Leasehold and Freehold Reform Bill

Written evidence submitted by The Property Institute to the Leasehold and Freehold Reform Bill Public Bill Committee (LFRB19)

About The Property Institute

1. The Property Institute is the leading professional body for the residential property management sector, representing over 6,000 property managers, and over 360 managing agent firms.

2. Its members manage well over 1.5 million leasehold homes in over 55,000 residential blocks and estates across tenures, the majority being leasehold (private and social sector), but also Scottish freehold and institutional build-to-rent across the UK.

3. Around 50% of the 55,000 blocks managed by member firms are resident-controlled clients i.e. Residential Management Company (RMC’s), Right to Manage (RTM) or resident association.

4. The Property Institute accredits and audits member firms against its Consumer Charter & Standards, and provides OFQUAL-accredited qualifications, training and CPD for professionals. It has awarded almost 10,000 qualifications to professional members in the last 20 years.

Executive Summary

5. The Property Institute welcomes the Leasehold and Freehold Reform Bill ("the Bill") and believes the leasehold system needs to be reformed to make it work better for leaseholders. The Bill as it stands is a good start but does not go far enough to achieving this aim. In particular, the regulation of managing agents is needed to improve protections for leaseholders.

6. T he following measures in the Bill are particularly welcome d by The Property Institute :

a. G reater transparency over service charges through a standardised chart of accounts (Clauses 2 7-28 ) . Many good managing agents already provide transparent information to leaseholders as a matter of course, but this is not always the case . A standardised chart will drive consistency which will in turn improve accountability and minimum best practice standards and make it easier for leaseholders to understand and compare .

b. Replacing building insurance commissions with transparent and reasonable fees (Clauses 31-32) . This will enable property managers to get appropriately compensated for the work they deliver while preventing scenarios where leaseholders can be overcharged .

c. Regulation of freehold estate management ( Part 4) . Improving rights for those living on managed estates is strongly welcomed. F reehold residents on managed estates would be further helped by regulation of property managing agents set out below.

7. The Property Institute calls for the Bill to be amended in the following five areas :

i) R egulation of managing agents , to protect leaseholders from poor practice , incompetence, and unnecessary costs in the management of their homes . Alternatively – if there is insufficient time for this measure as indicated at second reading – two pragmatic and targeted amendments would raise standards in the sector and pave the way for wider regulatory reform in the future:

· R equire mandatory qualifications of property managers . These have recently been introduced in the social housing sector and must be expanded to protect leaseholders and private tenants.

· Introduce an overarching mandatory code of practice of broad principles for property managers . This could draw on the recommendations of Lord Best’s working group on the regulation of property agents [1] , and build on existing codes of practice such as the ARMA Consumer Charter and Standards .

ii) Make the Government’s ‘How to Lease Guide’ a mandatory document to be shared with consumers who purchase a leasehold property, in a similar way to the ‘How to Rent Guide’ which landlords or agents must provide to tenants. This will help with transparency and increase awareness of the characteristics of leasehold.

iii) Enable terms to be implied into leases which allow for energy efficiency improvements, so that blocks of flats can decarbonise and play a part towards the 2050 Net Zero target.

iv) Introduce provisions mandating the time and fee for providing home buying and selling information. These provisions must be reasonably practicable and reflect adequately the cost and time resource required for compiling this information, especially for buildings with complexities such as fire safety remediation works.

v) Amend legal costs provisions (Clause 34) to be more targeted so that these provisions preclude unscrupulous landlords from using services charges to fund vexatious litigation, but still allow resident management companies, residential property managers and named managers, to pursue reasonable legal action and recover costs against individual leaseholders for unpaid service charges and/or breach of lease conditions .

Overall Position

8. Leasehold reform is much needed. For far too long leaseholders have had to deal with a complex and out-dated system that often does not work well for them. Property managers see the problems with the leasehold system as they carry out their work, and the Property Institute strongly supports the principles of this legislation. 

9. While the proposals set out so far are a good start, they do not go far enough in protecting leaseholders from bad practice. Notably absent is regulation of managing agents, which is needed to raise standards and improve competency across the sector. This has long since been recognised by Government and it is disappointing that it has not been included in the Bill.

10. The Property Institute welcomes the Government’s broad intent in the Bill to move the UK towards a system where residents have control of their own buildings. Around half of all buildings managed by our members are resident controlled. This number is likely to rise in the wake of recent ground rent reform, which, combined with the new and complex responsibilities created by the Building Safety Act, makes it even more important that the managing agents that residents instruct are competent and regulated to support them to navigate their legal responsibilities.

11. In taking forward its leasehold reform agenda the Government must ensure that greater attention is given to equipping leaseholders to manage their buildings effectively and safely, through training, resources, advice from the Leasehold Advisory Service and a regulated managing agent sector.

