Select Committee statement (Housing, Communities and Local Government): Leasehold Reform - Mar 21

I thank the Backbench Business Committee for making time for this statement. Last Tuesday, the Housing, Communities and Local Government Committee published our 12th report of this Session, following a six-month inquiry into leasehold reform. I thank all the members of the Committee, who agreed the report unanimously; several of them are in their places today. I particularly thank Nick Taylor, our Committee specialist, for his excellent work on this technically challenging subject.

 

We are grateful in particular for the work over many years of the all-party group on leasehold and commonhold reform, which has helped to highlight the multitude of issues of concern among leaseholders. It was extremely helpful to have public evidence from the joint chairs of the group, the hon. Member for Worthing West (Sir Peter Bottomley), who I see in his place, and my hon. Friend the Member for Poplar and Limehouse (Jim Fitzpatrick). I also see in his place my hon. Friend the Member for Ellesmere Port and Neston (Justin Madders). We also had written evidence from my hon. Friend the Member for Weaver Vale (Mike Amesbury), who during his time on the Committee strongly advocated such an inquiry—he is also in his place—as well as from my hon. Friends the Members for Brent North (Barry Gardiner), for Feltham and Heston (Seema Malhotra), and for Manchester Central (Lucy Powell), and the hon. Member for Pendle (Andrew Stephenson).

 

The Committee has never undertaken an inquiry that has had such an overwhelming response from individual members of the public. We received over 700 written submissions, mostly from leaseholders who wanted to tell us about their personal experiences. It is clear there is a great deal of dissatisfaction: onerous ground rent terms; high and opaque service charges; unfair and excessive permission charges; alleged mis-selling of leasehold properties by developers; imbalanced dispute mechanisms; and unreasonable costs to enfranchise or extend leases. In the worst cases, people have been left trapped in unsellable homes. More common are leaseholders with opaque service charges and poor levels of maintenance who have no reasonable means to challenge or query how their buildings are being managed. The Committee concluded that

 

“too often leaseholders, particularly in new-build properties, have been treated by developers, freeholders and managing agents, not as homeowners or customers, but as a source of steady profit.”

 

At the very start of our inquiry into leasehold reform, we invited 50 leaseholders to meet us in Parliament to talk about the issues that most concerned them. We listened carefully to their concerns, and when at the end of the session we asked them what they wanted us to recommend in our final report, they responded nearly unanimously, “Abolish leasehold”. We have listened. Leasehold is an inappropriate tenure for houses, and we support the Government’s proposals to prohibit leasehold development of new build houses. With regard to flats, we are unconvinced that professional freeholders provide a significantly higher level of service than what could be provided by leaseholders themselves. There is no reason why the vast majority could not be held in commonhold. Only the most complex mixed use developments and some retirement properties may continue to benefit from some form of leasehold ownership. We call on the Government to ensure that commonhold becomes a primary model of ownership of flats in England and Wales, as it is in many other countries, and to create incentives—and remove the disincentives—for developers and freeholders to ensure that this happens.

 

It is right to consider tenure for the future, but much of our evidence was from existing leaseholders who want their concerns to be addressed now. During our inquiry, we heard several accusations from leaseholders, particularly of houses, that they had been mis-sold their properties. A particular concern of a substantial number relates to their accusing developers of reneging on promises made by the sales teams to allow leaseholders to purchase their freeholds at an agreed price after two years. Leaseholders told us their freeholds had been sold on to third-party investors who are not willing to allow leaseholders to purchase their freeholds at the same price as previously offered. One leaseholder told us that the price of purchasing her freehold had increased from £3,000 to £13,000, and another that it had increased from £5,000 to £40,000.

 

Developers denied they had deliberately misled leaseholders, but the number of near-identical stories reflects a serious cross-market failure. We have called on the Competition and Markets Authority to investigate mis-selling in the leasehold sector and to make recommendations for compensation. We know the Secretary of State for Housing, Communities and Local Government has already called on the CMA to do this, and it has refused. We hope our call will act as pressure on the CMA finally to act in the interests of leaseholders.

