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Social Housing Speed Read – Select Committee report on leasehold reform

In this week's Speed Read, we discuss the findings of the report by the House of Commons Housing, Communities and Local Government Select Committee ("the Committee") on its inquiry into leasehold reform.

The Committee initiated the inquiry in July 2018 in order to examine the progress made by the Government following its consultation on leasehold reform from December 2017, addressing a number of issues primarily involving leasehold property ownership.

The appetite for reform, and the subsequent inquiry, was sparked in large part by revelations surrounding onerous terms imposed by developers on buyers of new-build leasehold property, in particular in relation to ground rent that was either set at or grew to unsustainable levels which affected the value of the property, and in extreme cases rendered the property unsellable.

The inquiry

The focus of the inquiry was initially the concerns surrounding leasehold houses, which the Committee believed is an inappropriate form of property ownership for houses, but it became apparent that many of the issues were faced by owners of leasehold property in general.

These issues include high service charges and a lack of transparency in relation to what the charges are for; unfair permission charges levied by landlords when tenants requested permission to carry out works to their property; buyers of leasehold property having insufficient knowledge of what leasehold tenure is and how it differs from freehold, leading to accusations of mis-selling by developers; and unreasonable costs of enfranchisement or obtaining lease extensions.

The Committee received over 700 responses to its inquiry, many of which were from individual leaseholders, reaching the conclusion that the Government must go even further on leasehold reform than it has already proposed. The inquiry found that in many cases leasehold was being used not as a way to effectively manage shared buildings or common areas, but was primarily a “means of providing steady income for developers, freeholders or managing agents” who did not act in the best interests of the leaseholders whom they represented.

The Committee’s recommendations

In its report in response to the inquiry, the Committee made a number of recommendations. Some of the key recommendations are as follows:

  • That the Government should ensure that commonhold becomes the primary model of ownership of flats in England and Wales. While it is accepted that some form of leasehold may be required for certain types of property, such as complex mixed-use developments and for retirement properties, there is no reason why the majority of residential buildings could not be held in commonhold.
  • 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, and which should very clearly outline the tenure of a property, the length of any lease, any ground rent or permission fees, and — where appropriate — a price at which the developer is willing to sell the freehold within six months.
  • The Government should prohibit the offering of financial incentives to persuade a customer to use a particular solicitor.
  • That a ground rent is onerous if it becomes disproportionate to the value of a home, such that it materially affects a leaseholder’s ability to sell their property or obtain a mortgage. Consequently, existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year. They should not increase above £250 over time, by RPI or any other mechanism.
  • The Government should revert to its original plan and require ground rents on newly established leases to be set at a peppercorn.
  • The Government should introduce legislation to restrict onerous permission fees in existing leases; and that permission fees are only ever included in the deeds of freehold properties where they are reasonable and absolutely necessary, although the inquiry saw no situation where this would be the case.
  • The Competition and Markets Authority should indicate its view as to whether onerous leasehold terms constitute ‘unfair terms’ and would be, therefore, unenforceable.
  • The Government should require the use of a standardised form for the invoicing of service charges, which clearly identifies the individual parts that make up the overall charge.
  • The Government should create a code of practice for local authorities and housing associations outlining their responsibilities to leaseholders and offering guidance on best practice in major works.

Please refer to the full report or the report summary for full details of the Committee’s recommendations.

The impact on Social Housing

The Committee’s report has been welcomed by a number of parties, from the Home Owners Alliance to MPs, but not all have been in favour of its recommendations. Matthew Jupp, principal of mortgages policy at UK Finance, has stated that “the reason for [many of the problems encountered by leaseholders] is that there are some very poor leasehold terms out there” and that “the focus should be on rectifying those” rather than a complete overhaul of the leasehold system.

All developers and freeholders would feel the effects of the proposed reforms, should they be brought into place. In most cases housebuilders will have purchased land on the assumption of being able to sell the freehold once the development is complete and will have factored this revenue into their viability calculations.

As a result, Bill Procter, chief executive of Consensus Business Group’s residential division, believes the mooted restrictions on ground rents will mean that “freeholds will be of no interest to investors . . . and developers’ existing business models will have to be adjusted, potentially leading to higher prices for homebuyers”, while the Home Builders Federation has said that it is important to make sure the changes “don’t threaten viability and as a result, supply” of homes.

This is a particular worry as a reduction in income for housebuilders will lead to social housing becoming less viable, while it could be an issue for local authority providers who have taken ground rent income into account when reviewing the viability of a proposed development, as reductions in ground rent could result in a lower affordable housing requirement.

There is also an issue for providers of shared ownership housing which currently relies on leasehold, a point made by the National Housing Federation as part of the Committee’s inquiry. The NHF believes that exemptions should be made for “shared ownership housing, Community Land Trusts, and other cases where leases are essential”.

The recommended code of practice for local authorities and housing associations will be anticipated by social housing providers, with the hope that further guidance will assist in ensuring that legal obligations are met and reducing the potential for successful legal action by tenants, provided the code is complied with.

Whatever happens, according to Jules Birch of Inside Housing, “the after-effects of a scandal that began with…a few major house builders will be felt across the housing sector.”

We will continue to provide updates in relation to the Government’s response to the Committee’s report as and when these are released.

If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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