Leasehold Reform

“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.”

At the very start of our inquiry into leasehold reform, we invited 50 leaseholders to meet us in Parliament to talk about the issues that most concerned them. We listened carefully to their concerns, and when at the end of the session we asked them what they wanted us to recommend in our final report, they responded nearly unanimously, “Abolish leasehold”. We have listened. Leasehold is an inappropriate tenure for houses, and we support the Government’s proposals to prohibit leasehold development of new build houses. With regard to flats, we are unconvinced that professional freeholders provide a significantly higher level of service than what could be provided by leaseholders themselves. There is no reason why the vast majority could not be held in commonhold. Only the most complex mixed use developments and some retirement properties may continue to benefit from some form of leasehold ownership. We call on the Government to ensure that commonhold becomes a primary model of ownership of flats in England and Wales, as it is in many other countries, and to create incentives—and remove the disincentives—for developers and freeholders to ensure that this happens.

It is right to consider tenure for the future, but much of our evidence was from existing leaseholders who want their concerns to be addressed now. During our inquiry, we heard several accusations from leaseholders, particularly of houses, that they had been mis-sold their properties. A particular concern of a substantial number relates to their accusing developers of reneging on promises made by the sales teams to allow leaseholders to purchase their freeholds at an agreed price after two years. Leaseholders told us their freeholds had been sold on to third-party investors who are not willing to allow leaseholders to purchase their freeholds at the same price as previously offered. One leaseholder told us that the price of purchasing her freehold had increased from £3,000 to £13,000, and another that it had increased from £5,000 to £40,000.

Developers denied they had deliberately misled leaseholders, but the number of near-identical stories reflects a serious cross-market failure. We have called on the Competition and Markets Authority to investigate mis-selling in the leasehold sector and to make recommendations for compensation. We know the Secretary of State for Housing, Communities and Local Government has already called on the CMA to do this, and it has refused. We hope our call will act as pressure on the CMA finally to act in the interests of leaseholders.

It was concerning to hear several reports from leaseholders that they had been advised, incentivised or required by the developer to use a specific conveyancing solicitor who subsequently did not advise them of onerous terms in their leases. We heard that developers had offered free carpets, free lawns, discounts or other financial incentives to use a preferred solicitor. Leaseholders were told that their sale would fall through if they did not complete within 28 days, and that only the solicitor recommended by the developer could be certain to hit the deadline. Consumers must be able to access independent and reliable legal advice when purchasing a property, so we have called on the Government to prohibit the offering of financial incentives to persuade a customer to use a particular solicitor.

Concerns were raised about onerous ground rents. Ground rents bear no relation to the level of maintenance or the quality of service provided to leaseholders; that is the function of the service charge. Some developers had imposed 10 to 15-year doubling ground rent terms in the leases of new build flats and houses. Taylor Wimpey has apologised and set up a remediation scheme, albeit with limitations, but others have not. Redrow told us that it had introduced 10-year doubling ground rents on 347 properties, with an average starting ground rent of £400 per annum, which would rise to £12,800 in the 50th year, but it has no plans to remedy these leases.

There is a growing trend for mortgage lenders to refuse to lend on leasehold properties where the ground rent exceeds 0.1% of the property or will do so. The options for leaseholders with onerous ground rents are limited. We are not convinced by voluntary offers, so what more can be done? One option is to use legislation to amend existing leases. The Government told us initially that they were not able to use legislation in these circumstances. The Secretary of State said that

“the nature of contract law means legislation cannot change the terms of leases that have already been signed.”

However, we found that it would be legally possible for the Government to introduce legislation to remove onerous ground rents in existing leases and retrospective legislation could be compliant with human rights law. Indeed, the Government propose to reduce the premium payable to enfranchise, which will in effect buy freeholders out of a contractual income stream at a discount. There is little difference in principle between altering the terms of enfranchisement and altering ground rents, and both are likely to be equally justifiable in human rights terms. Freeholders would probably need to be compensated, but that compensation need not necessarily be at full value. Our view is that existing ground rents should be limited to 0.1% of the present value of a property up to a maximum of £250 a year.

On future leases, the Government initially said that they would require those to be set at a peppercorn or zero financial value, but they have since proposed making £10 per annum a standard cap. It is unclear what value there is for the leaseholder or freeholder in requiring a ground rent of £10. We therefore recommend that the Government revert to their original plan to require ground rents on newly established leases to be set at a peppercorn or zero financial value.

Although it is fair that freeholders should be able to pass on reasonable costs arising from a change initiated by a leaseholder, many of the permission fees we heard about were plainly excessive and exploitative. Charges such as £3,500 for permission to build a conservatory or making a charge to fit a new doorbell are clearly ridiculous. We have called for permission fees to be limited to the true administrative costs incurred by freeholders. The Government should require this in the lease of new build properties, and legislation should be introduced to restrict such fees in existing leases.

Furthermore, the growing practice of imposing permission fees in the deeds of new build freehold properties and enfranchised former leasehold properties is an unjustified intrusion on homeowners that many campaigners have rightly referred to as “fleecehold”. We have made recommendations to deal with “fleecehold”, including that the Government should require that permission fees be only ever included in the deeds of freehold properties where they are reasonable and absolutely necessary, although we noted that we could not think of any circumstances in which this would be the case. We have also called on the Competition and Markets Authority to exercise its powers under section 130A of the Enterprise Act 2002 to indicate its view about whether onerous leasehold terms constitute unfair terms and would therefore be unenforceable. Where leaseholders have paid unreasonable fees or ground rents over the course of their leases so far, they should have them refunded by freeholders with interest.

Our report has made many other recommendations, and we welcome in particular the work being done by the Law Commission on a number of matters, such as enfranchisement, commonhold and other matters.