Q. 1 The adequacy of the Government’s programme of work on residential leasehold reform, including:

Leasehold is a form of residential tenure that has been abolished in most places around the world and should end in this country.

APPG officers welcome the Government’s programme to look at ways to reinvigorate commonhold and its commitment to tackling unfair practices and exploitation being faced by leaseholders in order to provide a fairer deal for leaseholders. It is not clear where and how government is considering the plight of leaseholders in private Grenfell type high blocks.

Since Parliament passed the Commonhold and Leasehold Reform Act 2002, the leasehold sector has become a breeding ground for abuses against leaseholders. There has been no growth of commonhold because the responsibility for it was left with the Ministry of Justice, and of all its concerns, the condition of people living in leasehold homes has clearly not been one of them.

It has now become clear through the work of the charity LKP with the help of the Open Data Institute that the actual number of residential flats and leasehold houses is estimated at 6.8 million (including Wales), including approximately 1.9 million flats rented in the social sector which are subject to leasehold property management service provisions.

APPG officers also welcome Government’s programme of work which includes a conversion of ground rents to a peppercorn ground rent system on new-build leasehold homes (note: this does not help existing leaseholders), reforming Right to Manage costs and procedures, its work around enfranchisement, regulation of managing agents and reasonableness and validity of service charge fees and most importantly the review on commonhold.

Whilst the aforementioned issues have been raised by APPG officers, APPG Group members in the House of Commons as well as in meetings with Housing Ministers and officials as well as during APPG meetings and numerous meetings with various leaseholder sector bodies and regulators and leaseholders, Government’s action so far to help victims caught-up in the leasehold house ground rent scandal remain inadequate.

In some areas of the country, particularly in the North West a significant majority of new houses were sold on a leasehold basis, with the figure reaching almost three-quarters in some parliamentary constituencies. (see note 3. below).

APPG officers and LKP are also of the view that many of the reforms recommended in this document could be cohesively and speedily implemented if Government were to be bold in its decision to properly implement commonhold tenure to, make commonhold work for owners, developers and lenders.

(a) its application to existing leaseholders in both houses and flats:

The issues surrounding leasehold tenure will hopefully be solved by legislative and regulatory reform.

The matter of remedial fire safety works is an urgent problem, requiring immediate Government action (see notes at point 1. below)

With regard onerous lease terms, Government made a commitment to bring forward proposals to rectify the position for those consumers burdened with onerous leases prior to the summer recess yet failed to do so which is wholly inadequate.

On enfranchisement, whilst APPG officers support the Law Commission’s review to create a simpler and cheaper route out of leasehold that will no doubt reduce protracted and costly disputes between parties, the review fails to provide assistance to leaseholders who are not seeking to enfranchise, nor to those who are unable to enfranchise under any new or revised legislation.

APPG officers strongly support the introduction of a simple and fairer scheme with a clear and transparent statutory pricing model.  Such a system would involve a straightforward formula for calculating the value of the freehold and this would be set out in statute so that everybody knows at the outset what they are dealing with.

Further inadequacies by Government are on fixing the problems in the property management industry and reviewing the level of service charge costs and managements fee charges and provide better regulation and protection for consumer against rogue landlords and agents.

Despite the plethora of complaints raised with Government officials by APPG officers and LKP about the inadequate service provided by the Leasehold Advisory Service (LEASE), Government continue to dispense significant funds from the public purse for a service which APPG officers believe is not fit for purpose (see notes at point 2. below). 

APPG officers call for a Government review on its backing for LEASE, and lack of support for other groups offering advice and supporting to leaseholders.

APPG officers hope to see a new radical approach from LEASE and a shake-up in its direction to achieve the aim and objective of former Housing Minister Gavin Barwell which is for LEASE to be:  

‘…solely and unapologetically on the side of leaseholders…

                                                                                                                                                                   LEASE Conference 2017

(b) whether further reforms should be introduced:

APPG’s proposed reforms:

1. Cladding

MHCLG’s announcement earlier this year of a £400m fund for the social sector was warmly received and meant vital work would be carried out while ensuring councils and housing associations would not be left out of pocket.

The situation in the private sector is far more complex and precarious. Many freeholders operate intentionally opaque businesses from offshore locations and often communicate through third parties, making negotiations difficult or even impossible.

Some homeowners have been lucky. There are instances where freeholders and developers have worked together and sought not to pass on costs. Others have not been so fortunate. In one example a building warranty expired and now the freeholder is set to bill leaseholders an estimated £2.4m for the removal and replacement of unsafe cladding.

