Second Supplementary Memorandum by CityWest
Homes
MEASURES TO ALLEVIATE LEASEHOLDER HARDSHIP
INTRODUCTION
1.2 CityWest Homes is actively involved
with the London Councils' leasehold forum in discussions with
the Department of Communities & Local Government on options
for assisting leaseholders with high major works bills. In addition,
CityWest Homes also represent the NFA on LEASE's social sector
working party, which has a wider agenda of looking at all service
charge matters for public sector leaseholders. This submission
considers sinking funds, equity release, service charge loans
and buy-back.
2. SINKING FUNDS
2.1 Sinking funds are currently used predominantly
in the private and RSL sectors. The main benefit of a sinking
fund is to provide a leaseholder at point of purchase with clarity
on responsibility for future major works. They also are useful
in spreading the cost between successive residents and should
prevent residents being faced with large bills for infrequent
work.
2.2 Capacity for leaseholders to pay major
works has been highlighted recently by Karen Buck MP in the Adjournment
Debate in Westminster Hall on 1 November. In that debate Karen
Buck MP indicated that she would like to see councils required
to have a sinking fund for recurring work that is not part of
the decent homes initiative. She has also indicated through her
website that she will be taking the matter (of high leaseholder
bills) forward through additional Parliamentary Questions and
raising the profile through the media.
SUMMARY OF
KEY ISSUES
AND RECOMMENDATIONS
There is little coherence in policy and practice
across the country regarding the alleviation of hardship for leaseholders.
A uniform application of good practice together with active Government
support for innovation provides the best option for assisting
those in most need.
2.3 CityWest Homes has canvassed the views
of London ALMOs on the operation of sinking funds. Obviously it
would be difficult for any local authority or ALMO to be required
to set up a sinking fund where their current leases did not allow
for it. Variation to those leases would be subject to court application
or determination by the Leasehold Valuation Tribunal. In either
situation, the views of leaseholders to a variation would need
to be sought. This has close conformity to the requirements of
the Audit Commission's housing inspectorate revised Key Line of
Enquiry No. 12, which requires that decisions on the use of sinking
funds be made in consultation with leaseholders.
2.4 These responses were amongst those received
to NFA consultation with London ALMOs:
Ascham Homes report that they have previously
operated a sinking fund (now wound up) that was time consuming
to administer and was unpopular with leaseholders.
The London Borough of Lewisham (going live as
an ALMO 22 January 2007) has recently consulted its leaseholders'
standing committee. The committee generally did not see an advantage
in saving via a sinking fund and that sound advice on finance
options coupled with reliable information on the likely costs
and timing of works would assist leaseholders more. In that regard,
any local authority/ALMO that did set up a sinking fund in attempting
to predict an accurate level of contribution would be hampered
by the present subsidy system which does not facilitate long term
planning.
Barnet Homes' lease makes no provision for sinking
funds.
2.5 CityWest Homes' lease does allow for
the operation of a sinking fund where certain funding conditions
can be met.
2.6 Despite the April 2006 relief from the
former 40% trust rate of taxation for sinking funds in the social
housing sector, it may be that even charging tax at the basic
or lower rate might be detrimental to lessees on lower incomes
who are not liable to pay tax. The tax on the earnings of sinking
funds together with administration costs of managing them may
render them less attractive as a savings vehicle for leaseholders
with limited income in comparison to a tax free savings opportunity
such as an ISA. Of course it would be helpful, if there was encouragement,
through affording public sector sinking funds tax free status
on earnings or alternatively achieving the same end through either
a statutory or voluntary scheme offering the opportunity for leaseholders
to pay monthly into a tax free savings account.
2.7 In summary, without some relief from
taxation on earnings, it is possible that sinking funds may still
be an appropriate solution for some leaseholders, but will be
achieved through consultation rather than regulatory means. There
is currently little chance of uniform acceptance across the local
authority/ALMO community because of leaseholder wishes and lease
differences. Reduced taxation could serve to change this, making
it more attractive for leaseholders and encourage non-contentious
variation to leases to facilitate the setting up of funds. NFA
and London Councils' practitioner networks can be used to ensure
that where sinking funds are set up following consultation with
leaseholders there is discussion to promote adoption of uniform
best practice.
2.8 As part of its review of ALMOs, the
Department of Communities & Local Government is working with
six pilot LAs/ALMOs to demonstrate the added value and opportunities
that might accrue from self-financing if they were able to operate
outside the constraints of the HRA subsidy system. If that did
occur it would remove the current potential position of lessees
making their contributions to future works and the LA/ALMO, despite
having planned to carry out the necessary works, finds that changes
in subsidy rules in the interim means they can't keep their commitment.