 

It was concerning to hear several reports from leaseholders that they had been advised, incentivised or required by the developer to use a specific conveyancing solicitor who subsequently did not advise them of onerous terms in their leases. We heard that developers had offered free carpets, free lawns, discounts or other financial incentives to use a preferred solicitor. Leaseholders were told that their sale would fall through if they did not complete within 28 days, and that only the solicitor recommended by the developer could be certain to hit the deadline. Consumers must be able to access independent and reliable legal advice when purchasing a property, so we have called on the Government to prohibit the offering of financial incentives to persuade a customer to use a particular solicitor.

 

Concerns were raised about onerous ground rents. Ground rents bear no relation to the level of maintenance or the quality of service provided to leaseholders; that is the function of the service charge. Some developers had imposed 10 to 15-year doubling ground rent terms in the leases of new build flats and houses. Taylor Wimpey has apologised and set up a remediation scheme, albeit with limitations, but others have not. Redrow told us that it had introduced 10-year doubling ground rents on 347 properties, with an average starting ground rent of £400 per annum, which would rise to £12,800 in the 50th year, but it has no plans to remedy these leases.

 

There is a growing trend for mortgage lenders to refuse to lend on leasehold properties where the ground rent exceeds 0.1% of the property or will do so. The options for leaseholders with onerous ground rents are limited. We are not convinced by voluntary offers, so what more can be done? One option is to use legislation to amend existing leases. The Government told us initially that they were not able to use legislation in these circumstances. The Secretary of State said that

 

“the nature of contract law means legislation cannot change the terms of leases that have already been signed.”

 

However, we found that it would be legally possible for the Government to introduce legislation to remove onerous ground rents in existing leases and retrospective legislation could be compliant with human rights law. Indeed, the Government propose to reduce the premium payable to enfranchise, which will in effect buy freeholders out of a contractual income stream at a discount. There is little difference in principle between altering the terms of enfranchisement and altering ground rents, and both are likely to be equally justifiable in human rights terms. Freeholders would probably need to be compensated, but that compensation need not necessarily be at full value. Our view is that existing ground rents should be limited to 0.1% of the present value of a property up to a maximum of £250 a year.

 

On future leases, the Government initially said that they would require those to be set at a peppercorn or zero financial value, but they have since proposed making £10 per annum a standard cap. It is unclear what value there is for the leaseholder or freeholder in requiring a ground rent of £10. We therefore recommend that the Government revert to their original plan to require ground rents on newly established leases to be set at a peppercorn or zero financial value.

 

Although it is fair that freeholders should be able to pass on reasonable costs arising from a change initiated by a leaseholder, many of the permission fees we heard about were plainly excessive and exploitative. Charges such as £3,500 for permission to build a conservatory or making a charge to fit a new doorbell are clearly ridiculous. We have called for permission fees to be limited to the true administrative costs incurred by freeholders. The Government should require this in the lease of new build properties, and legislation should be introduced to restrict such fees in existing leases.

 

Furthermore, the growing practice of imposing permission fees in the deeds of new build freehold properties and enfranchised former leasehold properties is an unjustified intrusion on homeowners that many campaigners have rightly referred to as “fleecehold”. We have made recommendations to deal with “fleecehold”, including that the Government should require that permission fees be only ever included in the deeds of freehold properties where they are reasonable and absolutely necessary, although we noted that we could not think of any circumstances in which this would be the case. We have also called on the Competition and Markets Authority to exercise its powers under section 130A of the Enterprise Act 2002 to indicate its view about whether onerous leasehold terms constitute unfair terms and would therefore be unenforceable. Where leaseholders have paid unreasonable fees or ground rents over the course of their leases so far, they should have them refunded by freeholders with interest.

