147.The evidence we received demonstrated very clearly that many leaseholders have significant concerns about high and escalating service charges. We heard that one of the most distressing experiences for leaseholders can be receiving a bill for tens of thousands of pounds for major works on their building; the fear that comes with needing to find money at short notice, but also the sense of injustice when freeholders and managing agents fail to keep costs to a reasonable level. While leaseholders have a right to challenge these charges through tribunals, many are reluctant to do so in practice, due to a fear of the legal costs, the threat of forfeiture and an imbalance of power in the process. In this chapter, we explore these concerns and make recommendations for how that balance of power might be more fairly realigned to put leaseholders’ interests first.
148.The costs of the day-to-day management and maintenance of leasehold blocks—usually undertaken by a managing agent on behalf of the freeholder—is recoverable from leaseholders through a service charge. The Landlord and Tenant Act 1985 provides that service charges must be reasonable and that the services provided must be carried out to a reasonable standard. However, several leaseholders told us that their service charges were excessive, that they had been overcharged or were paying for services not received, and there was a lack of transparency, with large and hidden commission fees paid to the managing agents or freeholders. Indeed, the Government summarised the concerns they had heard from leaseholders regarding service charges: that they are uncapped, they seem indisputable and that many leaseholders reported that they received no discernible service for their money.
149.The Leasehold Advisory Service (LEASE) reported that 29% of the calls they received in 2017–18 concerned service charges, while a 2016 survey from the same organisation found that 40% of leaseholders ‘strongly disagreed’ that service charges represented value for money. Anthony Essien, the Chief Executive of LEASE, explained that the complaints they had heard related the size of the service charges and their transparency:
Service charges around the country can be substantial [ … ] It is fair to say that the lessees who come to us, of course, are not coming to say, “My service charges are fine, and I am very happy with my landlord.” The amounts range from the relatively small to the large [ … ] Very often it is about sheer scale, but it is also about problems of clarity [ … ] What is apparent is that there is a lot of range between landlords—private and social sector—when it comes to how they deal with their lessees. Some are decent at engagement—I do not think there is anybody who is excellent—and there are others who are poor, for various reasons.
150.In 2011, Which? estimated that leaseholders were being overcharged by £700 million a year because of excessive fees and hidden costs contained within their service charges. Eight years on, and with the leasehold sector more than twice the size than estimated in 2011, it is likely that this figure is even higher today. Jim Fitzpatrick MP, representing the APPG on Leasehold and Commonhold Reform, told us that too many freeholders and managing agents were using the service charge to extract money from leaseholders, without providing an adequate service in return:
There has to be a complete rebalancing of the playing field to enfranchise leaseholders and give them greater rights under regulation against unscrupulous property management companies, which are ripping them off through service charges and refurbishment charges. Housing associations are doing exactly the same in the social sector. Private developers and freeholders are [ … ] using leaseholders as a cash cow and not using the service charges they are collecting to maintain the buildings they own because they do not care. They want the money more than they want to keep their leaseholders happy.
151.Seema Malhotra MP told us about the experiences of her leasehold constituents in Feltham and Heston, and highlighted widespread concerns around the lack of protection from the scale of service charges, insufficient transparency, limited redress when customer service is poor, and inadequate recognition of leaseholder rights to information. She reported that one leaseholder had been charged £4,000 for parking facilities that did not exist, while another had seen the service charge for communal repairs increase by £2,700, despite the management company never having undertaken such work. These stories corresponded with the evidence we heard directly from leaseholders. One anonymous submission told us that his service charge had increased by 27% every year for the last four years, which was “hammering our investment values and eroding our savings.” Another said he had been significantly overcharged for buildings insurance:
For years we were charged in excess of £500 per year EACH for buildings insurance, without any option to obtain more reasonable cover. The managing agents stated that they had no time to “shop around” for better quotes as they manage many properties. When we changed to [Right to Manage] a little while ago, our buildings insurance went down by three-quarters of what we had been paying, for the same cover and terms, as we were able to request quotes from several suppliers and get competitive cover that costs us in the region of £130pa.
152.Specific concerns were raised around large commission fees being paid to the managing agents or freeholders—particularly for buildings insurance—and these being hidden within service charges. Many trade bodies, including RICS, require that managing agents disclose when they are receiving commission, but the Federation of Private Residents’ Associations told us that “even in those cases, it is often well hidden.” They called the practice “immoral and fundamentally wrong”, as commission usually leads to increased charges for leaseholders. Richard Silva, from Long Harbour, agreed that hidden commission charges should be prohibited. John Dyer, representing the British Property Federation, denied that this was a widespread problem and argued that most managing agents did not take commission. However, Consensus Business Group told us, “it is correct that insurance commissions are earned by freeholders”, and that this was justified for administering the insurance programmes.
153.We have been greatly concerned by reports of leaseholders being overcharged, paying for services they are not receiving, and high commission fees for freeholders and managing agents. The Government should require the use of a standardised form for the invoicing of service charges, which clearly identifies the individual parts that make up the overall charge. It should be clearly identified where commission has been paid to the managing agent or freeholder and the proportion of the cost this constitutes. This would improve transparency and allow leaseholders to make comparisons with equivalent properties.