3. EQUITY RELEASE
3.1 Many local authorities/ALMOs operate
deferred payment schemes, which function as a form of equity release,
but there is no current commercial vehicle or product available
that suits the peculiarities of the public sector leasehold environment.
There is the "Houseproud" scheme, but that requires
overhaul as its qualifying criteria are restrictive and fees seem
expensive.
3.2 Equity release has been seen in some
quarters as a panacea for leaseholders facing high bills. Equity
release loans were highlighted by the London Councils' leaseholder
forum as far back as November 2005, and led to several DCLG sponsored
meetings with the Council of Mortgage Lenders (CML), the latest
of which was 6 September 2006.
3.3 The CML's view was that there was clearly
a contribution that equity release could make, but believed that
it was only likely to be an option in a minority of cases. However,
they did say that any scheme would need to be a reasonably general
scheme that councils and lenders bought into (rather than individual
schemes for individual councils).
3.4 The CML's view is mirrored in the recent
report published by the Joseph Rowntree Foundation (JHF), "Obstacles
to Equity Release" that has provided the best in-depth analysis
of this option to date. This report provides a clear focus on
the real issues and presents both sides of the equity release
argument. A copy can be downloaded at http://www.irf.orci.uk/pressroom/releases/031006.asp.
3.5 The report suggests that a new national
company be set up to make equity release loans. This company would
be sponsored by local government and funded with private finance.
The proposal which is endorsed by the NFA includes the following
features:
— Finance would be raised privately—no
costs to LAs beyond any indemnity or set up costs in individual
cases.
— The benefit of the company being
a creature of local government would be that the LA would be responsible
for admin and process.
— A national company could mix public
and private finance to meet LAs' requirements.
— A national company avoids LAs developing
and administering their own schemes.
— If equity release is the main purpose
of the company, equity release will be restricted to the over
65s.
— Existing commercial equity release
providers would provide private finance to the company and mortgage
lenders would be interested if the company also provided interest
only loans.
— It is thought that if the business
is there, it is would be possible to get a group of national firms
together to negotiate fixed price arrangements for independent
financial advice provided by specialist advisors trained specifically
for the LA client group.
— The company would be fully regulated
by the FSA.
— The purpose of the company would
be to provide credibility in the market place for equity release
loans, it could be a transitory company for example 10 years while
the mainstream market develops.
3.6 There is also a need for a change to
the benefit rules to redefine "essential works" to cover
decent homes works for the purposes of pension credit and other
benefit entitlements along with a protocol with the Department
of Work & Pensions to simplify the process for leaseholders
in receipt of benefits to claim interest paid on loans to finance
essential repairs.
4. OTHER OPTIONS
Service charge loans
4.1 A relaxation of service charge loan
regulations to allow local authorities/ALMOs to charge a lower
rate of interest is recommended. At present local authorities/ALMOs
act as lenders of last resort and the interest rate that must
be charged reflects this.
4.2 However, the requirement to charge a
high rate appears to be predicated on loan qualification criteria
that may apply in the general community and not specifically to
public sector leasehold units, for example some lenders may be
cautious about lending in a high rise block, notwithstanding that
the leaseholder can service a loan. Having to come to the local
authority/ALMO and paying an interest rate higher than is on offer
"in the high street" acts as a penalty for being a public
sector leaseholder.
4.3 There are also mandatory service charge
loans where local authorities/ALMOs have no choice but to offer
a loan. However, these are restricted in that they only apply
to properties within 10 years of the original RTB sale. This is
another area for possible flexibility.
Buy-back or staircasing
4.4 Many local authorities/ALMOs operate
a discretionary buy back scheme. However, even in cases of severe
financial hardship assessment of cases is subject to available
funds and it is recommended that there is an increase in government
subsidy to enable more assistance to be provided.
4.5 Another option not presently available
for RTB leaseholders is flexibility to staircase down from 100%
ownership using the equity in the property to repay a major works
recharge or fund a change in circumstances. This is an option
capable of further exploration, but initial modelling suggests
that increased subsidy or a grant would be necessary for the local
authority/ALMO to buy back equity in a unit either as a discrete
transaction or where the value of the step down was greater than
the liability to be discharged.
5. CONCLUSION
5.1 It has become clear from work currently
being undertaken in the sector that while some local authorities/ALMOs
are pushing innovation to the extent of their powers, there is
little coherence in policy and practice not only in London, but
across the country. Perhaps uniform application of good practice
together with active Government support for innovation such the
approaches proposed above and those coming out of the London Councils'
leasehold forum for example, provides the best option for assisting
those in most need.
| 
