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Housing committee calls for leasehold reform

The Housing, Communities and Local Government Committee has published a report calling for wide ranging reforms to the leasehold system in the UK following allegations of misselling.

The report, which was published yesterday, states that leaseholders have been treated as a source of “steady profit” by developers and freeholders, rather than as homeowners or consumers, and calls on the government to establish commonhold as the primary model of ownership of flats in England and Wales. 

According to the report, which calls on for the Competition and Markets Authority to investigate mis-selling in the sector and make recommendations for appropriate compensation, it would be legally possible for the government to introduce legislation to remove onerous ground rents in existing leases.

It said that existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year.

Clive Betts MP, chair of the committee, commented: “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.

“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 report makes the following recommendations to government: 

+ There is no reason why the majority of residential buildings could not be held in commonhold; the Government should establish commonhold as the primary model of ownership of flats. 

+ Due to “serious cross-market failure of oversight of sales practices”, the Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for compensation. 

+ Developers should be prohibited from offering financial incentives to persuade customers to use a particular solicitor 

+ Some leading developers have in the past sought to use their market dominance to exploit their customers by the imposition of onerous ground rents. Ground rents should be limited to 0.1% of a property’s value, and never higher than £250 or linked to the rate of inflation (RPI). 

+ Ground rents on newly established leases to be set at a peppercorn (i.e. zero financial value). 

+ Many examples of permission fees are excessive and exploitative, and the Government should introduce legislation to restrict onerous permission fees in existing leases. 

+ The government must legislate to require that freeholders’ tribunal costs can never be recovered through the service charge, or any other means, when the leaseholder has won the case. 

+ The Law Commission should recommend a process that will make enfranchisement substantially cheaper, even if that represents a transfer of power from freeholders to leaseholders.  

+ The term leasehold should be changed to “lease-rental”, which is a far better reflection of what consumers are actually buying into when the purchase a lease on a residential property. 

Leasehold reform campaigner Louie Burns, managing director of enfranchisement specialists the Leasehold Group of companies, said: “This report is welcome news indeed, as it proposes numerous recommendations that will improve the circumstances of leaseholders affected by the profound failures in the leasehold market.  

“For years we have been calling for reforms that will limit ground rents, tackle unfair service charges and permission fees, outlaw the sale of leasehold houses and the mis-selling of leasehold properties, and address the systemic imbalances of power that have favoured freeholders’ interests for far too long.  

“Freeholders have been arguing that their human rights will be affected if their contractual income streams are reduced. It is particularly encouraging that the select committee has supported leaseholders’ human rights to pay a lower premium to enfranchise and called on Government to remove onerous terms from existing leases.” 

Burns points out that the report also calls on the government to implement a new consultation process for leaseholders affected by major works in privately-owned buildings and recommends that a threshold of £10,000 per leaseholder should be established, above which works should only proceed with the consent of a majority of leaseholders in the building. 

She added: “The government has already acknowledged that the leasehold system is not working in consumers’ best interests. We urge the Government to look at the committee’s very sensible recommendations and enact legislation that will end the exploitation of leaseholders and create a system that works for consumers.” 

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