154.Leaseholders are often required to make regular payments to sinking (or ‘reserve’) funds, which are then used to cover the cost of major works, avoiding the impact of significant one-off bills. They are held on statutory trusts. Legislation was introduced in 2002 to regulate these funds, by specifying that they must be held separately in designated bank accounts and giving leaseholders rights to information. However, these regulations have never been brought into force. However, this has left sinking funds as one of the only spheres in which money held by a third-party is unregulated and unprotected. The Federation of Private Residents’ Associations told us that the lack of regulation had seen fraud and theft from leaseholders’ sinking funds:
It has been suggested that the sums held by unregulated and unprotected third parties may well exceed £1 billion. An individual can set up in business as a property manager without any formal qualifications or experience or insurance–even if they have a criminal background and hold these deposits or other sums. Perhaps unsurprisingly, this has from time to time resulted in leaseholders falling victim to fraud or outright theft of their payments.
155.Several leaseholders reported that the administration of their sinking funds lacked transparency and accused their freeholders and managing agents of unreasonably withdrawing money:
We were shocked to know that our landlord was giving a proportion of our service charge to FirstPort, the service management company. After 8 years of unknowingly paying into a sinking fund, there was only approximately £6,000 in the pot. There were 30 flats paying for 8 years = £6000—it did not make any sense. To date, neither A2Dominion nor FirstPort can or will provide any answers—Mrs Pamela Rose Canales
I paid £2,194.17 [ … ] on top of the circa £27,000 that you had already collected from the sinking fund. Your explanation to how much money was held in the sinking fund before you emptied it for your benefit was that you had changed the way you account for it and the balance would show as £0. This is less than transparent—Anonymous (email to the managing agent)
156.The Minister for Housing and Homelessness told us this was one of the issues being considered by the Regulation of Property Agents Working Group, chaired by Lord Best, which is due to make its report in the summer. She said the Government were keen for this issue to be considered but told us that theft from reserve funds did “not happen that often.”
157.Sinking funds urgently require regulation, to improve transparency for leaseholders and protect their money from less scrupulous freeholders and managing agents. Requiring them to be held separately, as legislated for in 2002, would improve transparency and make it easier to identify the trust funds. The Government should immediately bring into force sections 42A and 42B of the Landlord and Tenant Act 1987 to ensure that leaseholders’ reserve funds are protected.
158.It is increasingly common for private estates with leasehold houses to be required to contribute to the maintenance of communal areas and facilities—including roads, sewers and street lamps—which have not been adopted by the local authority. Estate management fees, as with service charges, have been criticised for their size, lack of transparency and the difficulty with which they can be challenged. The mere existence of such fees is also controversial. Which? argued that, “On a new-build housing estate, the roads should not be the responsibility of the leaseholder”. The National Leasehold Campaign told us that such fees would “be scandals in future years if not clamped down on now”, while Jo Darbyshire told us that estate management fees were becoming unaffordable for many residents:
You will typically find, on a new-build development, there is some token piece of land, which might be a children’s park or a grassed area, that attracts an estate management charge. Again, consumers have no concept that these are currently unregulated in how much they can go up by. We see all the time now from people who post in our group how they are hitting issues of affordability because they had no idea what was going to happen with these costs.
159.Developers blamed local authorities for being unwilling to adopt communal areas and public services. Jason Honeyman, representing Bellway, told us that local authorities “may not have the skillset” to manage more complicated developments, and did not “want the responsibility of managing it.” Instead, it was “easier to push it back to the residents or the developer”, requiring the establishment of residents’ management companies to manage communal areas and services. David Jenkinson, representing Persimmon, agreed that further regulation was required in this area. Local authorities, however, denied that they were unwilling, and criticised developers for being too willing to walk away. Gillian Boyle, from Manchester City Council, told us:
I am not sure that local authorities are unwilling. A lot of this comes back to the scheme at the beginning, with planning. Ideally, every square inch of that scheme should have a clear system of management. Whether that is everything goes off in individual freehold plots and the rest of it is adopted highway, that is probably the best solution for housing developments and is really what you should aim for. These common areas are a problem on a lot of estates, and I am dealing with cases at the moment of schemes that were built 10 years ago, of common areas that nobody really wants to manage. Developers want to walk away, and the residents are not clear about the charges for areas.
160.There should always be a clear agreement between developers and local authorities before development begins as to the public areas and utilities that are to be adopted by local authorities. These details must be provided to prospective purchasers at the start of the sales process.
161.Many of these private estates include freehold houses, whose owners are also required to pay estate management fees. However, freeholder owners have limited rights to challenge the level of charges and the standard of service provided, compared to the statutory rights that leaseholders enjoy. Helen Goodman MP introduced a Ten-Minute Rule Bill in November 2018 to address this issue, during which she highlighted the unfairness for freehold house owners:
Unlike leaseholders, who have access to a dedicated ombudsman service, freeholders have no legal recourse in the event of a dispute. Using old law—in particular section 121 of the Law of Property Act 1925—the agents can place charges on the property if residents are late with payments. It is an incredibly one-sided contract. Homeowners do not have the power to ask for justification of costs, but the management company can legally send in bailiffs or threaten repossession of the home if a resident does not pay on time.