APPG officers believe Ministers have been emphatic in their statements, consistently urging freeholders to assume responsibility and pay up. While the APPG welcomes their words, firm encouragement is simply no longer enough – now is the time for the Government to act in the private sector. No one should be left in the position of having worked and saved for years to become a property owner, to then learn their home is not safe and face the real possibility of losing it through no fault of their own.

The approach of developers with few exceptions have been to attempt to absolve themselves of all liability on any building. They do so despite their clear overriding responsibility to build or to own a safe building, regardless of what building regulations apply at the time.

APPG officers together with LKP believe important issues currently missing from the review of legislation include:

1. There should be better accounting for and protection of leaseholder funds. Housing Minister Prisk asked a roundtable meeting in 2013 whether in principle it would be beneficial to enable s152-156, which remain outstanding from the 2002 CLRA. Almost all elements of the sector supported the introduction of these protections for leaseholders, but they have still not been implemented. Unlike the PRS there is still no effective control of leaseholder funds beyond the limited powers provided by s42 of the LTA 1987. Should a managing agent go out of business it is currently almost inevitable that leaseholders will not recover their money. The FSA have been aware for some time that this is an issue.

2. There has been a long standing awareness by the FSA that leasehold buildings insurance can be subject to unjustifiably inflated commissions. The vast bulk of leaseholders are also not deemed to be direct parties to the policy so in the event of a dispute have very limited rights to raise matters with the Finance Ombudsman.

3. There are problems relating to Recognised Tenants Associations. Despite s130 initially being introduced as a back bench amendment in 2015 to what would go on to become the 2016 Housing and Planning bill, the relevant regulations have still not been implemented. Neither have the regulations provided for under s29 of the 1985 LTA. Even the Property Tribunal has not updated its procedural rules on this matter since 1980!

4. Cladding is the really urgent problem which has emerged subsequent to the Grenfell tragedy. Ministers repeatedly stated that they want developers and freeholders to pay for the costs. With few exceptions the bulk of costs continue to be passed to the leaseholders. The cladding issue has also exposed the fact we have many more building defects than previously understood. It is essential that some way is found that allows the government or others to take action against the developers to pay for the rectification of these defects for which they are clearly responsible. It cannot be right that a first time buyer, with no funds, is expected to take on the corporate power of what may well be a multi-national developer to attempt to show that the developer failed to comply with either building standards or their overall obligation to develop a safe building. For these reasons it is important that any new housing ombudsman scheme should cover existing stock built or refurbished in the last 25 years.

2. Reform OR REPLACEMENT of the Leasehold Advisory Service (LEASE) to work as it was initially intended

LEASE is governed by a board, appointed as individuals by the Secretary of State for the Ministry of Housing, Communities & Local Government.  It was originally created by Lord Young of Cookham who intended it to be a short-term measure to help the whole market understand the 1993 Leasehold Reform, Housing and Urban Development Act.

The 1996 Act provides funding for LEASE, and also refers to Government supporting “any” group, yet despite APPG officers and LKP exposing a plethora of problems surrounding LEASE and its poor advice and practices (as highlighted on LKP’s website), officials continue to support the service provided by LEASE.

Some of LEASE’s actions have included attempting to turn itself into a commercial enterprise by developing ways to work contrary to the best interest of leaseholders, training of some of the most oppressive landlords in the sector, not to report, nor expose poor practices within the sector to Government officials, nor highlight any defects in leasehold legislation and/or policy and misguide leaseholders by providing poor quality or inappropriate advice.

LEASE is in need of imminent review and reform.

3. Onerous Lease Terms / Leasehold Houses

Onerous lease terms are practically feudal and entirely unjustifiable.

Onerous ground rent clauses made freehold properties a lucrative venture for investment companies as they offered a guaranteed return on investment for the freeholder, providing a legally enforceable source of income whilst leaseholders are left with properties that can be impossible to sell, even at significantly reduced prices.

APPG officers are aware freeholders are advising against overreaction as they purport that onerous lease terms only apply to around 12,000 homes in England when according to LKP and the Nationwide it is suggested there are over 100,000 new build homes with onerous ground rent lease terms: either doubling ground rents or ground rents that are more than 0.1% of the purchase price.

Properties burdened with onerous lease terms also impact on Government’s Help to Buy loan schemes incurring substantial losses because to the terms agreed for repayment of the loan is based on property market values at the time of redemption, rather than on the original loan amount.