12. This is particularly important in the context of further ground rent reform which would encourage a move from freeholder control to leaseholder control. That transition needs to be managed carefully. While many freeholds could transfer successfully to engaged leaseholders, the significant scale of this change programme, plus the remaining cost to leaseholders of acquiring their freehold, means that there will inevitably be some freeholds that are not acquired by their leasehold communities, or are acquired by only some of the leaseholders within a building. There is a risk of harm to leaseholders here, especially where a landlord is left with a freehold of limited value and no incentive to manage the building.

Support for Specific Clauses

Greater transparency over service charges (Clauses 2 7 - 28 )

13. The Property Institute strongly supports greater transparency over service charges through a standardised chart of accounts and previously called for this measure to be included in the Building Safety Act . This will enable leaseholders to compare charges more easily between different buildings and across years, enabling them to understand what they are being charged for and raise any concerns.

14. M any good managing agents already provide transparent information to leaseholders, but others do not . These may be unqualified agents and, since the sector is not regulated , there is no mechanism for enforcing or raising standards.

Replacing building insurance commissions with transparent fees (Clauses 31-32)

15. The process of securing building insurance , collecting all premium payments and managing claims can be time-consuming and complex, especially post- Grenfell and the building safety crisis . Proportionate charges are appropriate for agents to compensate for the time taken , however this is not always transparent and is open to abuse.

16. Replacing commissions with transparent handling fees is a measure which enables property managers to be appropriately compensated for the work they deliver while preventing scenarios where leaseholders can be overcharged.

17. The parameters of these fees must reflect the varied extent of work across different buildings so that property managers can accurately forecast and issue service charge accounts and avoid vague contingency sums which can be inaccurate and precautionary.

Regulation of freehold estate management (Part 4)

18. The Property Institute warmly welcomes the extension of the codes of practice and aligning the rights of homeowners on managed estates with those of leaseholders. This is a step in the right direction towards transparency, fairness, and improved standards. The Property Institute hopes this step will ensure residents receive a high-quality professional service, for a reasonable fee.

19. Residents on freehold managed estates would be further helped by the introduction of mandatory qualifications and regulation of all property managers, which would help protect all resident communities, described below.

Suggested Amendments

i) Regulation of Managing Agents

20. How a building is managed has a significant impact on residents’ safety and experience of living in a leasehold property and the costs they incur. A well-managed building with a qualified and effective property manager goes unnoticed, as it should be, while buildings that fall into disrepair or are badly managed can be unsafe and make residents’ lives a misery.

21. This is why regulation of managing agents is badly needed. While some sectors oppose the idea of increased regulation for their own industry, it is quite the opposite in this sector: The Property Institute and its’ members have long been calling for regulation. This will push rogue operators out of the market and ensure minimum standards of competence, practice and behaviours in professionals who manage people’s homes and safety.

22. Currently anyone can set up as a managing agent or work as a property manager – there are no minimum entry requirements or qualifications for individuals or firms. Yet managing agents have significant responsibilities including for the upkeep and maintenance of the common parts of multi-occupancy buildings, health, and fire safety, and holding substantial funds on behalf of leaseholders, collected via service charges. Whilst the vast majority of managing agents do a good job, some make mistakes due to lack of knowledge/competence or, worse, exploit their privileged position. This causes detriment and harm to residents of multi-occupancy buildings.

23. The need for regulation of this sector has long been recognised by Government, resulting in Lord Best being asked to chair a working group to develop recommendations for government on a new regulatory framework for property agents, including managing agents. His report, published in July 2019, is still being considered by Government. It sets out the need for an independent regulator for all residential property agents to prevent bad practice, drive cultural change and raise standards right across the property industry. Such an independent regulator would oversee a regulatory framework based around:

· a new licensing regime that agents need to join in order to operate;

· mandatory qualifications to demonstrate individuals are competent; and,

· a new overarching mandatory code of practice for firms , with broad principles structured as follows:

o Customer Service

o Ethics

o Safety

o Technical Standards

24. The Property Institute strongly supports the recommendations set out in Lord Best’s report, but recognises concerns expressed by Government about the time pressure of the Bill to include lengthy amendments.

25. Therefore, The Property Institute proposes two simpler and shorter areas for amendment, which would improve the sector and pave the way for future regulation. They are elements within Lord Best’s report: mandatory qualifications and a mandatory code of practice.

Mandatory Qualifications

26. The Property Institute calls for the inclusion of an additional clause introducing mandatory minimum qualifications and continuous professional development for an individual to enter and operate as a managing agent or property manager in the private sector.

27. Mandatory qualifications have recently been introduced for property managers in the social housing sector through the Social Housing (Regulation) Act 2023; it is vital this is extended to the private sector as well, to drive up standards for leaseholders and private renters. Such an approach reflects that many multi-occupancy buildings in England are now mixed tenure, with a mix of owner occupier leaseholders, private tenants and/or social housing tenants.

28. In the absence of an independent regulator for all residential property agents (estate, lettings and managing agents), such mandatory qualifications, framed around technical knowledge, customer service, ethics and safety will enable managing agents and property managers to demonstrate competency.