 

Our report has made many other recommendations, and we welcome in particular the work being done by the Law Commission on a number of matters, such as enfranchisement, commonhold and other matters.

rose—

No, no.

We feel it is necessary not simply that we have a number of individual recommendations, but that the Government now call on, invite and fund the Law Commission to conduct a more comprehensive review of leasehold legislation as a whole. We have made many other recommendations that I do not have time to go into today, but we look forward to the Government response to our report. Given the weight of evidence we have had from so many individual people—our constituents—up and down the country, we urge Ministers to take our recommendations seriously.

May I say that I own a leasehold flat? In a few years’ time, I may own another one, but I have not had any problems.

 

The Chair of the Select Committee, and his colleagues and advisers, deserve enormous thanks and congratulations. In just three months, they had the innovation of the roundtable—I recommend the conclusion of that roundtable to the BBC, and others, who do not yet seem to have covered the detail of the report.

 

The hon. Gentleman picked up on issues raised by the National Leasehold Campaign, as well as the knowledge of Bob Bessell, a trustee of the Leasehold Knowledge Partnership, who has developed more than 1,500 retirement properties with no ground rents. He knows, as do we, that ground rents pay for nothing that is of benefit to those in their homes.

 

The report’s suggestion of lease-rental is good. Leaseholders should not think that they actually own anything, because they do not. They are effectively tenants, and as we saw with the Grenfell-style cladding, they were supposedly left carrying the cost of replacing that cladding, which is not good enough.

 

On behalf of the all-party group on leasehold and commonhold reform, I welcome the campaign to ensure that costs are made equal and that freeholders are not able to put the costs of unsuccessful legal actions on to leaseholders, who then have to pay even though they won a dispute.

 

It is important that all recommendations in the report are debated in full, and if we have more such reports, the work of those who have campaigned on this issue, particularly the hon. Members for Ellesmere Port and Neston (Justin Madders) and for Poplar and Limehouse (Jim Fitzpatrick)—he is currently in a meeting about leaseholders, but otherwise he would have spoken today—will be carried through to the benefit of leaseholders.

The point about the costs of legal action not being recoverable from leaseholders is made in our report, and I welcome the idea of a longer debate on that issue—perhaps once the Government have published their response, so that we can take that into account. We ought to pursue the idea of lease-rental more clearly, because people do not wholly own their properties in the way they think they do.

As my hon. Friend knows, I am particularly concerned about older people who have been somewhat duped into these schemes. Does he agree that the Competition and Markets Authority could quickly consider that issue and deal with problems in the sheltered accommodation sector?

Yes. We called for an investigation into mis-selling, as did the Government. Let us hope that, between us, we get that done, particularly for older people who may not have understood some of the difficult complications with those sorts of properties.

I congratulate the hon. Gentleman—I shall call him my hon. Friend—on his chairmanship of the Committee and on steering us towards this excellent report, in which I was pleased to participate. One point that he did not mention, given the time available to him, was the scandal of companies such as Bellway that sell the freeholds of properties to financial companies two years after they built them, without even notifying the leaseholders. Will he urge the Government to close the legal loophole that allows companies to sell properties to subsidiaries or other organisations without even notifying leaseholders and to ensure that leaseholders can buy the freehold at the same price that would be paid by any subsidiary?

Absolutely. It is a complete scandal, and a number of developers have blatantly admitted that they sold on the property and did not tell the leaseholders what was being done. Ultimately, banning new houses from being built as leaseholds solves the problem, but immediately there ought to be a right of first refusal for leaseholders to buy their freehold at a clear and regulated price. The Law Commission is working on that issue, and we support that.

