Memorandum by the National Housing Federation
SUMMARY
Many leaseholders, especially in
flatted property, can find themselves subject to very heavy service
charges for major works. In some cases it may be difficult or
impossible for them to pay these charges. This is a particular
problem in local authority housing but also arises in housing
association stock.
Although the Committee has highlighted
the impact of Government initiatives such as Decent Homes, in
fact the problem can arise from any substantial programme of works,
such as, for example, the replacement of lifts or windows.
Landlords are required by their leases
and by the precepts of responsible property ownership to undertake
works to maintain the building. The costs of doing so are sometimes
unavoidably very high. Like other property owners, leaseholders
are obliged to pay for maintenance and upkeep.
If leaseholders do not pay their
due share of the costs, the burden will inevitably fall elsewhere.
For local authority and housing association landlords, unless
a subsidy is provided from taxation, the cost not met by leaseholders
will effectively fall on periodic tenants, who are on average
considerably less well-off than leaseholders. We think this is
unfair.
We are sympathetic to the plight
of leaseholders, but we feel the emphasis should be not on reducing
charges but on extending existing mechanisms, and developing new
ones, that will make them easier to pay. Examples include equity
release, phased payment, and more use of sinking funds.
Existing statutory consultation mechanisms
are often inconsistent with modern methods of more efficient procurement.
The legislation should be updated as a matter of urgency.
1. INTRODUCTION
1.1 This memorandum is the National Housing
Federation's submission to the Inquiry by the Communities and
Local Government Committee of the House of Commons into the issue
of leaseholders and major works.
1.2 The National Housing Federation represents
housing associations in England. Between them, our members provide
two million homes for five million people. They build better homes
and more sustainable neighbourhoods. Housing associations are
independent, not-for-profit, social businesses.
1.3 The problem of high service charges
because of major works is particularly acute in local authorities,
because of their higher proportion of flatted property and the
universal entitlement of their tenants to buy their homes. However,
it is also significant in housing associations, particularly those
that have accepted transfer of former local authority housing
and those with substantial older flatted property, especially
in London.
1.4 The Committee has raised the issue of
high service charges in relation to the Decent Homes Standard
and other Government initiatives. While we agree that Government
initiatives are often a factor in generating the heavy costs that
these charges represent, it is important to stress that high service
charges can result from any major works, including those resulting
from normal landlord's maintenance and upkeep.
2. THE IMPACT
OF HIGH
SERVICE CHARGES
2.1 The Federation is well aware of the
impact of high service charges on leaseholders, and we can understand
their concern, and in some cases dismay, at being presented with
demands for very substantial payments. We recognise that, in some
cases, leaseholders on relatively low incomes may have extreme
difficulty in meeting these charges.
2.2 However, this is not a readily soluble
problem. Landlords are obliged under the terms of their leasesas
well as as a matter of general good practiceto maintain
in good condition the parts of the property for which they are
responsible. In the case of flats, this can entail very high costs,
for instance to replace windows, roofs, and lifts.
2.3 Flat owners have entered into leases
in which they undertake to meet their share of the costs reasonably
incurred by the landlord in meeting its responsibilities. While
we can understand their concerns when the costs are unusually
high, we would point out that paying for works is part and parcel
of home ownership, and that owners of freehold homes are equally
liable for bearing maintenance costs that may also be very heavy.
2.4 If contributions are not recovered from
leaseholders, it is inevitable that they will fall elsewhere.
If they are met from the general reserves of a housing association
(or the housing revenue account of a local authority), the effect
is that the cost is borne by periodic tenants. This would be entirely
unfair, particularly since tenants are, on the average, significantly
less well off than leaseholders.
2.5 However, we agree that landlords should
look sympathetically at mechanisms that make payment easier. One
such option is to spread payment over a number of years. This
can be done by accepting payment in instalments over a long period,
although probably interest would have to be charged. Another possibility
is to establish a sinking fund, although under the current law
this can be done only if the lease permits it. We suggest that
consideration should be given to granting landlords a statutory
power, after consultation, to establish a sinking fund to which
leaseholders would be required to contribute even if it is not
authorised under the lease.
2.6 We also support proposals to facilitate
equity release: that is, the leaseholder remortgages the property
to obtain funds to pay the service charge. This would be similar
to a freehold home owner's remortgaging to pay for major works.
If a remortgage is not possible, for instance if the leaseholder
is elderly and on a fixed income, other options might be available:
funds could be advanced on condition that the property will revert
to the lender at the leaseholder's death. It is possible that
the financial services industry would be able to bring forward
further proposals.