162.In its response to the consultation into Tackling unfair practices in the leasehold market in December 2017, the Government committed to “legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed-use estate can access equivalent rights as leaseholders to challenge the reasonableness of service charges.” Several witnesses supported such legislation, including Amy Simmons, representing the National Housing Federation, who said it was “really important” that where freeholders are obliged to pay for the upkeep of specific areas, they should have the same rights as leaseholders, so that they are protected and have redress.
163.The Government is right to legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities should have the same rights as leaseholders to contest the fairness of those fees. As we have recommended for service charges, such fees should be provided to residents on a standardised form, which clearly identifies the individual parts that make up the overall charge.
164.Large one-off bills for major works can be a source of great distress for leaseholders. We had seen this in the context of our work into building regulations and fire safety, where many leaseholders have been sent bills of tens of thousands of pounds to pay for the removal and replacement of potentially dangerous combustible cladding from their buildings. And we saw it again in this inquiry, where leaseholders wrote to us about the large one-off bills they had been sent, and wanted to highlight the lack of a cap on such charges, excessive management fees, insufficient transparency, limited consultation with freeholders and managing agents, and difficulties in disputing the charges. These are just some of the submissions we received:
We have all just been told [we] will be charged almost £2,000 to repaint our building and almost £5,000 will be their fee for administering the works! How can they justify that amount of money when they already get paid a lot of money and nothing ever gets done? Most people in our building have raised the issue that they are not willing to pay, however these people will get away with it. How do we have that kind of money?—Miss Rachel Thomas
There were cyclical works. Suddenly it became major works. Freeholder did not listen to leaseholder [objections] and pushed works anyway [ … ] As a result [of the] unprofessional approach of management, the costs of work increased from £79,000 to £600,000 in total. Each leaseholder to pay approximately £50,000 [ … ] Now I have an extra £450 a month to pay on top of my mortgage monthly. This has caused great distress now as is unaffordable to live in my own home—Jay Beeharry and Nina Rautio
On a small 25-year-old three-storey building with no structural issues the residents were quoted major works costs totalling nearly £250,000 (the previous cyclical cost was £29,000). This represents an 800% increase in costs and includes more than £26,000 in management fees. The leaseholders were alarmed and distressed when they received the Notice of Intention and Notice of Estimates to carry out major works and immediately questioned the validity of many of the items listed as requiring attention, particularly because in previous years all the works required had previously been met from the funds available in the sink fund—Barry Gardiner MP
165.We heard that high one-off bills were a concern for leaseholders in both the social sector and private sector, although it was concerning that the Minister for Housing and Homelessness told us that she had “not seen that evidence” and suggested the problem might be “a London thing”, even if she had not personally received any correspondence about it as a constituency MP.
166.Many local authorities do not operate a sinking fund for each building, while public procurement regulations mean that leaseholders in the social sector often do not get the best value for major works. The extensive use of Qualifying Long-Term Agreements (QLTAs)—long-term exclusivity contracts with particular contractors—reduces the freeholder’s consultation requirements and limits the ability of leaseholders to nominate alternative contractors. Local authorities did not deny that public procurement rules made one-off bills for major works more expensive for leaseholders, with Gillian Boyle from Manchester City Council suggesting it could be 10 to 20% more expensive than would be the case in the private sector:
It just costs more, because you have to go through a tender process and you have to go through the [Official Journal of the European Union] process. You end up with frameworks where you do not always get, perhaps, as good value as if you can just appoint a particular contractor who you know is going to do a good job, if you are a private organisation. We have done commercial schemes and I know for a fact that if I was a profit organisation, I would probably get that 10% to 20% cheaper. There is a cost in public procurement.
Larissa Reed, representing Brighton and Hove City Council, agreed, telling us that local authorities had additional duties, including the need to “ensure that people have a track record of delivery [ … ] and that costs money”.
167.The Commonhold and Leasehold Reform Act 2002 requires that leaseholders be consulted before the freeholder carries out qualifying works or enters into a QLTA. However, with leaseholders often in a minority in the social sector—particularly those in ‘right to buy’ properties—consultation is often perceived to be limited. If works are to be undertaken under a QLTA, the freeholder must give written notice, invite observations and have regard to any observations, but are not required to amend their proposals. The Brighton and Hove Housing Coalition, representing council leaseholders in that local authority, told us that the statutory notices for a Qualifying Long-Term Agreement did not allow for real consultation because the time period of 30 days was too short and there was no requirement on the freeholder to state final costs at the consultation stage, only estimates. Larissa Reed said that council leaseholders were consulted about major works, not simply notified, but that local authorities also had a duty to consider the needs of social tenants in the same buildings: “We do need to balance that, however, with the needs of the tenants, who also want these works to be done.”
168.Concerns over one-off charges for council leaseholders are not new. In 2013, the family of 93-year-old Florence Bourne reported she had “died of shame” after being unable to pay a £50,000 bill for roof repairs sent to her by Newham Council. It later emerged the roof could have lasted another 40 years, and the work was unnecessary. The case led to the Government introducing the Social landlords reduction of service charges: mandatory and discretionary directions 2014—commonly referred to as ‘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. However, the cap was limited in scope and only applied where repairs are funded by a central government grant. Barry Gardiner MP highlighted that Florrie’s Law could be circumvented by, for example, “fixing a leaking roof at a different time to conducting repair works”. When asked whether the cap should be strengthened, Larissa Reed said:
If you talked to any of our leaseholders, they would say yes. If you talked to our tenants, they would say no. Any money that we spend that is not leaseholder-paid comes out of our [Housing Revenue Account] and our tenants’ rents. That is something that tenants feel very strongly we should not be doing, because they feel that the leaseholder has the benefit in that, once we have spent the money on the works, the value of the property often increases as a result.