29. The need for qualifications for property managers has greatly increased with the introduction of the complex new building safety regime and the requirements of the new Building Safety Regulator. Building managers, particularly for buildings over 18m, now need to learn new skills, competencies, and behaviours to become, essentially, what the draft Building Safety Bill envisaged as ‘Building Safety Managers’. This requires significant upskilling which, if left to be voluntary, carries the considerable risk of being patchy and inconsistent.

30. This is particularly important given the trend towards resident-led management companies (such as RMCs and RTMs), who need to be able to rely on qualified property managers who are competent and professional in supporting them to meet their legal responsibilities.

Mandatory Code of Practice

31. The Property Institute recommends a new clause in the Bill mandating an overarching Code of Practice outlining overall broad principles which must be adhered to by managing agents.

32. This Code of Practice for managing agents, alongside mandatory qualifications, would pave the way for much-needed wider regulatory reform of the sector in the future. Such an overarching code could draw from the recommendations of Lord Best’s working group on the regulation of property agents [2] , and build on existing codes of practice such as the ARMA Consumer Charter and Standards .

ii) Make the ‘How to Lease Guide’ a mandatory document

33. The Property Institute recommends making it mandatory for consumers to be given the Government’s ‘How to Lease Guide’ before purchasing a leasehold property, suitably revised to reflect the changes being introduced by this Bill. This would apply to property agents involved in selling leasehold homes or any landlord seeking to sell a leasehold property directly to a consumer.

34. This measure would mirror the existing requirement for lettings agents to provide tenants with the ‘How to Rent Guide’ and would improve transparency of the leasehold system with its distinct characteristics. It is important that leaseholders understand all the implications, their rights, and responsibilities, before making a financial commitment. This includes understanding major works, the Section 20 consultation process, the right to apply to the First-tier Tribunal for the appointment of a new manager in certain circumstances, and the right to challenge the reasonableness of service charges at the First-tier Tribunal.

35. The significant changes included within this Bill and the Building Safety Act make it even more vital that leaseholders have access to clear, accurate and accessible information. Once updated, measures should be taken to distribute the ‘How to Lease Guide’ to existing leaseholders as well as new purchasers.

iii) Imply terms into leases to allow for energy efficiency improvements

36. The Property Institute recommends a new clause in the Bill to imply terms into existing leases to enable improvements to be made to buildings for energy efficiency and decarbonisation purposes.

37. Currently, most leases do not allow for the cost of any ‘improvements’ to a leasehold building to be recovered through the service charge, nor does it allow leaseholders to upgrade or improve any of the common areas (e.g. adding cavity wall insulation or installing tripe glazing to their windows). The rationale for this is that leaseholders are only required to pay for the upkeep of the building to its original standard, rather than some higher standard. However, this limits the ability of many blocks of flats to undergo changes which could improve the energy efficiency of buildings, such as insulation, solar PV or upgrades to windows and external doors, since they could be classed as ‘improvements’.

38. Given the need for decarbonisation of housing as part of efforts to reach Net Zero by 2050, it is vital that measures are taken to enable blocks of flats to undertake necessary works. Introducing this new clause would not mean that such works must be undertaken, or that leaseholders must pay for them, but it is an enabler and an important future-proofing measure.

iv) Maximum time and fee for home buying and selling information

39. The Property Institute supports maximum fees and time scales for the provision of information, which the Government has indicated they may include in the Bill. These must reflect adequately the cost and time resource required for compiling this information, especially for buildings with complexities such as fire safety remediation works, which can require in-depth reporting and ongoing correspondence.

40. These charges are applied so that the cost of work delivered is paid by the person receiving the benefit (i.e. the leaseholder wishing to move home), rather than being borne by all leaseholders in the building. However, in this unregulated sector, it is possible for some agents to charge excessive fees or take many weeks to provide information which can be very problematic for leaseholders seeking to move home.

41. The maximum cost previously set out by Government in June 2019 in response to its consultation was £200 plus VAT, which is no longer sufficient. A stepped fee structure is required to accommodate large and complex buildings, especially ones with building safety remediation issues, where considerable correspondence is often required.

42. A maximum time period of 21 days is recommended, as some buildings can be complex and often agents get multiple requests for LPE1s at the same time (e.g. after the Easter break).

v) Amend legal costs provisions (Clause 34) to be more targeted so that the provisions specifically preclude landlords from using services charges to fund vexatious litigation

43. The Property Institute would like to draw the Committee’s attention to Clause 34 and the potential negative implications of this clause as currently drafted, particularly for resident-led management companies (RMCs and RTMs) and named managers. There is an assumption in the legislation that ‘landlords’ who incur legal costs will be institutions with financial assets, but this is not the case for resident management companies who often have no financial resource at all. Resident directors may have to fund legal cases which are brought against them by other residents, or legal costs of pursuing non-payment of service charges by fellow residents. We consider the clause should be amended in such a way that it precludes unscrupulous landlords from using service charges to fund vexatious litigation, but still allows resident management companies, residential property managers and named managers, to pursue reasonable legal action and recover costs against individual leaseholders for unpaid service charges and/or breach of lease conditions.

January 2024.