Leasehold System Needs Reform, says House of Commons Committee

The Housing, Communities and Local Government Committee has made suggestions to the government about how best to change the much maligned leasehold system to combat a rising wave of anger at expensive and unnecessary service costs, onerous ground rents and ‘toxic leases’.

The Committee met with 50 leasehold owners to discuss various concerns that affect leasehold owners and ask what they would like to see the government do to rectify these issues. The response was unanimous. They wanted an end to the entire leasehold system. Its unlikely that Parliament would approve such a radical shake-up but the report has indicated that the vast number of issues could be addressed by switching to a Commonhold system where each of the leaseholders owns a share in the freehold of the property doing away for the need of a lengthy enfranchisement process under the current system. ​

_{‘Surprising’ feedback from leasehold owners}

One of the surprising elements of the report was the discovery that many buyers felt they had been ‘mis-sold’ their property as a ‘leasehold owner’. A leasehold is actually a wasting asset (diminishing in value over time) and the term ‘ownership’ implied a finality that they realised they did not have after purchase. Instead they informed the committee that all leasehold property sales should scrap reference to ‘home-ownership’ and instead replace this with a ‘right to live’ as this more accurately represented their position.

In response Long Harbour, representing the Freeholders in the discussion, stated that “A responsible freeholder plays a valuable role in protecting consumers by ensuring properties are maintained in the long-term interest of residents, managed in a professional and efficient manner and resolving not only critical issues such as fire safety but also ensuring peace and harmony within a residential dwelling block”. Ironically fire safety has been a bone of contention for many leaseholders following the events of Grenfell and the discovery of the number of properties that will need works to remove the cladding. Consensus Business Group told the committee they believed it was “reasonable that leaseholders rather than the freeholder should pay for the remediation works” and that the price paid for freeholds was on the understanding that the costs of remedial work were borne by leaseholders. A position that the leaseholders, and the government, disagree with.

The committee discovered that there were vast differences in how each believed leaseholders felt about the current situation. Long harbour claimed they had received complaints from just 0.07% of their leaseholders in the past year but the leaseholders pointed to a 2016 online survey of over 1,200 leaseholders conducted by the Leasehold Advisory Service (LEASE) that found that 57% of leaseholders who responded said they regretted buying a leasehold property.

_{​ Suggested changes to existing leasehold system}

It would appear that the Committee has sided with Leaseholders in the dispute and has advised the government to consider the following changes to the current system;

• 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 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 to avoid this information being ignored or ‘misrepresented’ by selling parties
• The Government needs to ensure that Commonhold becomes the primary model of ownership of flats in England and Wales

The Committee Chair, Clive Betts MP concluded “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. 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.”

_{The next stage} 

The Government has two months to respond to the report and set out its preferred route to try and address the concerns raised in the report.

Richard Collins is a Residential Property solicitor at Pinney Talfourd and will be watching the progress and keeping you informed as the situation develops, as we are sure leaseholders, landlords and prospective buyers alike will be keen to see the governments decision.

_{More information}

One of the proposed reforms is the adoption of a Commonhold system. If you would like to read more about this form of ownership please click here to read our Legal Hub article, written by Stephen Eccles, a Partner and Head of Property Litigation.

This article was written by Richard Collins, Solicitor​ at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of April 2019.​