Leasehold Reform Contents

Conclusions and recommendations

Future of leasehold tenure

1.There are clearly very significant differences between the freehold and leasehold tenures, but these are not always apparent to prospective leaseholders at the point of sale. As we will come on to recommend, this should be made much clearer to prospective purchasers from the start of the sales process. Our view is that it would be more appropriate to refer to this tenure as ‘lease-rental’. The Government and others may wish to use this terminology in future publications and policy statements. (Paragraph 12)

2.We are unconvinced that professional freeholders provide a significantly higher level of service than that which could be provided by leaseholders themselves, although we recognise that there are complexities in larger, especially mixed-use developments. The high premiums leaseholders are required to pay—ground rents, permission fees and enfranchisement costs—are paid regardless of the level of oversight the freeholder provides, and do not provide an obvious financial incentive for freeholders to work in the interests of leaseholders or promote the long-term condition of a building. (Paragraph 19)

3.As we will go on to outline in this report, 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 various recommendations for how this might happen. (Paragraph 25)

4.We believe that there is a clear distinction between flats sold on leasehold terms and houses. We recommend that the sale of houses under leasehold should cease, as the Government has proposed, and urgent action be taken to enable those leaseholders in houses to be given the right to enfranchisement under appropriate low cost arrangements. (Paragraph 26)

5.We urge the Government to ensure that commonhold becomes the primary model of ownership of flats in England and Wales, as it is in many other countries. The Government was right to have asked the Law Commission to review the legislation concerning commonhold, in particular to make it easier to convert leasehold properties to commonhold, and we urge the Government to act quickly once this review is completed to implement the Law Commission’s recommendations. However, if the Government is serious about promoting commonhold as a viable alternative to leasehold, it must also ensure that the incentives to build leasehold properties—particularly, monetary ground rents and permission fees—are more limited. At the same time, the Government will need to ensure that concerns regarding commonhold properties are meaningfully addressed, including ensuring appropriate resident participation in the management of buildings. This might include the provision of training to residents in management roles and ensuring external expert support is made available in extreme circumstances. (Paragraph 42)

6.Our expectation is that once commonhold legislation is reformed, leaseholds begin to convert, and more commonhold developments are brought forward, leasehold as a tenure will become increasingly redundant. While it may be the case that some retirement properties and the most complex, mixed-use developments 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 much greater control for residents over service charges and major works. (Paragraph 43)

Accusations of mis-selling

7.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. The Government should require the use of a standardised key features document, to be provided at the start of the sales process by a developer or estate agent, and which should very clearly outline the tenure of a property, the length of any lease, the ground rent and any permission fees. (Paragraph 51)

8.The right of first refusal currently only applies to leasehold flat owners. The Government is right to seek to extend this right to leasehold house owners. The Government must also close the legal loophole allowing developers to sell freeholds to subsidiary companies, which means leaseholders lose out on the opportunity to purchase the freehold at whatever price it is offered to the new freeholder. This would benefit both new and existing properties. The Government must also close the legal loophole allowing developers to sell freeholds to subsidiary companies, which means leaseholders lose out on the opportunity to purchase the freehold at whatever price it is offered to the new freeholder. (Paragraph 56)

9.The standardised key features document we recommend should also include, prominently, a price at which the developer is willing to sell the freehold within six months or, otherwise, a prescribed statement that the developer is not so willing, and that the purchaser would have to rely on their statutory rights. (Paragraph 57)

10.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. Some affected leaseholders may have a strong claim that their properties were mis-sold. The Competition and Markets Authority should investigate mis-selling in the leasehold sector within the next six months and, where appropriate, make recommendations for appropriate compensation, with the option of enfranchisement. (Paragraph 61)

11.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 and may not be inclined to put their client’s interests first. The Government should prohibit the offering of financial incentives to persuade a customer to use a particular solicitor. Further, as outlined above, key sales information should be provided at the start of the sales process in a standardised key features document, so purchasers are in no doubt about the costs involved in purchasing a leasehold property. (Paragraph 67)

12.It was extremely concerning to hear from so many leaseholders that their developer-recommended solicitors had failed to advise them of onerous terms in their leases. Such evidence suggests that some conveyancing solicitors have become too close to developers and did not put their client’s interests first. This does not, however, absolve developers of the blame for taking advantage of their dominant position and creating such leases in the first place. Buyers should be encouraged to ensure that they seek independent legal advice. (Paragraph 72)

13.The Government needs to act on its promise to help leaseholders seek redress where they have been let down by their conveyancing solicitors. The Government should undertake a review within the next six months to determine whether existing routes, including the Legal Ombudsman’s scheme, to redress are satisfactory or whether a new Alternative Dispute Resolution (ADR) scheme should be established for leaseholders with legitimate claims against their solicitors. (Paragraph 78)

