There has been much talk over the past few years about leasehold reform, with the term ‘fleecehold’ getting thrown around. The term is often used interchangeably when commenting on the rising cost of service charges to ordinary leaseholders, implying freeholders or managing agents are ‘fleecing’ them, and profiting as part of the process.
However, this is inaccurate. Notwithstanding a small minority who may use some unscrupulous practices to directly benefit from certain costs leaseholders pay toward, the service charges themselves cannot, by right, be profit making. Leaseholders only pay the actual cost of maintaining the development or building, with monies collected and administered in trust on their behalf. In the event monies are not spent, it is either returned to the leaseholder or held in reserves, as laid out in their lease.
The sad fact is the cost of maintaining buildings has rocketed in recent years, mainly due to fire safety reforms, buildings insurance, the cost-of-living crisis and arguably, fixing poorly constructed buildings.
Shared ownership properties find themselves particularly exposed to these challenges, with Housing Associations coming under increasing scrutiny of late
Billed as ‘affordable housing’, those buying shared ownership properties fall under the leasehold system however, the cost of upkeep is not shared, despite them only owning a small percentage of the asset.
Shared ownership schemes help first-time buyers afford to get on the property ladder. Buyers can usually purchase anywhere between 25% and 75% of the property value and then pay a subsidised rent for the portion of the home they don’t yet own. Just like traditional home ownership, they can take out a mortgage on the share value they purchase.
These homes are offered by housing associations, local councils, and other organisations, referred to as ‘providers’ or the landlord. All shared ownership homes (houses and flats) are leasehold properties and are deemed ‘affordable housing’.
While these might be seen as an affordable form of housing and referred to as ‘shared’ ownership, the principle of sharing does not apply to the cost of upkeep, with 100% of the cost of maintenance falling to the shared ownership buyer. The landlord to which the buyer pays rent to does not contribute to the ongoing costs of maintenance, despite directly benefitting from it.
Buyers can ‘staircase’ their ownership, purchasing more shares in the property until they achieve full ownership. The cost of these new shares depends on the value of the property at the time they buy the additional shares, and this of course will the open value of the property as maintained. Clearly, a well-maintained property will be worth more than one that has fallen into disrepair, meaning the landlord derives a capital benefit from the ongoing upkeep of the property, despite having not paid anything toward its upkeep.
How is this fair? Affordable housing should mean it is both affordable to buy and affordable to run. The cost of upkeep should be shared by all the owners yet all the costs of maintaining the assets fall on the leaseholder.
Whether or not the cost of upkeep is transparent or reasonable is a separate issue. However, you cannot argue it’s right that those who benefit from the cost of upkeep pay nothing toward it. The core issue lies in the misalignment of responsibilities and benefits, which should be addressed through leasehold reform. We need to look at how to build affordability into the building design, or redress shared ownership schemes so that housing providers share the burden of upkeep.
Essentially, the current leasehold model undermines the goal of providing a path to homeownership for those living in shared ownership properties by disproportionately burdening owners with costs that should logically be shared. If these schemes are to remain a viable option for affordable housing, significant changes are needed to ensure fairness, transparency, and true affordability for all parties involved. Only then can shared ownership truly live up to its promise of being a steppingstone to full ownership, rather than a financial trap for those trying to achieve it.
David Goldberg, CEO, POD Management