169.High one-off bills for major works can be greatly distressing for leaseholders. Florrie’s Law was introduced to protect council leaseholders from high one-off bills, but it has too many exemptions.
170.Further, high bills are not only a concern in the social sector. We have received evidence from several leaseholders in the private sector who have been made to pay high one-off bills for major works. We recommend that the Government implement a new consultation process for leaseholders in privately-owned buildings affected by major works. A threshold of £10,000 per leaseholder should be established above which major works should only proceed with the explicit consent of a majority of leaseholders in the building. If no agreement can be reached with leaseholders, freeholders should only be able to proceed with major works subject to the authorisation of a tribunal, which would determine whether the works are both essential and represent value for money. If works are deemed to be inessential or unreasonably expensive—for example, due to excessive management fees—they should not be allowed to proceed. Where such works do proceed, the freeholder should be obliged to offer a low-interest, long-term loan to affected leaseholders. The threshold should apply regardless of whether funding is provided by central government and should apply to the cumulative costs of all major works within a five-year period.
171.These proposals would rebalance power towards leaseholders, ensuring transparent and meaningful consultation over major works, pressure to keep costs low, and the explicit consent of those who ultimately have to pay the bill. They would also ensure that leaseholders are not able to block essential works unnecessarily. Further, this would also likely create a strong incentive for freeholders to manage sinking funds more effectively.
172.The Government should introduce a Code of Practice for local authorities and housing associations, outlining their responsibilities to leaseholders in social housing blocks and offering guidance on best practice for major works. Local authorities should be required to provide evidence to leaseholders that they are receiving the same value from procurement practices in the public sector as they might reasonably expect in the private sector, and that public procurement rules are not used as an excuse for overcharging. Further, as is common in the private sector, local authorities should also be required to administer sinking funds for each of the buildings or estates they are responsible for, so leaseholders are less at risk of unexpected bills for major works.
173.Leaseholders are able to challenge their freeholders through the tribunal system. The use of the tribunal system was intended to give leaseholders access to a fast and affordable means of seeking redress. However, leaseholders are often reluctant to go down this route. Leaseholders wrote to us to highlight their concerns around an imbalance of power in the tribunal process, legal costs being passed to leaseholders even when they win, and the fear that challenging their freeholder through the tribunal process might lead to the forfeiture of their properties.
174.While the tribunal system was initially intended to be a low-cost mechanism for leaseholders, we heard that it regularly sees lawyers appearing on behalf of freeholders and managing agents. Jim Fitzpatrick MP told us that the playing field was not level for ordinary leaseholders:
[ … ] what is happening is that leaseholders are turning up on a number of instances to represent themselves [ … ] Freeholders are turning up with barristers, even QCs, and because of their knowledge of law and legal procedures they are running rings round ordinary people who are just taking a concern to a lower-tier tribunal, hoping they can get some sense of balance and fairness through the informal procedure. The playing field just is not level.
175.Shula Rich of the Federation of Private Residents’ Associations said she had attended many tribunals alongside leaseholders. She reported that, where there is a litigant in person up against a barrister—with a comprehensive understanding of legal precedents—it was much easier for the Tribunal to side with the barrister than “to wonder whether the litigant in person might or might not be right.” Barry Gardiner MP described such practices as an “abuse” that “needs to be stopped.” Indeed, Taylor Wimpey told us that the tribunal process was long, complex and expensive, and “unduly weighted towards the freeholder” who has the “expertise to use the complex system to their advantage”. They called on the Government to review the operation of the tribunal system in this context, with the aim of “speeding up the process and rebalancing it to remove the apparent bias to freeholders.”
176.Jo Darbyshire from the National Leasehold Campaign highlighted what she described as a “David and Goliath fight” between freeholders and leaseholders. She said freeholders had been known to use the tribunal system to weaken opposition from leaseholders over time:
We are aware of cases where people will take a freeholder to tribunal. They may win. That will then be appealed, so they have to go to appeal. It is six months of their life [ … ] The next year, they will be challenged again. Some of the people we know have seen cases where the freeholder does it year after year, and they do it on purpose because they know that, eventually, the leaseholder will just go, “Do you know what? It is just easier to pay”.
In an example of the imbalance of power inherent in the system, one of our witnesses, Larissa Reed, was criticised by the Brighton and Hove Housing Coalition for allegedly saying that, when Brighton and Hove City Council are taken to a tribunal by leaseholders, “they always win”. When asked whether this was a sign of a healthy system, Ms Reed told us that tribunals were only used “as an absolutely last resort”—and that the healthiness of the system was demonstrated in that 90% of the disputes had not gone to a tribunal.