2.7 It has sometimes been argued that another
solution is that the landlord should take a legal charge over
the property. This would mean that the property could not be sold
until the debt was paid. While we do not altogether rule this
out as a solution, we have serious reservations about it because
many years might pass before the property is sold; indeed, if
the owner lets it out, it might never be sold. Moreover, a legal
charge does not provide any immediate funding; it merely holds
out the possibility that the landlord may be able to recover the
cost at some point in the future.
2.8 We strongly support the point made in
the Haler Report that the current provisions of the Landlord and
Tenant Acts are inconsistent with modern methods of efficient
procurement. It cannot be satisfactory that landlords are obliged
routinely to ask the LVT for dispensation from the statutory processes.
We call on the Government to bring forward as a matter of urgency
proposals to update the law on service charges.
2.9 Before moving on to address the specific
questions raised by the Committee, we should like to make the
point that although the issue of high service charges is one that
arises in leasehold property, it is important to be clear that
it is not a problem with leasehold tenure as such. Rather, the
problem is that, while leaseholders own the individual flats,
someone or something is responsible for the upkeep of the building
as a whole. Even in a commonhold arrangement, where the commonhold
association is run by the flat owners collectively, it is still
possible that the association might agree to undertake works that
a minority of individual owners are unwilling or unable to pay
for, thus giving rise to exactly the same issues as currently
arise in leasehold stock.
3. SPECIFIC ISSUES
RAISED BY
THE COMMITTEE
We respond to the specific points raised by
the Committee as follows.
3.1 The difficulties experienced by leaseholders
in connection with major works initiated under the Decent Homes
and other government programmes.
Work carried out in response to government initiatives
is only a part of the problem. We suggest the emphasis should
be on the issue of high charges that arise from any cause, including
normal maintenance and upkeep.
3.2 The role of local and central government
in commissioning works, ensuring value for money and determining
the level of costs to be carried by leaseholders.
Works should be commissioned in the most cost-effective
manner and would rightly be open to challenge if they were not.
However, procurement methods have changed dramatically since the
current legislation was enacted, and a landlord that followed
the existing statutory processes would not be able to enter into
long-term contracts that are now recognised as being more efficient
for some types of work. In practice, landlords seek dispensation
in order to place long-term contracts, but this is hardly a satisfactory
state of affairs. The Landlord and Tenant Acts need to be updated
to take account of modern procurement.
3.3 The effectiveness of measures available
or proposed to reduce the burden upon leaseholders.
We respond below to each of the recommendations
in the report. However, we wish to stress that reducing the burden
on leaseholders should not be the sole, or even the paramount,
consideration. Leaseholders have entered into the responsibilities
of home ownership, which include, as for any other home owner,
the costs of upkeep. The issue is not about reducing that cost
but about levying it in a way that makes it easier to bear when
leaseholders are in difficulties.
4. HALER REPORT:
RECOMMENDATIONS
We reproduce below each recommendation (in italics)
followed by our comments.
1. Separate legislation for the social sector?
The Minister, and Government, should give
early consideration as to which of the two alterative positions
are to apply and strengthen or amend the legislation accordingly:
a level playing field with common
legislation applicable to both private and social sector landlords
and leaseholders; or
separate legislation for the two
sectors.
We favour common legislation applicable to local
authorities, housing associations, and private landlords.
2. Removal of "public works" costs
from recharges
The issue of directions by the Secretary
of State (Part VI, Local Government and Housing Act 1989, as amended)
on what items of account are to be regarded as properly within
the HRA and "public works" properly to be recharged
to the General Fund may assist in substantially reducing recharges
to lessees in respect of general estate works and works required
by other statutory obligations.
This is an issue relevant only to the local
authority sector so we make no comment.
3. Statutory Consultation
It cannot be acceptable for Parliament to
make requirements with which the landlord cannot comply other
than to formally seek dispensation; there is a pressing need to
review the S20 legislation and procedures to produce a workable
solution in accordance with the wishes of Parliament.
We strongly agree. This is urgent.
4. To provide new legislation to enable leaseholders
to opt-out from the statutory
consultation (S20) process;
to join together as a recognised
body to assume management responsibilities for spending decisions,
on behalf of the landlord.
It is envisaged that this should apply subject
to the leaseholders having a prescribed percentage in the block,
say 15%-20% and their delegated control to exclude issues such
as statutory disrepair and emergency works.
We are not persuaded by these proposals.
Section 20 is designed for the protection of
leaseholders and they are unlikely to agree to opt out from it.
While an opt-out might be useful in some circumstances, we suggest
a better approach would be to amend section 20 so that it permits
the landlord, after due consultation, to enter into long-term
arrangements for services and works and that the resulting costs
should be recoverable from leaseholders provided they are properly
incurred under the agreed arrangement even if they are not quantifiable
at the outset.