On behalf of the National Leasehold Campaign, I congratulate the Chair of the Select Committee and its members on an excellent, comprehensive report. There is, I think, a sense of vindication among all those who have campaigned on this issue, not least myself, the National Leasehold Campaign, the hon. Member for Worthing West (Sir Peter Bottomley) and my hon. Friend the Member for Poplar and Limehouse (Jim Fitzpatrick), because the Committee has picked up on all the issues that were of great concern to us. When considering the report, I hope the Government will note that the Leasehold Reform Bill is still on the books, which would make the process of enfranchisement simple and easy. Did the Committee come to a view on the agreements that have been reached between some developers and leaseholders for changing the terms of their lease from ground rent doubling to RPI?

We did consider that, and we said that although such voluntary agreements might be a step forward, they were not sufficient and they were not as good as our proposals to restrict leases on existing properties to 0.1% of the value, or £250. Legislation would overturn the current arrangement, and provide a better one for leaseholders.

The scandal of new houses being sold on leases, often to first-time buyers, is present in my constituency in Dunstable and Leighton Buzzard, and involves builders such as Galliford Try, which trades as Linden Homes, Taylor Woodrow and Persimmon. I am concerned about how we get speedy and affordable redress for people caught in that situation, including those Taylor Woodrow victims who are not the original purchasers and to whom Taylor Woodrow are offering nothing. The report states that the Law Commission is not due to provide its final report until later in 2019, and the Committee recommends implementation of these measures within 12 months. That cannot come a day too soon. This scandal should never have been allowed to happen, and I say to my good friend the Minister that we need urgent action please.

The word “scandal” is absolutely right to describe the way some of these developers have behaved. Hopefully action will follow quickly from the Law Commission’s report, and the Committee will keep an eye on that and press for action, as I am sure will other hon. Members. We must keep reminding ourselves that the companies who have done this are hardly hard up. In the last financial year, Taylor Woodrow made profits of £800 million and Persimmon of £1 billion. Those companies are not relying on that money to keep themselves afloat.

I apologise, Mr Deputy Speaker, for standing up too soon—just when I begin to think I know what I am doing, I realise that I really do not.

 

I congratulate the Chair of the Select Committee and its members on an excellent report, as well as the all-party group on leasehold and commonhold reform, and the work of my hon. Friend the Member for Ellesmere Port and Neston (Justin Madders). They have managed to deliver cross-party consensus, and the need for reform is clear. Does the Chair of the Committee agree that following the Law Commission’s detailed work into enfranchisement, it is important that a simple formula is set for leaseholders to buy the freehold of their home, based either on a multiple of ground rent, or on a percentage of the capital value of the property?

We need something simple, and the Law Commission has been asked to consider that issue because something as simple as a multiple of ground rent might not be fair. The freeholders who would get the biggest benefit from a multiple of ground rent will be those who made the largest ground rent charges, and it would be perverse if those who behaved the worst were to benefit in that way. We want the Law Commission’s report as quickly as possible and a formula that is as simple as possible but also fair.

I, too, thank the Select Committee for its report, which is long overdue. My constituency has a particular issue with elderly constituents who have moved into blocks for independent living and found that their assets have depreciated hugely. They are not being managed or looked after, but the service charges keep going up, and people cannot afford to leave. They are trapped. Something needs to be done to help those vulnerable constituents, and it seems to me that we need to open up the market for management service companies. Did the Committee consider whether it would be possible to allow leaseholders to set up their own community interest company and take on those responsibilities? Leaseholders would not rip themselves off in the way that they are currently ripped off by some of these unscrupulous companies.

There are circumstances where leaseholders can do that—ultimately, they could move to a form of commonhold, although that requires substantial agreement among themselves, and many elderly leaseholders might not want to go down that road without lots of explanation and help. One of our concerns was that there is not much help or publicity about that process, and that issue could be looked at. Service charges are often terribly opaque, and proper information is not provided. The right to challenge is not explained, and challenge through a tribunal is difficult. Another thing that would help is a simpler housing court system, which we hear the Government are going to introduce. The quicker they do that, the better.