177.While the tribunal system was designed to be a cost-free jurisdiction, in practice it can be very expensive for leaseholders to challenge high service charges and one-off bills. Leaseholder Agnes Kory wrote to us about her experience of the tribunal system, which left her with a £40,000 legal bill:
For many years I have been asking for (and have been refused) break-down of charges demanded. Having refused to pay unidentified sums, recently I was taken to the First-tier Tribunal which did not mind that management did not provide full breakdown of charges. The First-tier Tribunal ruled that it was unreasonable of me to ask for full breakdown of charges. The First-tier Tribunal allowed management’s barrister to practically run the hearing and disallowed my own evidence and that of my surveyor (although he was instructed by the First-tier Tribunal to attend!). The argument was about £5,000 but management’s legal team now demands another £40,000 for their costs. This is eight times more than the disputed amount and four times more than my annual income.
178.Further, we heard that freeholders were able to recover their legal costs through the service charge, even when they lose. Amanda Gourlay, a barrister specialising in leasehold law, expressed her view that, “in the interests of access to justice, one party should not be required to run the risk of paying the other’s costs with no prospect of recovering their own.” However, housing lawyer Giles Peaker, told us that this practice was increasingly commonplace, and that freeholders were routinely recovering their costs, either under the service charge or under an administration charge. He explained that it would be possible for the leaseholder to apply for a ‘Section 20C’ order to stop the freeholder from recovering tribunal costs in this way, but that the burden lay with the often-unrepresented leaseholder. Mr Peaker argued that the default position should be the other way around; that the freeholder, rather than the leaseholder, should have to make an application to seek a reallocation of costs. Jim Fitzpatrick MP highlighted the case of leaseholders in his constituency who had been made to pay their freeholder’s legal costs:
I had leaseholders in one of my private blocks. They were very nice properties with very professional people. I suspect most of the flats were around about £1 million and some up to £3 million. They took the freeholder to court, won at first-tier tribunal, won at second-tier tribunal and found the legal costs on their service charges the next year. They want back to the tribunal and said, “This cannot be right. We won both cases and he is charging us for his legal fees”. The answer was that it was a legitimate business expense incurred as a result of his responsibilities as a freeholder, so he is entitled to charge you for the privilege of beating him.
179.Leaseholders should not be required to run the risk of paying their freeholder’s legal costs, even if they win. The Government must legislate to require that freeholders’ tribunal costs can never be recovered through the service charge, or any other means, when the leaseholder has won the case, unless the leaseholder has behaved unreasonably. This would go some way towards alleviating the risks to leaseholders in bringing service charge or other challenges to tribunal.
180.A freeholder may seek the forfeiture of a lease where they deem that the leaseholder is in breach of their lease agreement. This is usually initiated by the service of a notice under section 146 of the Law of Property Act 1925. Parliament has intervened to make it more difficult for a freeholder to successfully forfeit a lease, including in the Housing Act 1996 (which prohibited the serving of a section 146 notice based on arrears in service charges unless there has been a determination of the amount of service charge a leaseholder must pay) and the Commonhold and Leasehold Reform Act 2002 (which prohibited the serving of a section 146 notice for breach of covenant, unless a determination has been made).
181.However, we heard that freeholders and managing agents were increasingly reliant on forfeiture clauses in leases in order to recover alleged arrears of payments from leaseholders. Giles Peaker told us there was “this pressure to use forfeiture as a first resort”, but noted that there were no other mechanisms for a landlord to address breaches of a lease, and it was very rare for freeholders to actually achieve a forfeiture. Amanda Gourlay highlighted that there can be a significant and disproportionate difference between the level of legal fees incurred and the seriousness of the issue and, combined with the threat of forfeiture, the effect “has been to confer on landlords an all but unassailable position of strength in relation to the costs of litigation”. With the risk of losing a property, Ms Gourlay highlighted that, “The financial risks of defending a claim to £1,000 of ground rent arrears are likely to be disproportionate to the amount of money at stake”. Similarly, Shula Rich told us it was in the freeholder’s interest “just to threaten forfeiture, so that the costs can be fixed right from the beginning on the lessee, who has only chosen to ask for justification or explanation of the service charges.”
182.Several leaseholders told us that they had been threatened with forfeiture unless they paid what was demanded by their freeholder. Some of the more egregious examples we heard about are summarised below:
[ … ] we went through a harrowing process of being asked for around £30k with the threat of ‘forfeiture’ of the property [ … ] More threats of costs and forfeiture followed and only my single minded pursuit of the belief that this is an injustice is pushing us forward [ … ] Through this entire process our ultimate aim is to avoid forfeiture of a lease worth approximately £850,000 and simply to have a clear and modern equitable lease—Major Nathan Jones
[The freeholder] demanded we pay him £50,000 to amend and update the floorplan on the lease. We offered £10,000 so as not to lose our buyer even though we had done nothing wrong—but he refused [ … ] He threatened us with forfeiture and verbally threatened my mild-mannered husband by telling us if we did not pay up that things would get worse and worse for us. We were being threatened with forfeiture and felt he was trying to extort money from us whilst blocking our sale—Mrs Anne Heelan
We have also heard of a landlord who has charged a £181 penalty to an incoming leaseholder because notice was served on their agent and not the landlord themselves [ … ] They are threatening Section 146, forfeiture proceedings unless the sum of £863.00 was paid within 14 days. Of that £863.00, only £250.00 was outstanding ground rent which is less than the de minimis amount for which the s.146 proceedings could be taken [ … ] The leaseholder impacted preferred to pay than the risk an ongoing issue with a landlord who she would have to interact with for many years to come—Conveyancing Association
183.Guy Fetherstonhaugh QC described forfeiture as “fantastically draconian.” While the threat of forfeiture usually leads to compliance by the tenant, it can in extreme cases lead to the tenant losing their asset and the landlord gaining a ‘windfall’. As noted by Amanda Gourlay, there is no obligation to account to the leaseholder for any proceeds of the forfeiture; the leaseholder simply loses their property. Jim Fitzpatrick MP highlighted how this threat had influenced the thinking of leaseholders in his constituency, who had received bills for the replacement of cladding on their buildings and been threatened with forfeiture if they did not pay:
Many of these are young professionals. They are mortgaged up to the hilt. They could not borrow any more money from their lender if they wanted to, because they just do not have the wherewithal. They are now facing bills of thousands of pounds for this cladding work. They are exposed because, if they do not meet the freeholder’s terms, their homes are vulnerable. For £5,000, £10,000 or £20,000—whatever the costs are—they could lose their £400,000 or £500,000 flat. They do not have protection under law, because forfeiture gives the power to the freeholder or the developer.