Onerous lease terms

14.The Minister was right to say that ground rent bears no relation to the level of maintenance or quality of service provided to leaseholders—indeed, that is the function of the service charge. Many buildings are well managed without any ground rent being paid. While monetary ground rents may provide an economic incentive for professional freeholders to participate in the market, we have already concluded that—other than in complex, mixed-use developments and retirement properties—most do not provide a significantly higher level of service than that which could be provided by leaseholders themselves. While developers told us that leasehold houses are routinely sold at a lower price than their freehold equivalents, it is concerning that several leaseholders provided evidence that this was not a consistent policy. (Paragraph 83)

15.Any ground rent is onerous if it becomes disproportionate to the value of a home, such that it materially affects a leaseholder’s ability to sell their property or obtain a mortgage. In practical terms, it is increasingly clear that a ground rent in excess of 0.1% of the value of a property or £250—including rents likely to reach this level in future due to doubling, or other, ground rent review mechanisms—is beginning to affect the saleability and mortgage-ability of leasehold properties. (Paragraph 91)

16.It is unacceptable 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. (Paragraph 95)

17.We were disappointed that, despite making two written requests for information, some developers were not willing to provide us with clear information as to the numbers of leasehold houses and flats that they had sold with ground rents exceeding 0.1% of the value of the properties. We are sceptical that the industry does not readily have access to data on the houses they sold and the ground rents they set. There needs to be greater transparency from the industry and we call on them again to publish this information, to help clarify the true scale of the issue. (Paragraph 96)

18.The options for leaseholders with onerous ground rents are limited. House owners are entitled to pay to enfranchise after two years of ownership, thus removing any obligation to pay ground rent, onerous or otherwise. However, this would only be possible if the cost of enfranchisement—which we call to be made “substantially cheaper” later in this report—is both reasonable and affordable for the house owner. Flat owners, similarly, are entitled to enfranchise, although this is a much more difficult process, requiring the consent of 50% of the owners in a residential block of flats. Otherwise, leaseholders are reliant upon the benevolence of their freeholder to remove unreasonable terms. (Paragraph 98)

19.We are not convinced of the merits of the voluntary developer- and freeholder-led schemes that offer to convert leases with doubling ground rents to RPI-based review mechanisms, which have been supported by the Government. RPI-reviews may still see ground rents rise above 0.1% of a property’s value, which many lenders consider to be onerous. Most require RPI reviews across the entire length of the lease, as opposed to a defined initial period, while others demand high fees in exchange for removing onerous terms. These offers are not good value when compared to the Government’s proposed cap for ground rents on new leasehold properties. It is unacceptable that many freeholders and developers are not even offering this bare minimum. The Government’s threat to “eyeball” freeholders and developers is simply not good enough; leaseholders need stronger action from central Government—as we call for in this report. (Paragraph 106)

20.We note that it would be legally possible for the Government to introduce legislation to remove onerous ground rents in existing leases. While it would be difficult to change the terms of existing leases, it would not be impossible. Retrospective legislation could be compliant with human rights law. We understand that controlling rent would not be confiscation of property but control of its use. Thus, provided not imposed arbitrarily, it is likely Parliament could amend the terms of existing leases ‘lawfully’. Compensation would most likely result in a scheme being compliant with human rights legislation; the impact on society could also justify a scheme. (Paragraph 114)

21.Indeed, the Government proposes to reduce the premium payable to enfranchise, effectively buying freeholders out of a contractual income stream at a discount. There is little economic difference between reducing the statutory discount and reducing the contractual income stream, and this is likely to be equally justifiable in human rights terms. (Paragraph 115)

22.Freeholders would probably need to be compensated in order to ensure the legislation is compliant with human rights law. But that compensation need not necessarily be full value. The Government should undertake a comprehensive study of existing rents to determine the scale of the problem of onerous ground rents and the level of compensation which would be consistent with human rights law. (Paragraph 116)

23.Our view is that, within any retrospective legislation, existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year. They should not increase above £250 over time, by RPI or any other mechanism. 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. Leaseholders should not face any charge, such as administrative and legal costs, or conditions for the variation of their lease to amend the level of ground rent as a consequence of retrospective legislation. (Paragraph 117)

24.Alternatively, the Government should establish a compensation scheme for the mis-sale of onerous ground rents, funded by the relevant developers and the purchasers’ solicitors. (Paragraph 118)

25.We recommend that the Government should revert to its original plan and require ground rents on newly established leases to be set at a peppercorn (i.e. zero financial value). 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. Monetary ground rents are also an impediment to the adoption of commonhold, which should be a greater priority for the Government, whilst they maintain a risk that forfeiture proceedings might be brought against leaseholders. (Paragraph 129)