APPG officers support LKP’s view that developers have not been forthcoming in disclosing the number and location of new builds sold since 2005 with any of the following criteria:

1. where the ground rent doubles in multiples of less than 25 years
2. where the ground rent is more than 0.1% of the original property purchase price
3. where the ground rent may have risen to more than 0.1% of the current property value
4. where the starting or current ground rent is more than £250 for properties outside London or more than £1,000 in London.

APPG officers recommend that developers should be compelled to disclose the number and locations of new-build leasehold properties with onerous lease terms. The Select Committee might kindly assist the APPG in obtaining such information if it is not provided by developers following these submissions

Transparency and disclosure surrounding the locality of these properties is imperative to protect consumers.  APPG officers recommend all offers made by developers to leaseholders are recorded for monitoring purposes.

APPG officers commend Taylor Wimpey (“TW”) for initiating its “ground rent assistance scheme” yet wish to bring to the Select Committee’s attention that other developers who also sold ten year doubling ground rent leases are yet to follow TW’s lead.

APPG officers support LKP who remain sceptical about the TWs assistance scheme for reasons as follows:

1. Of the £130 million set aside in April 2017 the latest TW announcement, almost a year later, states that payments of only just over £11 million have been made.
2. TW have limited their offer to the original purchaser only. Where those properties have been sold to a second buyer, the people who purchased subsequently are now stuck with a property they may not be able to sell.
3. TW have only made offers to those leaseholders who have contacted TW.
4. We understand that a number of problems with the TW offer have emerged which may mean leaseholders are not able to accept terms of the offer.
5. We understand that TW requires the leaseholder to enter into some form of compromise agreement as part of any settlement. In normal circumstances this might be considered reasonable, however it may disadvantage the consumer should the government take further action.

The Select Committee might also kindly assist in obtaining proposals from other property developers on their proposed redress schemes and on disclosure of actual numbers and locations of all new build leases with doubling ground rent, sold.

Unlike a service charge, ground-rents are not a payment towards any kind of maintenance, upkeep or other services.  The ground-rent was historically only the consideration that enabled a contract to exist and was typically a “peppercorn” rent, which was in many cases not even collected.

Further questions APPG officers and/or the Select Committee may wish to put to developers might include:

i.   When did they begin to offer new homes on a leasehold rather than freehold basis and why

ii.  What is the justification for onerous ground rent clauses

iii. What were developers reporting to directors and to shareholders at the time about this additional revenue stream

iv. What is the extent of other ongoing charges that are attached to properties (as opposed to the lease)

v.  What kind of deals were struck with the new freeholders and why did they not first offer their customers the opportunity to buy on the same terms

vi.  Who are those freeholders and what is the value of their interests and how that compares with the purchase prices in each transaction

vii. Why were some buyers required or induced to use solicitors recommended by the developer

viii. How did the lenders and the lawyers miss the fact that these leases might render the homes unsellable

Where this has not been a condition of sale, there is evidence of purchasers feeling pressured to use a recommended solicitor, either through incentives being offered by the developer or by the imposition of arbitrary timescales to complete a transaction.

APPG officers are concern that the ongoing relationship between developers and recommended solicitors could potentially represent a conflict of interest, as in some cases firms were benefitting from hundreds of referrals each year. 

There is also evidence of developers promising purchasers that they would have ‘first refusal’ on the purchase of the freehold some even quoted an informal price. Instead they were later notified that their freehold had been sold on, without their consent, to a third party company.  The companies who purchase the freeholds generally refuse to sell them on to the tenant ‘informally,’ or quote an extremely excessive price. 

APPG officers would be grateful if the Committee could examine whether these relationships prejudiced the service provided to individual leaseholders.

4. Unfair Lease Terms

APPG officers propose that the Law Commission’s remit include a review of unfair lease terms in new, existing and historic residential leases. 

A Consumer can rely on UCTA which excludes certain contracts relating to property, yet a consumer of a leasehold property has no such legal redress yet, their purchase value is significantly higher than most purchases in a person’s lifetime.

APPG officers recommend these unfair terms fall within the scope of UCTA.

5. Overhaul of the Property Tribunal system

Initially the Property Tribunal was set up as a low cost vehicle to help leaseholders.  The First-tier of the Property Tribunal now regularly hears complex legal cases where barristers and occasionally QCs represent the parties, mostly landlords.