184.Calls for reform of forfeiture legislation are not new. The Law Commission first proposed a system of discretionary court orders, in place of forfeiture, in 1985. In 2006, the Law Commission again proposed giving courts the power to choose from a range of orders including: terminating the tenancy, making the tenant remedy the breach, selling the tenancy, payment of money, and/or transferring the tenancy, suggested the choice be guided by proportionality. It also supplied a draft Bill. However, the Government did not respond to the Law Commission’s proposals in 2006 and the legislation has remained unaltered since the Commonhold and Leasehold Reform Act 2002.
185.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. The Government should immediately take up the Law Commission’s 2006 proposals to reform forfeiture, to give leaseholders greater confidence in disputing large bills by reducing the threat of losing a substantial asset to the freeholder.
186.Redress mechanisms for social sector leaseholders are more well-established. In particular, the Housing Ombudsman Service considers complaints regarding registered providers of social housing, including from leaseholders in social housing blocks. This access was noted by Amy Simmons, from the National Housing Federation, as one of the main advantages for social sector leaseholders over those in the private sector:
The major difference, for our members, is the level of redress that those leaseholders have. If you are a leaseholder of one of our members, a social housing provider, if you are not happy with the way that your home is being managed or the relationship that you have with the freeholder, you can go through the housing association complaints mechanism, and you can seek redress through the Housing Ombudsman [ … ] Not all those levels of redress are open to the private sector.
187.However, we heard that action was urgently needed to give leaseholders in the private sector greater control over the service charges and one-off bills they receive, as well as improve the routes to redress for leaseholders to challenge such charges. The Government has made several proposals which, if urgently and adeptly implemented, have the potential to address some of these concerns for existing leaseholders.
188.The Government asked the Law Commission to undertake an assessment of the right to manage (RTM) legislation. The RTM was introduced by the Commonhold and Leasehold Reform Act 2002 and is a right granted to leaseholders to take over the freeholder’s management functions through a company set up for this purpose. However, relatively few flats or housing estates have formed their own RTM organisations and, as noted by the National Leasehold Campaign, there have been particular difficulties where the property owners do not reside at the property, and nervousness from leaseholders to take on the responsibility of becoming an RTM director. The Law Commission also noted the overly technical and rigid process for leaseholders to follow when making a claim to acquire the right to manage, as well as inflexible eligibility conditions and difficulties managing shared access roads and gardens used by other properties on an estate. The consultation period for the Law Commission’s programme of work on RTM will remain open until April 2019. Richard Silva, representing Long Harbour, supported the work being undertaken by the Law Commission and noted that RTM was “a kind of bridge between the leasehold/freehold structure and commonhold.”
189.The Government has also brought forward proposals to strengthen the right of residents’ associations to be ‘recognised’ and, so, have a formal voice in consultations over major works and other management processes. In its response to the consultation on Recognising residents’ associations, and their power to request information about tenants, the Government noted that some leaseholders have faced significant barriers in establishing recognised tenants’ associations (RTAs) and promised to introduce secondary legislation to address this. Sir Peter Bottomley MP expressed his view that “the only reason to avoid recognising a tenants’ [ … ] association is because you are taking money you should not be taking.”
190.The Government told us it was moving forward with its proposals to regulate managing agents, including a single, mandatory and legally-enforceable Code of Practice to set minimum standards for the sector. Several organisations told us that these proposals could be key to reform of the sector, but were concerned that the Government had been slow to implement them. The British Property Federation noted that, since the initial consultations, “no further progress has been made”, while the Ground Rents Income Fund highlighted “the lack of action with regard to the regulation of managing agents, which, if carried out correctly, would address many of the problems faced by consumers.”
191.Further Government announcements that could lead to improved legal protections for leaseholders include: proposals for a new Specialist Housing Court, which this Committee supported in our 2018 report into the Private Rented Sector and for which the Government launched a call for evidence in November 2018; a new Housing Complaints Resolution Service, to provide a single point of access to resolve complaints for housing consumers, announced in January 2019; and proposals for a New Homes Ombudsman, to support homebuyers facing problems with their newly built home, unveiled in October 2018.
