This article is taken from the June 2024 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

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Last December, Michael Gove delivered what might be the most puzzling speech of any senior politician in recent times. Entitled “Falling back in love with the Future”, it opened with an extended paean to the extraordinary legacy of Britain’s Victorian housebuilders:

They looked to the future with hope. It was in the 19th century that our great cities expanded to become the workshops of the world, the forcing houses of invention and the homes to swelling millions.

London spread east as the docklands became a window to the world, west to graceful suburbs such as Holland Park and Notting Hill, north to embrace villages such as Highgate within its ambit, and south from Clapham to Crystal Palace. It became the greatest city on the globe.

Stirring stuff. What the great sphinx failed to mention is that not only is he not dismantling the 20th century policies which have for decades stalled that great engine of progress (the Green Belt is entirely about stopping London and other “great cities” spreading), but he’s trying to kill off what little of that engine remains.

As John Kroencke explains in his excellent recent monograph, Private Planning and the Great Estates, many of those “graceful suburbs”, beloved by residents, were in large part built through leasehold — the very ogre the Housing Secretary’s proposed legislation purports to slay.

This argument must strike many of those familiar only with the modern debate on leasehold as unreal. But one cannot grasp how extraordinarily bad are some of the proposals in the Leasehold and Freehold Reform Bill without understanding it, because Gove (and canny leasehold reform campaigners) are using real but remediable abuses by one class of freeholder to attempt a huge, uncompensated expropriation of property and wealth from some of the institutions we have most to thank for the most beautiful parts of our historic cities.

Leasehold 101

Today, the general impression of leasehold is as an arcane and unjust perversion of freehold, whereby someone buys a house or flat but someone else is still their landlord. But as originally envisioned, it was actually a straightforward middle ground between renting and outright ownership whereby the tenant, instead of renting on a monthly basis, instead bought a time-limited right of occupation to a property.

Such arrangements conferred several advantages. The leaseholder simultaneously enjoyed more long-term security than a conventional tenant and more flexibility; if they needed to move, their right of occupation could be sold on the open market. (The value of leases did depreciate as the time on them ran down, but such is the case with the value of most physical assets in non-shortage conditions.)

Freeholders, meanwhile, secured a revenue from rents but, more importantly, also the prospect of what is called “reversionary” value: when the lease expired, the whole property reverted fully to their ownership. They were also able to impose covenants regarding the upkeep and outward appearance of the building and restrictions on use — not unreasonable, given that they owned it.

Larger freeholders (Kroencke’s “great estates”) were able to exploit this to great effect by designing, building and maintaining attractive neighbourhoods. Where a conventional landlord might see a housing crisis merely as a chance to raise rents, these can and did demolish and rebuild whole areas at higher density as “our great cities expanded”.

Imagine that you were able to pay up front for a five-year rental on a property, and instead of a fixed contract, were free to sell that rental agreement to someone else if your circumstances changed. That, at base, is all leasehold was.

Right to Extend

To the extent the modern impression is true however, it is as a result of historic Conservative policy. Following Margaret Thatcher’s success in creating a new class of homeowners out of state-controlled housing stock via Right to Buy, the Major government — which supposedly cherished private property — tried to do the same thing with privately-held stock.

There’s a real risk the taxpayer will end up on the hook if freeholders go insolvent

Leaseholder enfranchisement, created by Thatcher for exceptional circumstances, was vastly expanded into the right for leaseholders either to significantly extend their lease or, in certain circumstances, compulsory-purchase the freehold outright. At a stroke, a discrete form of property deal was transformed into what it appears to many today: an inferior form of freehold. A leasehold flat or house normally sells for less than a freehold equivalent (this is important) but not that much less; a small discount in exchange for seemingly-arcane restrictions.

This hugely undermines, if not quite breaks entirely, the original dynamic of leasehold. Existing freeholders, now much less certain of ever realising the reversionary value of (what remains) their property, have a clear incentive to focus on revenue from ground rents.