The overriding rules governing the First-tier Property Tribunal are to enable the Tribunal to deal with cases fairly and justly, yet there are no circumstances in which leaseholders are entitled to claim their costs, even if they win their case and/or suffered hardship as a result, yet conversely a majority of leases contain terms that allow the landlord to pass on its costs to the leaseholder, even if they lose, which is scandalous as leaseholders may have to pay significant legal costs in defending applications they consider unreasonable in the first instance.

A new costs structure needs to be implemented which balances out power between the parties to a claim.

APPG officers also have concerns about the varying levels of expertise of Tribunal Judges.

6. Lease extensions

APPG officers recommend that Government implement a methodology to help leaseholders seeking to extend their leases and suggests implementation of an imposed formula similar to that which is used in Northern Ireland and Scotland, whereby leaseholders can buy out the freehold for set multiple of annual ground rents.

The Ground Rents Act (NI) 2001 allows homeowners of long leases on residential property in Northern Ireland to buy out (redeem) their ground rent.   There are certain exceptions set out in Section 3 of the Act:

i)       a lease which has been extended under the Leasehold (Enlargement and Extension) Act (Northern Ireland) 1971

ii)     a lease with a residuary term of 50 years or less

iii)   an equity sharing lease

iv)   a lease of agricultural land

v)     a lease from the National Trust

vi)   a lease of a flat

vii) a lease where proceedings for recovery of possession are pending

7. Overhaul of leaseholder redress schemes

APPG officers support the view of Chief Ombudsman Lewis Shand Smith: “Redress in the housing sector is a really confusing picture for all involved. The patchwork of ADR and ombudsman schemes is a mystery to consumers and therefore is incredibly difficult for them to navigate’

We also supporting the former Secretary of State for Housing, the Rt Hon Sajid Javid MP on the need for a single ombudsman for housing to restore trust and ensure that consumers get a much better standard of service.

Heavier sanction need to be imposed and consideration be given for the creation of a ‘black list’ or similar instrument to identify those firms who fail or are unwilling to comply in their duty of care to consumers.

Currently an organisation can sign up to an ombudsman scheme, breach its rules, get struck off with no redress then join another scheme.  The Ombudsman and similar schemes can exercise compliance, but are unable to Regulate firms.

Better regulation of the sector is needed.

The Competition Markets Authority, Which? and Trading Standards have found difficulty in reporting or investigating bad practice by property developers. This might be because developers fall outside current ombudsman schemes.

APPG officers recommend a review of ombudsman schemes and call for regulation that works to protect consumers and promotes integrity in the sector.

8. Forfeiture

The APPG knows there is considerable injustice as the result of the use of forfeiture in the residential leasehold sector. The Government have no specific data on the matter.

The APPG calls on Government to move forward with adopting the Law Commission’s long outstanding report on replacing residential forfeiture entitled “Termination of tenancies for tenant default” and that in bringing forward the Law Commission report the government considers how the use of the forced sale applies in commonhold regimes around the world and looks to consider if the Law Commission’s wording might be adopted to any future review of commonhold in England.

APPG officers strongly recommend this major problem be addressed

9. Park Homes

Park homes suffer similar issues to leasehold properties, including inflated service charges and poor maintenance and lack of regulation. 

The APPG is aware of a number of inadequacies in Park Homes legislation and have received a vast number of submissions from both local authorities and leaseholders, particularly surrounding the excessive cost of extending pitch agreements.

There is also concern about the number of holiday parks being changed-over to permanent residential parks without the protection of the Mobile Homes Act as they are without proper licences. Residents on those parks could be charged up to 15% commission should they decide or have to sell their homes.

APPG officers call for a stringent review of the Mobile Homes Act so as to eradicate the problems faced by park home residents.

10. Enfranchisement

While APPG officers welcome the Law Commission’s current review of enfranchisement and looking at ways to make the current process simpler and cheaper, the new proposals do not provide assistance for those who do not want to enfranchise, who cannot afford to enfranchise, or who cannot afford to enfranchise under any new legislation.

Any redress for consumers should include the removal of onerous ground rent lease terms from present leases which could be easily be addressed by a deed of variation.

11. Recognised Tenants Associations

APPG officers are concerned that the new regulations under the Housing and Planning Bill 2016 are still to be implemented as well as regulations under section 29 of the Landlord and Tenant Act 1985. Such unnecessary delays is not in the best interest of leaseholders.

•                               Q. 2 What support and government intervention can be provided to existing leaseholders, in both houses and flats, affected by onerous leasehold terms:
•                                

As mentioned above, a review of enfranchisement offers leaseholders some assistance.  Greater flexibility on proposed reform needs to be looked into.

