Flawed system leaves leaseholders at risk of exploitation by developers, freeholders and managing agents – urgent reform needed say MPs

The Housing, Communities and Local Government Committee has called for wide ranging reforms to the leasehold system in a report published today. The Committee finds that the balance of power in existing leases, legislation and public policy is too heavily weighted against leaseholders.

While the growth in the number of leasehold houses, particularly in the North West of England, has been a particular concern in recent years, the Committee found that flat lessees were also vulnerable to onerous ground rents, high and opaque service charges and one-off bills, unfair permission charges, imbalanced dispute mechanisms, inadequate advisory services, and unreasonable costs to enfranchise or extend leases.

The report finds key elements of the current leasehold system are open to abuse and without defined purpose. Ground rents have in some cases increased to a level leaving properties unsellable and unmortgageable, while permission fees have been levied far beyond the reasonable cost of administration. Both should be subject to legislation that establishes when they can be used and how they should be calculated. Other aspects, such as processes for invoicing service charges and renewing leasehold must be made simpler, demonstrate value for money and provide greater transparency to leaseholders.

The Committee has concluded that:

• It would be legally possible for the Government to introduce legislation to remove onerous ground rents in existing leases. Existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year.
• The Government should revert to its original plan and require ground rents on newly-established leases to be set at a peppercorn (i.e. zero financial value).
• The Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation.
• The Government needs to ensure that commonhold becomes the primary model of ownership of flats in England and Wales.
• The Government should require the use of a standardised key features document, to be provided at the start of the sales process by a developer or estate agent.

Committee Chair, Clive Betts MP said:

“We found that the leasehold system often fails to provide an effective system for managing multi-occupancy residential properties, and believe that a commonhold model would be more appropriate in most circumstances. Buildings require effective management to ensure they are kept up to a sufficient standard of repair, but to spread responsibility for covering the costs. Yet in too many cases, leasehold has failed to do this, and acted primarily as means of providing a steady income for developers, freeholders or managing agents. 

“In the worst cases, people have been left trapped in unsellable and unmortgageable homes, needing permission or having to pay high fees for even minor cosmetic changes. More common are opaque service charges and poor levels of maintenance, with no reasonable means for leaseholders to challenge or query how their buildings are managed. Financially, the buck always seems to stop with the leaseholders and there is little they can do about it.

“There are some practices that should stop outright. There is no reasonable case for a house to be sold as leasehold. Equally, financial incentives to use preferred solicitors raise serious questions of a conflict of interest. In other areas, such as ground rents, service charges and dispute mechanisms, the Government needs to tip the balance back towards leaseholders. They must set explicitly set out in legislation how ground rents and permission fees should operate in existing leases, provide transparency for leaseholders, and establish robust mechanisms for dispute resolution.

“Commonhold works well in other countries but remains little used in England and Wales. We urge the Government to view this as the primary model for ownership of flats but they need to set the conditions for it to succeed, beyond the work being undertaken by the Law Commission. There is little evidence that professional freeholders provide a better level of service than can be provided by leaseholders themselves.

“Over the course of this inquiry we have heard a number of claims that individuals have been mis-sold. Developers are adamant that they have not deliberately misled buyers with false promises or partial sales information. However, the pattern of near-identical stories demonstrate significant failings in the process. A mandatory document detailing standardised key features of the sale would help prevent such cases being repeated. The Competition and Markets Authority should also investigate these claims and, where necessary, decide on appropriate compensation.

Main findings and recommendations:

Ground rent

• Any ground rent is onerous if it becomes disproportionate to the value of a home, such that it materially affects a leaseholder's ability to sell their property or obtain a mortgage.

• In practical terms, it is increasingly clear that a ground rent in excess of 0.1% of the value of a property or £250—or likely to become so in future due to doubling, or other, review mechanisms—is beginning to affect the saleability and mortgage-ability of leasehold properties.

• We note that it would be legally possible for the Government to introduce legislation to remove onerous ground rents in existing leases.

• 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 per year. They should not increase above £250 over time, by RPI or any other mechanism.

• Alternatively, the Government should establish a compensation scheme for the mis-sale of onerous ground rents, funded by the relevant developers and the purchasers’ solicitors.

• We recommend that the Government revert to its original plan and require ground rents on newly established leases to be set at a peppercorn (i.e. zero financial value).

Permission fees

• The Government should introduce legislation to restrict onerous permission fees in existing leases.

• The Government should require that permission fees are only ever included in the deeds of freehold properties where they are reasonable and absolutely necessary, although we cannot think of any circumstances in which they would be so.

Costs of maintenance

• The Competition and Markets Authority should indicate its view as to whether onerous leasehold terms constitute ‘unfair terms’ and would be, therefore, unenforceable.

• The Government should require the use of a standardised form for the invoicing of service charges, which clearly identifies the individual parts that make up the overall charge.

• We recommend that the Government implement a new consultation process for leaseholders affected by major works in privately owned properties. A threshold of £10,000 per leaseholder should be established, above which works should only proceed with the consent of a majority of leaseholders in the building.

Protecting buyers at point of sale

• The Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation.

• The Government should require the use of a standardised key features document, to be provided at the start of the sales process by a developer or estate agent, and which should very clearly outline the tenure of a property, the length of any lease, any ground rent or permission fees, and—where appropriate—a price at which the developer is willing to sell the freehold within six months.

• The Government should prohibit the offering of financial incentives to persuade a customer to use a particular solicitor.

Dispute resolution

• The Government must legislate to require that freeholders’ tribunal costs can never be recovered through the service charge, or any other means, when the leaseholder has won the case.

• The Government should immediately take up the Law Commission’s 2006 proposals to reform forfeiture, to give leaseholders greater confidence in disputing large bills by reducing the threat of losing a substantial asset to the freeholder.

Enfranchisement

• We urge the Law Commission to recommend a process that will make enfranchisement substantially cheaper.

• The Government should introduce low-interest loans—a Help to Buy scheme for leaseholders—so that leaseholders who want to enfranchise or extend their leases, but cannot afford to or obtain the necessary finance, have the opportunity to do so.