Next month Michael Gove will announce long-awaited plans for the reform of the leasehold system of property ownership, by which millions of people own the right to occupy their home but not, in absolute terms, the home itself. Gove has repeatedly said he wants to abolish the “feudal” system of leaseholders and freeholders (who own land and property outright, and may charge ground rent or high fees for extending leases). So there was disappointment last week when it was reported that his plan to do so had been quashed by Downing Street, and that only lesser measures will be announced.
But Gove would never have been able to abolish leaseholds or the expensive process of extending them – and even supposing he could, it is not Downing Street he would have to battle, but the Treasury, because the cost to the taxpayer of doing so would run into the tens of billions. Nor does he need to take such drastic action. Governments have understood what is needed to make the system work for at least 25 years, but they have been prevented from doing so by wealthy landowners, the industry that serves them and the political failure to change a system that overcharges leaseholders by hundreds of millions per year. That’s according to one surveyor who has spent 12 years fighting to fix the leasehold system – a battle that cost him his job.
James Wyatt has been a surveyor and valuation specialist for more than 20 years. He studied economics at Cambridge, where he specialised in asset prices, and worked for almost a decade for the estate agency John D Wood. In the course of his work he found he was bothered by something the industry accepted without question: across the country, millions of people are stuck with dwindling leases that cost huge sums to extend.
The government says there are almost five million leaseholders in the UK, although estimates range as high as six million. Roughly two million properties have a lease of less than 80 years. If a leaseholder does not extend their lease before this crucial threshold, they start to incur “marriage value” – a much higher charge for extending the lease, which rises year after year until it is so expensive that it is not worth trying to keep the property, and it reverts to the freeholder. A lack of funds, poor advice or simple forgetfulness can mean a property gradually becomes unsellable.
The amount of marriage value a leaseholder has to pay is calculated using a set of formulae called “relativity graphs”. For decades, estate agents and freeholders have claimed that these are simply functions of an impartial market. This was a lie: the graphs were drawn up in 1996 by estate agents on behalf of the Duke of Westminster, one of Britain’s largest landowners. “We all knew it,” Wyatt told me. “Everyone in the market knew it. But no one wanted to say that the emperor has no clothes.”
The government knew it, too. In 1997 Tony Blair told ministers that the leasehold reforms in the Housing Act 1993 needed a new formula by which the value of a lease could be fairly calculated. Blair’s housing minister, Nick Raynsford, asked the College of Estate Management to collect the data needed – but the big estate agencies simply refused to hand it over. “Why would you,” said Wyatt, “when you’re earning tens of millions of pounds in fees every year?”
Wyatt remembers an industry conference at which the head of a large solicitors’ firm observed openly that the wrongly calculated graphs were “a gravy train” that had “allowed us all to make an incredibly good living”. The people paying for this gravy train were millions of leaseholders who mistakenly believed they were being charged a fair value to retain the right to their homes.
The problem was, no leaseholder could afford to fight the freeholders’ graphs in court; Hugh Grosvenor, 32, the current Duke of Westminster, has a net worth of about £10bn; he is only one of thousands of freeholders who would have an interest in seeing off such a challenge. No one in the industry wanted the gravy train to stop; no one, that is, except Wyatt.
[See also: The great housing con]
In 2011 Wyatt decided to test the freeholders’ claim that their graphs were based on “market evidence”. Working with two academics from the London School of Economics, he spent two years gathering and analysing data on 7,969 housing transactions that took place before the graphs were used. They used the data to develop a new model, using the same statistical technique (“hedonic regression”) that is used by building societies to value properties. The new model, they said, reflected the real values of the market. It was reviewed by other academics, including John Muellbauer, professor of economics at Oxford, and Sean Holly, director of economic research at Cambridge, before being published by the Bank of England and the journal of the Royal Economic Society. “It’s what you would call robust,” said Wyatt.
But the model had serious implications for the industry. “We calculated that leaseholders had been overpaying by about £400m-£500m a year,” Wyatt said, based on “unverifiable evidence” supplied to them by the country’s largest estate agents. This had been going on for almost 20 years.
Wyatt knew that simply publishing a new model wouldn’t change the system, so he began looking for test cases with which to challenge the freeholders’ graphs in court. In 2014, not long after the first case began, he was told by his employer: “ ‘Look, James, we do have freeholder clients…’ So I had to give up my well-paid job and lead the charge myself.”
The first case was defeated, but in 2016 he went to court again, in the case of Mundy v the Trustees of Sloane Stanley Estate. This time the industry took him more seriously. He began to get phone calls. “A senior surveyor told me I should walk in front of a bus. Another one called me up and said, ‘James, for God’s sake, I’ve got school fees to pay – can you please not do this?’ ”
In court it became still more obvious which way the odds were stacked. On one side were Wyatt and two academics; on the other, “the landed estates and all their firepower… a team of barristers, solicitors and advisers”. As the case progressed through the Lands Chamber of the Upper Tribunal, Wyatt said, the information disclosed by his opponents confirmed what he had suspected was behind the freeholder’s graphs: “They told everyone for years that it was market evidence. In the tribunal, it came out that it wasn’t market evidence – it was just their opinion.”
When Wyatt compiled his own evidence, however, he was told that large parts of it would have to be redacted, so they could not be considered by the court. His barrister told him it was unheard of for evidence to be redacted in a property case: “He said, ‘I’ve only ever heard of it when it’s been a matter of national security.’ ”
When his case was rejected Wyatt, undeterred, took it to the Court of Appeal, where the judge admitted that leasehold valuations were “a false market… based upon false assumptions”, but that it was not the job of the courts “to tell the market how it ought to behave”. “We lost on an interpretation of a minor point of law,” Wyatt said. “They had to find some reason not to find in our favour, because the repercussions of us winning were so great.”
The Mundy case was lost – at some personal cost to Wyatt, who had to pay the freeholders’ costs – but he continued to brief politicians on why leaseholders were being overcharged. Some could relate – Nadhim Zahawi told Wyatt he “felt completely ripped off” by the cost of buying the freehold on one of his properties – and ministers told him, he said, that the revised model was “exactly what we need”. He was approached by the Labour Party in the run-up to the 2019 election and told he had what appeared to be “the only viable solution”. He has spent years meeting the Law Commission, civil servants and MPs, including the former housing secretary Robert Jenrick and the building safety minister Lord Greenhalgh – and still, the gravy train has rolled on.
Today, Wyatt is sceptical that a leasehold reform bill – a big piece of legislation in which many interested parties would have a say – would get through parliament before the next election. Nor does he say it’s possible simply to abolish the system: freeholders do own property, and their right to do so is protected by British primary legislation and the European Convention on Human Rights. While many freeholds are owned by the landed gentry, thousands of others belong to middle-class pensioners. All of these people would sue the government for expropriating them were leasehold to be crudely abolished, at a cost to the taxpayer, Wyatt estimates, of £30bn to £40bn.
Wyatt believes a short valuation bill, which would create a simple online calculator for leasehold extension or “enfranchisement” (buying the freehold on a property), would be achievable this parliament. “The government could tomorrow, in theory, have an online calculator that would solve the leasehold reform issue overnight,” he believes. “But the thing is that this government won’t do that. They’re going to prioritise other matters that are not so litigious.”
[See also: How Help to Buy broke the housing market]