I congratulate my hon. Friend and the Select Committee on the report, which is incredibly hard-hitting. My constituents, such as Pamela Rose Canales and other Camellia House residents who contributed evidence, greatly appreciate it. I believe the report is a game-changer. This issue has been bubbling away in this House, and we now have a real opportunity to fundamentally review and change legislation in this area. May I pick up on three very brief recommendations he has made, and ask how quickly he thinks they could be taken forward?

 

The first relates to the prevention of the ability of landlords to recoup their legal fees from those against whom they lose their case. Secondly, in my experience, paying the service charge has not been the issue. People are happy to pay a fair service charge. As my hon. Friend says, the issue is the lack of transparency and justification, and the unpredictable nature of additional charges that can just appear throughout the year. Perhaps with the housing court that he mentioned, changes could come in quickly.

 

Finally, how quickly could the Law Commission be asked by the Government to undertake a comprehensive review, bearing in mind that it could take 12 to 18 months? We want the legislative changes to be introduced as quickly as possible.

On the first point, if a leaseholder at a tribunal asks at the beginning for a ruling that, if they win, costs cannot be passed on to the freeholder, the tribunal can so rule. The problem is that many leaseholders do not know about that requirement. The Government could do an awful lot immediately to publicise that.

 

Secondly, on service charges, we recommend that a standard format should be brought in, so that all leaseholders know what to expect and all information is given to them in a proper manner. The Government could publish guidance without having to wait for primary legislation. We hope that they will look at doing that very quickly.

 

On the Law Commission, I do not know how long it would take it to report, but the Government could make an immediate decision to ask it to produce a report. However, the Law Commission made it very clear to us that it currently does not have the resources in its budget to do that. It would need the Government to offer, and provide, sufficient funding.

The whole system of leasehold and ground rent is a racket, and it has gone on for centuries. It was invented by aristocrats who had stolen all the land from the monasteries in the 16th and 17th centuries. It is a scandal that we, and successive generations of politicians, have continued to allow the thing to exist. Funnily enough, when it came to a moment when there was a dire shortage of housing, the house builders saw an opportunity. It is no wonder that we have ended up with the position we are in at the moment. Would it not just be simpler to scrap the whole system?

I am tempted to say yes. What we said in the report was that we need to move to a whole new approach, where commonhold becomes the default option for flats, we abolish leasehold for houses, and if we put the sorts of restrictions on ground rents and permission fees that we have been talking about, there will not, ultimately, be any incentive for freeholders and that will drive it out of the market. I think the issue is twofold: stopping it on new properties and removing the incentive for freeholders, so their income streams, which are wrongly obtained now, will not be available in future.

I congratulate my hon. Friend and the Select Committee on an excellent report. Like many other colleagues here today, I have many constituents who are affected by this terrible scandal. The Committee rightly addresses how people can get redress and compensation. Clearly, there is still a lot of uncertainty. For those who have already been hit, how they get redress and compensation is a big issue. During his presentation, my hon. Friend said that he does not think retrospective legislation should in any way conflict with human rights legislation. Can he say a bit more about that?

We took evidence on that. There are caveats and conditions on human rights legislation. If there is a general good to be obtained, that can outweigh the particular interest of private owners of property. The Government have already got around that on enfranchisement. They have asked the Law Commission to recommend a simple enfranchisement that could mean that the freeholder receives less compensation when the leaseholder enfranchises. In that case, the Government are already considering reducing the value of enfranchisement to freeholders. That is no different to a recommendation to reduce the value of ground rents to freeholders in principle. That probably needs further work, but we had advice that it is possible. There will be a requirement for some compensation, but it need not be full-value compensation.

I, too, would like to thank the Chair and his Committee, my hon. Friend the Member for Ellesmere Port and Neston (Justin Madders), the hon. Member for Worthing West (Sir Peter Bottomley) and my hon. Friend the Member for Poplar and Limehouse (Jim Fitzpatrick) who have raised this issue consistently in this House, certainly since I have been here.