26.While the Law Commission is currently undertaking a programme of work to reform commonhold, it will take some years for its proposals to be implemented and for commonhold to become a realistic alternative for most leaseholders. Until that point, freeholders are likely to continue to play some role in the supervision of large and complex mixed-use developments—and we accept that there will be little incentive for them to do so without a monetary ground rent. The Government may need to implement an exemption for mixed-use buildings, until such point that the reforms proposed by the Law Commission and others lead to commonhold becoming a realistic alternative for leaseholders in more complex buildings. Any exempted ground rent should not exceed 0.1% of the present value of a property, up to a maximum of £250 per year. (Paragraph 130)

27.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. (Paragraph 136)

28.Alongside its proposal to cap ground rents on future leasehold properties, the Government should require that permission fees in the leases of new-build properties are not permitted to exceed the true administrative costs incurred by freeholders. The Government should also introduce legislation to restrict onerous permission fees in existing leases, as we have recommended for onerous ground rent terms. Compensation for costs already incurred may be appropriate if terms in existing leases are found to have been unfairly imposed upon leaseholders. (Paragraph 137)

29.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’. The Government should require that permission fees are only ever included in the deeds of freehold properties where they are reasonable and absolutely necessary, although we cannot think of any circumstances in which they would be so. (Paragraph 138)

30.The Government should set clear timescales for the implementation of its proposal to introduce a cap on the administration fees that are incurred during the sales process. (Paragraph 139)

31.The Government should immediately ensure that the Law Commission has adequate funding to extend its programme of work to identify how unfair terms law could apply to existing leaseholders. (Paragraph 144)

32.Alongside a review of mis-selling in the leasehold sector, which we have called to be carried out within the next six months, the Competition and Markets Authority should exercise its powers under section 130A of the Enterprise Act 2002 to indicate its view as to whether onerous leasehold terms constitute ‘unfair terms’ and are, therefore, unenforceable. (Paragraph 145)

33.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 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. In such circumstances, the Government should establish a clear and easily accessible route to compensation for affected leaseholders. Where 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. In such circumstances, the Government should establish a clear and easily accessible route to compensation for affected leaseholders. (Paragraph 146)

Service charges, one-off bills and dispute mechanisms

34.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. 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. (Paragraph 153)

35.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. (Paragraph 157)

36.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. (Paragraph 160)

37.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. (Paragraph 163)

38.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. (Paragraph 169)

39.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. (Paragraph 170)

40.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. (Paragraph 171)

41.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. (Paragraph 172)

42.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. 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. (Paragraph 179)

43.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. (Paragraph 185)

44.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. (Paragraph 192)

45.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. (Paragraph 196)

46.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. (Paragraph 201)

Enfranchisement

47.It is not always clear to leaseholders that there is a statutory route to enfranchisement and lease extensions, and this has led to many accepting worse terms than they might otherwise have been legally entitled to. Freeholders should be required to provide an estimate of the statutory cost of enfranchisement or lease extensions when making an offer through the informal route. (Paragraph 208)

48.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. We support the Law Commission’s detailed analysis of this issue and look forward to the outcome of its consultation. We urge the Law Commission to recommend a process that will make enfranchisement substantially cheaper. If this represents “an obvious transfer of power from one party to another”, as freeholders warned, then that may be a good thing. The Government should implement these changes within 12 months, as many leaseholders are waiting to enfranchise under a new system. (Paragraph 212)

49.As we have already noted, the Government’s proposal to reduce the premium payable to enfranchise is equally justifiable in human rights terms as our recommendation to reduce freeholders’ contractual income streams through lower ground rents. If the Government is willing to countenance a cheaper process for enfranchisement, it should have no objection to removing onerous terms from existing leases either. (Paragraph 213)

50.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 leasehold and freehold tenure, but also where lease terms have affected the saleability and mortgage-ability of properties. The Government should introduce a low-interest loan scheme, so that leaseholders who want to enfranchise or extend their leases—but cannot afford to or obtain the necessary finance—have the opportunity to do so. This could be promoted as a form of Help to Buy for leaseholders. (Paragraph 216)

51.National Trust leaseholders are in a difficult position given the inalienability of the land on which their properties sit. We support the National Trust’s proposal to buy back any long lease at market value, which balances the obligations they face on inalienable land, while protecting the value of their leaseholders’ assets. The National Trust, and other charities, may wish to consider whether it is appropriate to sell leasehold properties on inalienable land in the first place. (Paragraph 222)

52.The 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 will be required. The Government should invite, and fund, the Law Commission to conduct a more comprehensive review of leasehold legislation, that would incorporate a full review of the Commonhold and Leasehold Reform Act 2002, the Landlord and Tenant Act 1987 and other relevant legislation. (Paragraph 226)





Published: 19 March 2019