Flawed leasehold system needs ‘urgent reform’

Commons committee finds leaseholders at risk of exploitation by developers, freeholders and managing agents.

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The leasehold system needs wide-ranging reform – including its own variation on Help To Buy – with a Commons HCLG committee finding the balance of power in existing leases, legislation and public policy too heavily weighted against leaseholders.

A key recommendation from the committee calls for the introduction of government backed low-interest loans – a Help To Buy scheme for leaseholders – 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.

Overall, the report finds key elements of the current leasehold system are open to abuse and without defined purpose.

Ground rents have in some cases increased to a level leaving properties unsellable and unmortgageable, while permission fees have been levied far beyond the reasonable cost of administration.

The committee says both should be subject to legislation that establishes when they can be used and how they should be calculated.

Over the course of this inquiry, the committee heard a number of claims that individuals had been mis-sold.

While developers were sure, in evidence, that they have not deliberately misled buyers with false promises or partial sales information, the report references a pattern of “near identical” stories as demonstrating significant failings in the process.

Calling on the Competition and Markets Authority to investigate these claims and decide on appropriate compensation where necessary, the committee says a mandatory document detailing standardised key features of the sale would help prevent such cases being repeated.

Other aspects, such as processes for invoicing service charges and renewing leasehold must be made simpler, demonstrate value for money and provide greater transparency to leaseholders, the committee said.

The committee concluded that:

  • It would be legally possible for the government to introduce legislation to remove onerous ground rents in existing leases – existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year
  • 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)
  • The Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation
  • The government needs to ensure that commonhold becomes the primary model of ownership of flats in England and Wales
  • 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

While the growth in the number of leasehold houses, particularly in the North West of England, has been a particular concern in recent years, the committee found that flat lessees were also vulnerable to onerous ground rents, high and opaque service charges and one-off bills, unfair permission charges, imbalanced dispute mechanisms, inadequate advisory services, and unreasonable costs to enfranchise or extend leases.

Committee chair Clive Betts MP said: “We found that the leasehold system often fails to provide an effective system for managing multi-occupancy residential properties, and believe that a commonhold model would be more appropriate in most circumstances.

“Buildings require effective management to ensure they are kept up to a sufficient standard of repair, but to spread responsibility for covering the costs.

“Yet in too many cases, leasehold has failed to do this, and acted primarily as means of providing a steady income for developers, freeholders or managing agents.”

He continued: “In the worst cases, people have been left trapped in unsellable and unmortgageable homes, needing permission or having to pay high fees for even minor cosmetic changes. More common are opaque service charges and poor levels of maintenance, with no reasonable means for leaseholders to challenge or query how their buildings are managed.

“Financially, the buck always seems to stop with the leaseholders and there is little they can do about it.

“There are some practices that should stop outright. There is no reasonable case for a house to be sold as leasehold. Equally, financial incentives to use preferred solicitors raise serious questions of a conflict of interest.

“In other areas, such as ground rents, service charges and dispute mechanisms, the government needs to tip the balance back towards leaseholders.

“They must set explicitly set out in legislation how ground rents and permission fees should operate in existing leases, provide transparency for leaseholders, and establish robust mechanisms for dispute resolution.”

 

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