 

The Leasehold Knowledge Partnership has been very helpful to leaseholders and to us on the legal issues. I am really pleased that the report says, rightly, that the balance of power is weighted against the leaseholder. The hon. Member for Rhondda (Chris Bryant) said that this is the modern equivalent of the racket that followed the dissolution of the monasteries. Does the Chair not agree that this is indeed a modern racket, whereby developers, solicitors and financiers, many of them offshore, are deliberately running a racket and organising conferences to share knowledge on how to rip off leaseholders?

Yes. I too thank the Leasehold Knowledge Partnership for its work. My hon. Friend is absolutely right. Houses are being mis-sold in the first place. Then, when people are in a leasehold situation, they are being charged ridiculous amounts for permission fees for things that should be done anyway without the requirement of the freeholder to say yes. Service charges are put in for services that are often not delivered. Freeholders are making money out of that. We heard examples of freeholders contracting for insurance on the property and taking a percentage contribution out of the money they paid over. Those things are completely wrong. The sooner we can change the system, the better.

I would like to put on record my thanks to the Chair of the Select Committee, every Select Committee member, the all-party group and the campaign. Many of my constituents in the Northwich and Runcorn parts of my constituency have been affected, as people have rightly said, by this mis-selling scandal affecting leaseholders. What more can the Government and the Select Committee do to press the Competition and Markets Authority to investigate and recommend levels of compensation? We need action now.

Absolutely right. I will take that up, and I think we can write directly to the CMA as well. Obviously, the Government will get a copy of the report and will respond. We will make sure that the CMA gets a copy as well and responds to it. This is a scandal. Many people’s lives are being blighted by this situation. We need to do everything we can as quickly as we can to rectify it.

I, too, welcome the report. It is a national scandal—that is clear. These people knew exactly what they were doing. These have been sold as financial products. People are making a lot of money out of this and they are preying on many first-time buyers who are keen to get into their homes. We have already heard about the lawyers who were recommended at a discount. People were hoodwinked. They now tell me that it is difficult to sell their homes. They have told me that they do not feel that they actually own their home, but that somebody else owns it. I recognise that it is difficult when people have signed contracts, but that does not mean that we should not do something about it. We need to sort out this scandal for existing homeowners.

Absolutely. We have said that we think there ought to be retrospective changes to the permission charges and the ground rents where they are clearly onerous. The Competition and Markets Authority ought to look at whether those contracts are enforceable, because they are, in many cases, unreasonable. There are two ways we can and should approach that. I am pleased to see that the Minister has sat through this statement on the Government Front Bench, because in the end she is the one who is going to have to deliver a lot of these changes. I think she is hearing very clearly from across the House that there is a real demand that this whole matter be addressed properly by the Government and that they implement the Committee’s recommendations.

It has been an honour to serve on the Select Committee, and may I say how well chaired it is? I thank the APPG for its contribution, and indeed all those who have campaigned on the matter for so long. I was the victim of leasehold many years ago, when I found myself in the straitjacket of the costs of the freeholders. What was clear from the evidence we received was just how far-reaching the problem is. What has been going on is a national scam—the words “racket” and “scandal” have also been used—so we absolutely must get to grips with it as quickly as possible.

 

Over the past two years, buyers on one of the recently built estates in my constituency have been told by the salespeople that they would not have to pay as much council tax as others because they would be paying a separate charge for their verges to be looked after. Local authorities now have a responsibility to address that issue with those estates.

We made it clear right at the beginning of our report that there should be a clear explanation from the seller of what extra charges there might be for the future maintenance of areas of open space that have not been taken over by the council. If they are to be managed by a private company, its service charge should be open and transparent, but all that information should also be provided right at the beginning. My hon. Friend is absolutely right that this is a scandal. I referred to 700 pieces of written evidence, but every day we are continuing to get leaseholders writing to us, having seen our evidence sessions on the television or read about them on the website, saying, “Me too; we have been badly treated and we want something done about it.”