192.We welcome the Government’s strong focus on improving regulation and routes of redress in the housing sector and note it has made multiple announcements over the past 12 months on a variety of proposals. However, we urge the Government to implement these measures with urgency, and to do so with a clear and joined-up approach that acknowledges how each of these mechanisms might work together, in particular with a Specialist Housing Court and the Housing Ombudsman Service, to provide a coherent route to redress for leaseholders.
193.Further to the work being undertaken by the Government on redress, freeholders were keen to promote a draft Code of Conduct they had drafted alongside specialist property law firm, Winckworth Sherwood, to address concerns around unfair practices in the sector. The British Property Federation told the Committee:
The industry would welcome the introduction of a code of conduct which covers the construction of ground rents and on-going management of the relationship of the relationship between the homeowner and ground rent investors. A code could have a significant role to play in not only helping to safeguard purchasers of leasehold properties, but also help drive good practice within the industry and highlight those not operating to the required standard.
194.The Ground Rents Income Fund argued that a code would seek to enshrine good practice and responsible stewardship of residential leasehold property. They noted that regulation in this area is largely absent, and “we recognise that self-regulation by itself has not been sufficient”. Long Harbour said a code would: guarantee responsible conduct in the sector, raise standards across the sector, drive out bad practices, and ensure fairness for residents in the leasehold system. They explained that a code would “incorporate a Freehold Investment and Management Charter and be based on the adoption of guiding principles: Fairness; Accountability; Integrity; Transparency and Helpfulness”.
195.The Federation of Private Residents Associations noted that there were trade bodies in the sector that have implemented codes of practice and membership schemes, but argued that they “lack any real sanction on their members” as participation in the scheme is normally optional. There was, they said, “no legal barrier to anyone, however disreputable, setting up in the sector.”
196.The Committee supports the proactive approach of freeholders in devising a code of conduct and urges the Government to review the case for mandatory regulation of the freehold sector, overseen by an ombudsman, with redress and sanctions where appropriate.
197.The Leasehold Advisory Service (LEASE) is an executive non-departmental public body, sponsored by the Ministry of Housing, Communities and Local Government. It is governed by a board, appointed as individuals by the Secretary of State. LEASE was set up in 1994 to provide free information, initial advice and guidance—defined as the provision of outline, summary, legal advice enabling leaseholders to make informed decisions—to members of the public about residential leasehold and park homes law. Several written submissions raised concerns about the work of LEASE, including the APPG on Leasehold and Commonhold Reform, which highlighted “a plethora of problems” and called for the “reform or replacement” of the organisation.
198.We heard mixed views regarding the quality of the service provided by LEASE. One anonymous leaseholder reported that LEASE was “wonderful—and I could not have survived the past 18 years without it”, although they criticised the length of time it took to arrange an appointment with an advisor. Sir Peter Bottomley MP, representing the APPG on Leasehold and Commonhold Reform, expressed his view that, “Many of the people working in LEASE, answering the phone calls, and their lawyers give the best advice they can.” However, other leaseholders were far more critical of the service. Katie Kendrick, from the National Leasehold Campaign, told us that, the feedback she had received from leaseholders was that “the help they have received is, honestly, quite appalling.” Anthony Essien, the Chief Executive of LEASE, said that if anybody said they were dissatisfied with the service provided, this would “concern me gravely”.
199.Jo Darbyshire warned that LEASE had a “huge credibility problem among leaseholders” due to the commercial operations it had previously undertaken. Witnesses highlighted past conferences hosted by LEASE for freeholders, which we were told included seminars on how to draft leases to maximise the income for freeholders and inflate insurance commissions. Mr Essien informed us that, since 2017, such commercial work had come to an end and “our focus is now completely on leaseholders.”
200.LEASE was also criticised for its lack of leaseholder representation at board level. Ms Darbyshire expressed her view that change at LEASE needed to start at the top, and “you could not make a better statement than to appoint a leaseholder and people who have experience as leaseholders in some of the senior roles there.” Mr Essien explained that all public appointments were outside of his control, but emphasised that he would be happy to work with any board member. The Minister for Housing and Homelessness informed us that she would be appointing people to the board of LEASE within the next six months and would bear these requests in mind.
201.We are concerned that the only government-funded service for leaseholders continues to have such a poor reputation among many leaseholders. The Government should undertake a comprehensive review of the Leasehold Advisory Service (LEASE), with a focus on maximising the service provided to leaseholders. The Government must, as a matter of urgency, appoint representatives of leaseholders to the board of LEASE, to ensure their voices are fully reflected in strategic discussions.
250 Ministry of Housing, Communities and Local Government (), para 43
251 Leasehold Advisory Service (), para 3, and , Leasehold Advisory Service
252 (Anthony Essien, Leasehold Advisory Service)
253 , Which?, 26 October 2011
254 The Which? investigation said, “There are 1.8m leasehold properties in the UK and flat owners are losing out to the tune of £700m a year because of excessive fees and hidden costs contained within their service charges”. As outlined in Chapter One, more recent estimates suggest there are between four and six million leasehold properties.
