Select Committee on Communities and Local Government Committee Written Evidence


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 leases—as well as as a matter of general good practice—to 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 authorities—in 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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