The Government has acknowledged that the leasehold system is not working in consumers’ best interests and needs to be reformed. Such calls have regained prominence in recent years with the revelation that some developers had imposed onerous—predominantly, 10- and 15-year doubling—ground rent terms in the leases of newbuild flats and houses, leaving some leaseholders unable to sell their properties or re-mortgage. But these are not the only concerns. Campaigners for reform in the leasehold sector have also criticised high and opaque service charges and one-off bills, unfair permission charges, alleged mis-selling of leasehold properties by developers, imbalanced dispute mechanisms, inadequate advice services, and unreasonable costs to enfranchise or extend leases.
At the start of our inquiry, we were particularly keen to explore the growing concerns relating to houses being sold on a leasehold basis, which we believe is an inappropriate tenure for houses and should cease. However, as our inquiry progressed, it became apparent that many of these issues were also faced by leaseholders in flats, and our recommendations reflect this.
Too often, leaseholders—particularly in new-build properties—have been treated by developers, freeholders and managing agents, not as homeowners or customers, but as a source of steady profit. The balance of power in existing leases, legislation and public policy is too heavily weighted against leaseholders, and this must change. Our report sets out recommendations for how this might happen.
While it may be the case that the most complex, mixed-use developments and some retirement properties would continue to require some form of leasehold ownership, there is no reason why the majority of residential buildings could not be held in commonhold; free from ground rents, lease extensions, and with greater control for residents over service charges and major works. We are unconvinced that professional freeholders provide a significantly higher level of service than that which could be provided by leaseholders themselves.
Developers denied that their sales teams deliberately misled leaseholders with partial sales information and false promises of purchasing their freeholds at an agreed price. But the number of near-identical stories from leaseholders reflects a serious cross-market failure of oversight of sales practices.
It is clear that many of the leaseholders we heard from were not aware of the differences between freehold and leasehold at the point of purchase, in particular the additional costs and obligations that come with a leasehold property.
Consumers must be able to access independent and reliable legal advice when purchasing a property. Their interests cannot be served where they are coerced into using developer-recommended conveyancing solicitors, who rely on repeat business from developers.
Ground rent bears no relation to the level of maintenance or quality of service provided to leaseholders—that is the function of the service charge. Many buildings are well managed without any ground rent being paid. It is unacceptable, therefore, that some leading developers have in the past sought to use their market dominance to exploit their customers through the imposition of terms leading to disproportionate ground rents. There is no excuse for such onerous terms, which are symptomatic of the imbalance of power in the leasehold market and are causing considerable distress to affected leaseholders.
While it would be difficult to change the terms of existing leases, it would not be impossible. Legislation could be made compliant with human rights law. Freeholders would probably need to be compensated, but that does not necessarily need to be at full value. The Government’s proposal to reduce the premium payable to enfranchise is equally justifiable in human rights terms as calls to reduce freeholders’ contractual income streams through lower ground rents.
While not as low as the Government’s proposed limit on ground rents for future properties, such a cap would reflect that leaseholders entered into a contract expecting to pay a modest ground rent over the course of their tenure and that freeholders have made an investment with a legitimate expectation of receiving some future revenue.
In most residential buildings, leaseholders receive very little in return for paying ground rent and it is unclear what value there is, for leaseholder or freeholder, in requiring a ground rent of £10. The Government may, however, need to implement an exemption for mixed-use buildings, until commonhold becomes a realistic alternative in more complex buildings.
It is fair that freeholders should be able to pass on reasonable costs to leaseholders where these have been incurred in the necessary administration arising from a change instigated by the leaseholder. But many of the permission fees and administrative charges we have heard about are plainly excessive, exploitative and yet another example of developers and freeholders seeking to extract money from leaseholders who have very limited recourse to challenge such fees.
The growing practice of imposing permission fees in the deeds of new-build freehold properties and enfranchised former-leasehold properties is an unjustified intrusion upon homeowners which many campaigners have rightly referred to as ‘fleecehold’.
Were the CMA to determine that onerous terms in existing leases are indeed unfair, or that they were mis-sold, the Government should take further action. Where it is determined that leaseholders have paid unreasonable permission fees or ground rents over the course of their leases so far, they should have those refunded by freeholders with interest.
We have been concerned by reports of leaseholders being overcharged, paying for services they are not receiving, and high commission fees for freeholders and managing agents.
High one-off bills can be greatly distressing for leaseholders. Florrie’s Law—which capped the amount local authority leaseholders would be required to pay for repairs to £10,000 (or £15,000 in London) over a five-year period—was introduced to protect council leaseholders from high one-off bills, but it has too many exemptions. For example, it only applies where funding has been provided by central government. Further, high bills are also a concern in the private sector.
Leaseholders highlighted their concerns around an imbalance of power in the tribunal process. Leaseholders should not be required to run the risk of paying their freeholder’s legal costs, even if they win. Further, while the threat of forfeiture puts freeholders in a near unassailable position of strength in disputes with their leaseholders, freeholders do require an alternative, less draconian, mechanism for ensuring compliance with the lease.
We support the Government in its objective to make it simpler, easier, quicker and cheaper for leaseholders to enfranchise. We agree that costs are too high and the process too complex.
While we look forward to the implementation of a reformed enfranchisement process, many leaseholders will struggle to afford to purchase their freeholds at any price. This is a particular concern for house lessees on estates with a mixture of tenures, or where lease terms have affected the saleability and mortgage-ability of properties.
The existing work being undertaken by the Law Commission is important and welcome. However, the wider legislation that governs leasehold is not fit for purpose, and a more thorough review of leasehold legislation is now required.
Published: 19 March 2019