255 (Jim Fitzpatrick MP, APPG on Leasehold and Commonhold Reform)
256 Seema Malhotra MP (), para 4
257 Anonymous ()
258 Note further information on Right to Manage in paragraph 188
259 Anonymous ()
260 Federation of Private Residents’ Associations ()
261 Federation of Private Residents’ Associations ()
262 (Richard Silva, Long Harbour)
263 (John Dyer, British Property Federation)
264 Consensus Business Group (), section 3(m)
265 Landlord and Tenant Act 1987, s 42
266 Federation of Private Residents’ Associations ()
267 Mrs Pamela Rose Canales ()
268 Anonymous ()
269 (Heather Wheeler MP, Minister for Housing and Homelessness)
270 National Leasehold Campaign (), para 12
271 Which? ()
272 National Leasehold Campaign (), para 26, and Q64 (Jo Darbyshire, National Leasehold Campaign)
273 (Jason Honeyman, Bellway)
274 (David Jenkinson, Persimmon)
275 (Gillian Boyle, Manchester City Council)
277 , Department for Communities and Local Government, December 2017, para 80
278 (Amy Simmons, National Housing Federation)
279 , Housing, Communities and Local Government Committee, July 2018
280 Miss Rachel Thomas ()
281 Jay Beeharry and Nina Rautio ()
282 Barry Gardiner MP ()
283 (Heather Wheeler MP, Minister for Housing and Homelessness)
284 (Gillian Boyle, Manchester City Council)
285 (Larissa Reed, Brighton and Hove City Council)
286 For further detail, see, Leasehold Advisory Service. The Commonhold and Leasehold Reform Act 2002 replaced a consultation process outlined in Section 20 of the Landlord and Tenant Act 1985—which is why qualifying works are often referred to as ‘Section 20’ works.
287 Brighton and Hove Housing Coalition (), para 7
288 (Larissa Reed, Brighton and Hove City Council)
289 , Ministry of Housing, Communities and Local Government, 12 August 2014
290 , Ministry of Housing, Communities and Local Government, 11 August 2014
291 Barry Gardiner MP () and Seema Malhotra MP (), para 4
292 (Larissa Reed, Brighton and Hove City Council)
293 Leasehold Knowledge Partnership ()
294 (Jim Fitzpatrick MP, APPG on Leasehold and Commonhold Reform)
295 (Shula Rich, Federation of Private Residents’ Associations)
296 Barry Gardiner MP ()
297 Taylor Wimpey ()
298 (Jo Darbyshire, National Leasehold Campaign)
299 Brighton and Hove Housing Coalition ()
300 (Larissa Reed, Brighton and Hove City Council)
301 Agnes Kory ()
302 Amanda Gourlay ()
303 (Giles Peaker)
304 An order under section 20C of the Landlord and Tenant Act 1985
305 (Jim Fitzpatrick MP, APPG on Leasehold and Commonhold Reform)
306 There are cases in which a section 146 notice isn’t required, notably for non-payment of rent. There are other restrictions on forfeiture for non-payment of rent.
307 Amanda Gourlay ()
308 (Giles Peaker)
309 Amanda Gourlay ()
310 (Shula Rich, Federation of Private Residents’ Associations)
311 Major Nathan Jones ()
312 Mrs Anne Heelan ()
313 Conveyancing Association (), para 5(vi)
314 (Guy Fetherstonhaugh QC)
315 (Jim Fitzpatrick MP, APPG on Leasehold and Commonhold Reform)
316 , Law Commission, 21 March 1985
317 , Law Commission, 2006, CM 6946
318 , Housing Ombudsman Service: “ This means that as well as considering complaints from tenants, we can also consider complaints from leaseholders and shared owners. The only category of home owners who are not eligible to bring a complaint to the Ombudsman are those who own the freehold of their home.”
319 (Amy Simmons, National Housing Federation)
320 Ministry of Housing, Communities and Local Government (), para 9
321 As described by the Law Commission (), para 1.50
322 National Leasehold Campaign (), para 12
323 Law Commission (), para 1.51
324 , Law Commission
325 (Richard Silva, Long Harbour)
326 Ministry of Housing, Communities and Local Government (), para 14
327 (Sir Peter Bottomley MP, APPG on Leasehold and Commonhold Reform)
328 Ministry of Housing, Communities and Local Government (), paras 17–24
329 British Property Federation (), para 12, and Ground Rents Income Fund ()
330 , Housing, Communities and Local Government Committee, April 2018, para 35, and , Ministry for Housing, Communities and Local Government, 13 November 2018
331 , Ministry for Housing, Communities and Local Government, 24 January 2019
332 , Ministry for Housing, Communities and Local Government, 1 October 2018
333 For example, , 11 January 2019
334 British Property Federation (), para 17
335 Ground Rents Income Fund ()
336 Long Harbour ()
337 Federation of Private Residents’ Associations ()
338 Leasehold Advisory Service ()
339 All Party Parliamentary Group on Leasehold and Commonhold Reform ()
340 Anonymous ()
341 (Sir Peter Bottomley MP, APPG on Leasehold and Commonhold Reform)
342 (Katie Kendrick, National Leasehold Campaign)
343 (Anthony Essien, Leasehold Advisory Service)
344 (Jo Darbyshire, National Leasehold Campaign)
345 National Leasehold Campaign (), para 36, and (Sir Peter Bottomley MP, APPG on Leasehold and Commonhold Reform)
346 (Anthony Essien, Leasehold Advisory Service)
347 (Jo Darbyshire, National Leasehold Campaign)
348 (Anthony Essien, Leasehold Advisory Service)
349 (Heather Wheeler MP, Minister for Housing and Homelessness)
Published: 19 March 2019