With one-fifth of properties in England currently in leasehold ownership the Government announced in December 2017 that it would turn its attention to tackling what the Communities and Local Government, former Secretary of State for Housing, the Rt Hon. Sajid Javid MP, described as unfair and “practically feudal” practices in the leasehold market. The Government promised to crack down on a system that it described as not working in consumers’ best interests.
In October 2018, the Government launched a consultation which went further in proposing a more transparent system for homeowners, aimed at eradicating ‘onerous’ ground rents, eliminating disproportionate costs to extend leases and, with certain unspecified exceptions, abolishing new residential long leaseholds for almost all new build houses (see our earlier article: Tracking Unfair Practices in the leasehold market - the proposed legislation.)
With the reform of the leasehold market now a political priority for the Government, on 19 March 2019 the House of Commons, Housing Communities and Local Government Select Committee (Committee) published a final report, outlining the reforms it thinks are necessary to make the leasehold market fairer. This detailed report proposes reforms even more radical than those proposed in the earlier consultations.
The report covers five key areas and sends out a clear message that fundamental reform of the sector is likely to be coming.
Transition away from leasehold to commonhold ownership
The Report makes it clear that it wants commonhold to become the primary model of ownership for flats. Commonhold was first introduced in 2004 by the Commonhold and Leasehold Reform Act (CLRA) 2002 as a form of ownership of land which is designed to enable the freehold ownership of flats. With only 150 commonhold units in England and Wales, the Commission has been forced to admit that it has not been a popular mode of ownership, but it is continuing to argue that commonhold has several advantages over the leasehold model, namely that owners have an interest in the long-term well-being of the wider building and shared areas, with greater control over one-off costs and service charges.
The Committee chair, Clive Betts MP, has stated that ‘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.’
To combat this, the Committee wants commonhold to become the ‘primary model of ownership of flats’ in England and Wales with a gradual transition of current leasehold properties to commonhold and the construction of new commonhold properties.
Given the known flaws with the commonhold system as it stands it seems unlikely that it will be more widely used until these issues have been addressed.
The Committee is concerned that developers’ salespeople and developer-recommended solicitors fail to highlight onerous terms in leases which result in purchasers being misled throughout the purchase process. The Committee has proposed a mandatory document detailing standardised key features of the sale. In addition, it has recommended that the Government prohibits developers from offering financial incentives to persuade a purchaser to use a particular solicitor, so that every purchaser has access to independent and reliable legal advice.
With an increase in ground rent levels and a rise in the use of onerous review provisions, the Government announced that it proposes to stop the modern practice of buying and selling ground rents as an economic asset. Its view is that it is unfair that tenants are required to pay ‘economic rents at levels which are solely designed to serve the commercial purposes of the developer and any future investors’. The Committee’s report supports this and states that ground rents on new long leases for both houses and flats should be capped at a peppercorn (ie zero financial value), not the £10 a year proposed by the Government in earlier consultations.
More importantly, in a major shift from the consultation documents the Committee thinks it would be legally possible to introduce legislation to remove onerous ground rents in existing leases as well and that these should be capped at 0.1% of the value of the property with an upper limit of £250 per annum. This would be a shock to ground rent investors even if compensation is provided.
The Committee also states that in addition to its proposal to cap ground rents, the Government should require that permission fees in the leases of new-build properties are not permitted to exceed the true administrative costs incurred by freeholders. The Government should also introduce legislation to restrict onerous permission fees in existing leases. They even argue that compensation for costs already incurred may be appropriate if terms in existing leases are found to have been unfairly imposed upon leaseholders.
The Committee has questioned the transparency of service charges and the effectiveness of the mechanisms available for leaseholders to dispute their service charges, urging the Government to implement a standardised form for the invoicing of service charges, which clearly identifies the individual parts that make up the overall charge. It should be clearly identified where commission has been paid to the managing agent, or freeholder, and the proportion of the cost this constitutes.
The report also recommends that the Government implement a new consultation process for leaseholders in privately-owned buildings affected by major works. A threshold of £10,000 per leaseholder should be established above which major works should only proceed with the explicit consent of a majority of leaseholders in the building. If no agreement can be reached with leaseholders, freeholders should only be able to proceed with major works subject to the authorisation of a tribunal, which would determine whether the works are both essential and represent value for money. If works are deemed to be inessential or unreasonably expensive—for example, due to excessive management fees—they should not be allowed to proceed. Where such works do proceed, the freeholder should be obliged to offer a low-interest, long-term loan to affected leaseholders. The threshold should apply regardless of whether funding is provided by central government and should apply to the cumulative costs of all major works within a five-year period.
In addition, to assist leaseholders who may need to go to Tribunal to challenge the landlord, the Committee states that the Government must legislate to require that freeholders’ tribunal costs can never be recovered through the service charge, or by any other means, when the leaseholder has won the case, unless the leaseholder has behaved unreasonably.
Further to the call for Leasehold clarity the Committee supports the Law Commission’s detailed analysis of this area and the Government’s proposals to make the process for leaseholders to purchase a freehold or extend a lease clearer, faster and cheaper even if this is at the expense of the freeholder. The Committee is clearly pushing for a system that changes the balance of power in favour of tenants as the report states that “the Government’s proposal to reduce the premium payable to enfranchise is equally justifiable in human rights terms as our recommendation to reduce freeholders’ contractual income streams through lower ground rents. If the Government is willing to countenance a cheaper process for enfranchisement, it should have no objection to removing onerous terms from existing leases either.”
The Committee has a particular concern where the existence of a lease or lease terms have affected the saleability and mortgage-ability of properties. It is suggested that the Government should introduce a low-interest loan scheme, so that leaseholders who want to enfranchise or extend their leases—but cannot afford to or cannot obtain the necessary finance—have the opportunity to do so. This could be promoted as a form of Help to Buy for leaseholders.
It is clear that the Committee was committed to looking at wider reforms to promote transparency including putting consumers’ needs ahead of those of developers or investors.
The impact of the proposals will almost certainly, if implemented, affect the structuring of new residential schemes, the value of freehold reversions and, for both buyers and lenders, the desirability of houses owned on long leases. However the legislative changes required to implement the proposals are considerable and will take time to put in place. The Government have another few weeks to respond to the recommendations. Once they have, we may have a clearer idea of how much of the report they intend to act upon.