We do not agree that leaseholders representing
only a small proportion of the building should be allowed to take
over management responsibilities for the whole of it. This would
risk marginalising the legitimate interests of other occupants,
including periodic tenants, as well as the landlord.
5. Capping of major works charges
Capping of service charges may appear the
only immediate solution to present problems.
The landlord-side's opposition to capping,
on financial grounds, makes clear that they would not, was
[sic] capping to be introduced, favour any discretion per authority
but a mandatory scheme across the board. The following method
is suggested: the council caps the leaseholder's bill at the designated
level, reports the consequences to Government which then allocates
specific subsidy to cover the ensuing extra interest and capital
repayment costs.
We are opposed to capping, and not only on financial
grounds as the report suggests. Leaseholders are subject to the
same obligation as any other property owner to pay for maintenance
and upkeep. If they fail to do so, the cost will inevitably be
borne elsewhere: by periodic tenants, for example, or the taxpayer.
We think this is unfair.
6. Exchange sale scheme
There would be considerable merit in re-introduction
of the Exchange Sale Scheme to allow social landlords to strategically
direct problematic isolated leasehold units and concentrate them
in blocks where leasehold tenure could form a majority.
While there may be value, for other reasons,
in concentrating leasehold tenure as this proposal envisages,
we do not think it is a solution to the issue of high charges.
If a block of flats requires new lifts, for instance, or a new
roof, the costs are inherent in the nature of the building, not
the form of tenure, and the share borne by any individual leaseholder
is likely to be the same.
7. Targeted buy-back
The incentive to buy back already exists
but the cash is not readily available for most local authoritiesin
these circumstances a solution would be to allow local authorities
to offset 100% of their buy back costs against RTB receipts in
respect of approved buy back schemes.
For housing associations, RTB receipts are used
for new housing and other social objectives. Buy-backs would have
to be justified against other potential uses for the funds involved.
8. Reverse staircasing
Reverse staircasing should be open to all
social sector lessees, irrespective of whether they were original
RTB or shared-ownership purchases but, as with proposals for capping,
be restricted to resident-lessees.
Reverse staircasing may sometimes be an option
but, as for buy-backs, the cost to the landlord would have to
be justified against other potential uses for the funds involved.
9. Equity release
To encourage local government in the sponsorship
of a new national company to provide equity release monies from
private finance.
While we support various forms of equity release,
we are not convinced of the case for a new national company. This
business should be undertaken only if it is financially viable,
in which case it should be attractive to the existing lending
industry.
10. Discretionary and mandatory loans
Government to prescribe regulations to standardise
schemes for discretionary and mandatory loans for service charges
and to require compliance by social sector landlords.
We are concerned that standardising schemes
might case inflexibility. We think that a range of options should
be considered, including the acceptance of payment over a period
of years as well as more formal loans. It should be noted that
housing associations are not financial institutions and would
not always be a position to give loans.
11. Equity reversion loans
To encourage local authorities to utilise
existing powers in provision of equity reversion loans.
This is an issue relevant only to the local
authority sector so we make no comment.
12. Redefine "essential works"
to assist benefit payments
The definition of "essential works"
to be expanded to include works are part of Decent Homes programmes
for the purpose of payments by the Benefits Agency toward interest
on loans.
We agree.
13. Sinking funds
If sinking funds should be the norm for social
sector service charge payers then legislation will be required
to change Housing Revenue Account rules and to provide deemed
inclusion of sinking fund contributions in all leases.
An alternative approach would be the encouragement
of individual savings schemes, administered by the landlord; the
scheme would require ring-fencing rules that the saved sum would
only be available for service charge costs and was assignable
with the dwelling. This could be through a Government initiative
and model scheme.
We agree that landlords should have a statutory
power (but not a duty) to establish sinking funds, even where
there is no provision for it in the lease. However, it should
be noted that the current tax treatment of sinking funds is unfavourable
and can deter landlords and tenants from establishing them.
14. Code of management practice
The mandatory application of a code of management
practice, approved under 1993 Act powers, to social landlords;
compliance to be through Audit Commission Housing Inspectorate.
We agree, subject to due consultation.
15. Advice and support services
That social sector landlords be required
to fund local leaseholder advice and support services, ideally
through a service charge levy from leaseholders. There is a precedent
for this in the funding arrangements for the Housing Ombudsman
whereby the service is funded by the end-user.
We do not agree. Social sector leaseholders
already have access to the relevant Ombudsman if they feel they
have been unfairly treated (in addition to their other legal remedies).
Leaseholders would almost certainly object to a further levy.
16. Leaseholder impact assessment
That, every case relating to HRA expenditure
arising from Government directives, initiatives or new legislation,
to be accompanied by a formal leasehold impact assessment as an
integral part of the process.
This is an issue relevant only to the local
authority sector so we make no comment.
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