Meanwhile large landowners, not least the State itself, can no longer trust the government to honour what was previously an excellent mechanism for making the best use of their assets. As the Iron Lady herself might have put it: one problem with leasehold reform is that eventually you run out of other people’s property.

The Bill

Enfranchisement was always a weaselly way of trying to buy votes with other people’s assets whilst paying lip service to the ideal of property rights and the rule of law. Gove’s proposed legislation — and, in his defence, much of the campaigning by leasehold reformers that induced him to table it — is in the same spirit. You can tell by its choice of targets.

Many leaseholders, especially on new-build estates where the freehold is held by property developers, have genuine grievances about predatory ground rents and maintenance charges. The obvious solution would be regulating ground rent and expanding Right to Manage (RTM), which empowers leaseholders to oust poor management and take over themselves or choose their own external support.

Gove instead proposes to retroactively cap all ground rents at zero whilst saying precious little about RTM (of the Law Commission’s hundred-odd proposals for the latter, only a handful made it into the Bill), preferring instead to focus on “abolishing” marriage value. (“Marriage value” refers simply to the increase in value when a leasehold and freehold are brought together — married — on the basis that an outright freehold is worth more than the combined value of a leasehold and underlying freehold separately.)

Of course, the Government can’t actually abolish the price mechanism, nor does Gove propose to. What he actually wants to do is abolish the mechanism by which marriage value is shared equally between leaseholder and freeholder when the former buys the latter out, arbitrarily assigning the entire windfall to the leaseholder.

These proposals have two things in common. First, they don’t address the genuine bad actors and poor behaviour that lends the cause of leasehold reform its moral patina. It’s only the old estates, with their centuries-long track record and perspective, that have been exercised about marriage value; the new freeholders, some of whose conduct is why the Bill exists at all, have focused campaigning almost entirely on ground rents.

Second, both would effect massive transfers of wealth from freeholders to leaseholders without compensation: “abolition” of marriage value to the tune of around £7bn, by one expert estimate given to me, and the retrospective capping of ground rents of around £30bn. It says much about the Bill’s supporters, both within government and without, that they have prioritised this over actually dealing with bad management.

Consequences

We do not, at the time of writing, know the final form of this shabby bargain between those who covet other people’s stuff and those with the power to confiscate it. But, like every other attempt to look busy on the housing crisis without actually building lots of homes, we do know that these proposals would create plenty of problems.

First, it will screw over many leaseholders who have already bought their freehold. As it only takes 50 per cent of leaseholders to buy a freehold in a shared building, those who have often had to buy out neighbours who chose not to participate; some took out loans to do so. Those neighbours will now be able to cash in, inflicting steep losses on those who enfranchised in the first place.

Second, many leaseholders will discover that their eye-watering service charges are not the result of profiteering managing agents, but simply reflect the fact that the UK has Europe’s oldest housing stock and much of it (mostly the post-war stuff) should have been demolished long ago. It isn’t iniquity that people in fabulously valuable 19th century houses pay less in service charges than people in 20th century tower blocks — their homes are simply better built.

Finally, there’s a real risk the taxpayer will end up on the hook for Gove’s largesse. Deprived of any hope of reverted ownership or income from rents, many freeholds will be worthless. Many leaseholders might not even bother to buy them, leaving the freeholder holding all the liabilities and responsibilities with no compensation.

If freeholders start going insolvent after the Bill becomes law, as some experts have warned, these worthless freeholds will pass to the Crown — and their costly (and politically-sensitive) liabilities and obligations will fall on the taxpayer.

There is still time to abandon this Bill. If Gove really believes what he said in December, he should deliver the leasehold reform Britain really needs: that which would allow the great estates to return to their rightful place in the vanguard of housebuilding and deliver the next generation of “graceful suburbs” and “great cities”.

Instead, his speech looks like an attempt to tell historians he knew what the solution was — whilst practising the very opposite of what he preached.