Leaseholders who find themselves caught in the onerous lease terms trap should be compensated sufficiently so they are placed in the position they would have been in but for the onerous lease clause. Without Government intervention APPG officers believe properties blighted with these terms, their values will continue to decline.

There are a number of issues with the TW scheme and it is unclear if anything has been offered on a voluntary basis by other developers.  What is clear is TWs self-policing model has failed to adequately address this issue and APPG officers support Government action to this end.

TW have not offered any compensation to those leaseholder who purchased pre-owned properties, nor are they seeking to offer leaseholders due compensation unless they contact TW in the first instance.

APPG officers are concerned that of the £130 million set aside in April 2017 the latest TW announcement, almost one year later, states that payments of just over £11 million have been made and asks what is the cause of the delay to compensate leaseholders.

While any support offered for leaseholders to access redress would be welcome; current routes of redress are inadequate and are heavily in favour of developers.

APPG officers lends support for a review into a new statutory framework for redress.

While attention has been focussed on developer-led voluntary systems to mitigate the impact of ten year doubling ground rent leases, including TW’s “Ground Rent Assistance Scheme,” there has been no evaluation of the extent or effectiveness of such schemes. 

APPG officers believe the potential benefit to the leaseholders in removing these onerous lease terms will ensure they have a home that has the chance of increasing in value and which may be easier to sell. It should be remembered that these leaseholders were often advised by solicitors recommended by the developer when they took on their onerous leases. There could never have been any way for the first time buyer to understand the complexities of the leasehold system. Both the valuers and conveyancers must have known of the potential problem and the select committee may wish to ask about the influence the developer has on this part of the market.

If it is accepted that the onerous terms in many leases were unfair enough to warrant a ban on all leasehold houses being sold in future, then those terms ought to be deemed unfair and a legislative process initiated to compensate leaseholders. 

As highlighted by LKP major developers have been involved in a number of unacceptable practices, but have faced no action from the existing regulatory framework.  For example, during certain periods of time, there is evidence of developers selling properties subject to the use of solicitors or mortgage brokers recommended from a panel. 

Q. 3 What are the implications of providing such support and government intervention to these existing leaseholders

APPG officers concur with LKP that there are many argument put forward by the supply side of the sector which claim that removing onerous lease terms will somehow unfairly prejudice their business, they do not accept the arguments which seek to justify these onerous lease terms.

Conversely, the potential benefit to leaseholders in removing these onerous lease terms will ensure they have a home that has the chance of increasing in value which may be easier to sell.

Many of these freeholders use new valuation models to inflate the value of these assets. Shortly after the freehold purchase the asset valuation doubles in the first year of ownership.

It remains unclear to APPG officers and to LKP why so many of these supposedly ethical freeholders operate through off shore opaque ownership structures and ask for the Select Committee’s assistance in exploring this problem further. A large number of owners of these freeholders assert that they own their freeholds on behalf of pension funds and that ordinary pensioners will be the ones who suffer. The Tchenguiz Family Trust which claim to own 1% of all residential freehold titles in England and Wales is based in the British Virgin Islands.

The ground rent scandal has been widely referred to as the “PPI of the housing sector” and we see clear parallels between both. 

As it is accepted by Government that doubling ground-rent leases are onerous and unfair, the leaseholders should not be burdened with additional costs in taking action to rectify the situation?  Why can the sector not be compelled to pay for rectifying the problems that they created, as in the case of PPI?

We have seen no clear evidence of the difficulties a change in regulations would have on the freehold side of the sector. Much like any other market they must have considered that the market in freehold valuations would go down as well as up.

There are separate but serious issues being described as ‘a charity loophole’ which is being faced by a number of National Trust leaseholders and other charity leaseholders, who have so far been left out of much of the debate and proposals for reform.  APPG officers would welcome a separate focus from the Select Committee on this issue, which has thus far been ignored by Government.

Submissions on leasehold law reform by Law Commissioner Nicholas Hopkins

APPG officers fully endorse the submissions made by Law Commissioner Nicholas Hopkins on leasehold law reform.

Link to the Commissioner’s submissions:

https://www.leaseholdknowledge.com/law-commissioner-nicholas-hopkins-hopes-his-work-prompts-complete-reform-of-leasehold

Disclaimer:  This is not an official publication of the House of Commons or the House of Lords. It has not been approved by either House or its committees. All-Party Parliamentary Groups are informal groups of Members of both Houses with a common interest in particular issues.  The views expressed in this paper are those of the Group officers and its secretariat, the charity Leasehold Knowledge Partnership.