still represent a major step forward by ending the role of expensive middle-men freeholders and ensuring leaseholder control of service charges and block management. Because, unlike commonhold, share of freehold flats are already a well-established feature of the property market, it would be harder to oppose than more radical reforms.
Third, we should abolish forfeiture, the threat of which is used by freeholders to intimidate leaseholders. Forfeiture entitles the freeholder to take possession of a leaseholder’s property without compensation if debts to freeholders, such as service charges, are not paid. Although in practice forfeiture is “highly unlikely”, its mere existence can frighten leaseholders into accepting the status quo. Its abolition need not prove difficult. The Law Commission outlined how to do it in 2006.
The Leasehold and Freehold Reform Bill offers a rare chance to correct some of the injustices inherent in England and Wales’s anachronistic leasehold system. While capping ground rents is a promising start, unless further amendments are introduced to address the abuse of services, that chance could yet go to waste.