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Property ownership - is the system weighted against leaseholders?

  1. 08 April 2019
  2. By Andi Michael

With concerns around the purchase of leasehold, and the call for reform growing louder, we consider whether the housing system is weighted against leaseholders.


It was recently claimed by a group of MPs that conveyancers are ‘too close’ with developers, leading to leaseholders being coerced into using recommended solicitors for fear of not completing their house purchase on time.
 
In a recent report published by the Housing, Communities and Local Government select committee, it said that the balance of power in leases, legislation and public policy was weighted too heavily against leaseholders.
 
As part of its inquiry into leasehold reform, the committee found a flawed system leaving leaseholders at risk of exploitation by developers, freeholders and managing agents – and called for urgent changes.

‘Too cosy with developers’

The report found that leaseholders have been pressured into instructing conveyancing solicitors who are too cosy with developers. Katie Kendrick, founder of the National Leasehold Campaign and a strong advocate of leasehold reform, was asked to give evidence to the inquiry and revealed that members of her group were offered ‘free carpets, free lawn in the back gardens...or a discount off other parts of the house if they were to use their (the developer’s) panel of solicitors.
 
Meanwhile, another leaseholder said that he was eager to use the solicitor instructed for his previous house purchase, but the developer 'held back information from them to the point that my solicitor told us if we didn’t use [their] recommended [solicitor] there was no way we would complete within the eight-week deadline'.
 
The report insisted that the interests of buyers cannot be served where they are coerced into using developer-recommended solicitors, given these solicitors rely on repeat business from developers and may not always put their clients’ interests first.

MPs are now urging the government to ban financial (and other) incentives to prevent leaseholders from being coerced. The committee argued such coercive practices are especially worrying after hearing that some developer-recommended solicitors failed to draw clients' attention to the ownership structure or onerous lease terms of their leasehold properties.
 
One leaseholder said the solicitor he was made to use didn’t offer any warning about the permission fees required to remortgage, build a conservatory or even change the colour of his front door. He also said the solicitor failed to disclose that the ground rent would be increasing with RPI every decade.
 
As part of the inquiry, MPs were also made aware that freeholders have been recovering their legal costs of a tribunal challenge through the service charge, even when they lose. The committee’s chair, Labour MP Clive Betts, said he was previously unaware of what he called a ‘completely outrageous’ practice.

What did the committee recommend?

The committee - which found that the current leasehold system is far too open to abuse, with owners of leasehold flats and houses vulnerable to onerous ground rents, high and opaque service charges and one-off bills - came up with a number of recommendations to improve and reform it.
 
To prevent the above, as well as ‘unfair permission charges, imbalanced dispute mechanisms, inadequate advisory services and unreasonable costs to enfranchise or extend leases’, the committee concluded that it would be legally possible for the government to introduce legislation to eradicate onerous ground rents in existing leases.
 
The MPs also called for existing ground rents to be limited to 0.1% of the present value of a property, up to a maximum of £250 per year. Additionally, it urged the government to return to its original plan and require ground rents on newly-established leases to be set at a peppercorn (i.e. zero financial value).
 
Furthermore, the committee said the Competition and Markets Authority (CMA) should investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation, and called for the government to ensure that commonhold becomes the primary model of ownership of flats in England and Wales. It also urged the government to 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.
 
The report found that ground rents have, in some cases, risen to a level where properties have become unsellable and unmortgageable, while permission fees ‘have been levied far beyond the reasonable cost of administration’. The committee argued both should be subject to legislation outlining when they can be used and how they should be calculated.
 

Other features - for example the processes for invoicing service charges and renewing leasehold - should also be made simpler, demonstrate value for money and provide greater transparency to leaseholders.
 
“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,” Clive Betts said.
 
“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.”
 
“Equally, financial incentives to use preferred solicitors raise serious questions of a conflict of interest,” he added. “In other areas, such as ground rents, service charges and dispute mechanisms, the government needs to tip the balance back towards leaseholders.

An ongoing issue 

Previously, we looked at how the leasehold scandal first came to public attention and what was being done to solve the issue, and it’s been heavily back in the news of late with the release of the select committee’s report and subsequent responses from the government.
 
The government held its first consultation on tackling unfair leasehold practices in July 2017, just after the leasehold scandal first hit the headlines. Sajid Javid, Communities Secretary at the time, announced proposals to crackdown on unfair practices in December 2017, but it wasn’t until October 2018 that a consultation - titled ‘Implementing reforms to the leasehold system in England’ – was announced.
 
This consultation ended in November 2018 and the government is still analysing the feedback on how best to implement wholesale leasehold reform.
 
Most recently, current Communities Secretary James Brokenshire announced an industry pledge to stop leaseholders being trapped in unfair and costly deals. Over 40 leading property developers and freeholders, including major housebuilders such as Taylor Wimpey and Barratt Homes, have already signed up to the promise, which commits them to ‘doing away with onerous doubling clauses that can result in ground rents soaring exponentially over a short period of time’.
 
Separately, the Law Commission stepped in with plans for 'radical' reforms for owners of leasehold houses and flats in September 2018, and recently published its consultation paper on commonhold reform, following on from a Call for Evidence on commonhold in February 2018.
 
The consultation closed on March 10 this year and the Commission’s final report, as well as an outline of recommendations on how to effectively implement commonhold, is set to be released at some stage this year.  
 
While some progress has been made recently – with the strong words from the select committee and the government-backed pledge to end toxic leasehold deals – there is still a lot that remains uncertain.
 
 

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