Freehold Estate Management Fees

Helen Morgan Excerpts

Thursday 13th July 2023 Westminster Hall

[Helen Morgan (North Shropshire) (LD)]

I beg to move,

That this House has considered freehold estate management fees.

It is a great pleasure to serve with you in the Chair this afternoon, Dr Huq. I am grateful to the Backbench Business Committee for granting this debate and also to the 14 MPs from across the House who enthusiastically wrote to me to support it. I suspect that the fact that they are, unfortunately, not all here is a function of its taking place on a Thursday afternoon. Like me, they have been contacted by constituents whose lives have been blighted by the often scandalous reality of unfair, unregulated estate management fees, and feel obliged to call on the Government to legislate robustly to correct this.

I will begin by outlining the crux of the problem for many freeholders in the UK who are trapped by such arrangements. It is becoming increasingly common in new housing developments for the shared areas that are built to remain unadopted by the local council. Instead, a management company takes responsibility for the shared areas outside the bricks and mortar of the owners’ homes, and the freeholders are required by law to pay annual charges for the upkeep of those areas. That could include anything, from the maintenance of garden areas to roads and footpaths. As I will come on to later in my speech, it can even include the sewerage connections of the properties in the development. Sometimes, the freeholders will also be the joint owners of the shared areas.

The commercial substance of these arrangements is that the freeholders sign up to a leasehold agreement, even if the legal form gives it a different name. It is in the nature of these agreements that the problems begin. A common practice, I found, is for brochures and contracts, or sales staff to refer to estate management charges as

“a small annual charge for grass-cutting or for the upkeep of the play area.”

In some cases, that description of the charges could not be further from the truth.

[Justin Madders (Ellesmere Port and Neston) (Lab)]

I have been pursuing this matter for some time. Indeed, I have described it as the new payment protection insurance, or PPI, because there are so many people who have been signed up to things that they did not know about. The similarities between that and the leasehold scandal are all too familiar. Does the hon. Member feel that there needs to be far greater candour and transparency from developers when they sell their properties?

[Helen Morgan]

I thank the hon. Member for his intervention and I agree with him; that is one part of the solution to this problem.

From day one, homebuyers are being fleeced by the developer, given the reality of the charges they will face, and unfortunately, because they are often first-time buyers, they do not have the experience or knowledge to delve deeper into the charges during the conveyancing process.

These charges are usually uncapped and unregulated, with no means of redress for the buyer, which can be the beginning of a spiral of problems that freeholders in this position face. A common arrangement is that the management company is a zero-profit company that simply passes the cost of maintenance work to the freeholders. However, this work is subcontracted to a profit-making company; and I am sure it will come as no surprise to hear that, in these arrangements, the subcontractor is often connected to the original developer and makes exorbitant profits. The subcontractor does that by ensuring that the cost of the maintenance work is extortionate. To add insult to injury, although the freeholders are paying for the upkeep of the communal area, or the public area, or the roads, or the street lights, they do not receive a reduction in their council tax.

A stakeholder from the Cambridge Centre for Housing And Planning Research said in an interview that the reason why the number of freehold estates with estate rent charge requirements is increasing is that local authorities are not keen to adopt all communal areas and roads on estates. But in actual fact, local authorities are being incentivised to encourage these arrangements, because they raise council tax revenue without incurring any maintenance costs.

I will provide a few examples from my constituency to demonstrate the harm that these arrangements can cause when they have not been established in good faith. I have spoken on many occasions about the Brambles development in Whitchurch in my constituency, and I will mention it again today, because the circumstances are so appalling, and I believe they could and should have been avoided. The Brambles is a development of 14 houses built in 2016 by the developer Sherwood Homes Ltd, on land for which Shropshire Council had already granted planning permission for development. It was a condition of the planning permission that the road, footpath and drainage would all be complete before the houses were occupied. Unfortunately, despite that agreement, these elements were never fully completed, but building completion certificates were issued for the properties and they were subsequently sold and inhabited.

Once a number of the houses had been occupied, the drainage system failed, which led on some days to raw sewage backing up in residents’ gardens. Sherwood Homes Ltd had not taken out the section 104 agreement required in the planning permission, and not only was the arrangement dysfunctional, but the connection to the Welsh Water sewage network was illegal. In addition, neither the road lighting nor footpath was completed.

In December 2019, Sherwood Homes Ltd went bust, and Shropshire Council could not take planning enforcement action against the company. The residents of the Brambles, who were the successors in title to the private company that was established to manage the development, had been the subject of the enforcement process. The truly shocking reality is that they have been required to accept five-figure charges on their properties to rectify the £1 million issue of connecting the drainage to Welsh Water’s network. It is also worth noting that the saga has cost the rest of Shropshire’s taxpayers a considerable amount, because council officers have expended time and effort in attempting to rectify the situation.

Had the residents not been the owners of the shared areas, they would not have been liable. Perhaps if Shropshire Council had been expecting to bear the full costs of the clear-up, it would have taken out an injunction to prevent the final homes from being sold and occupied until the drainage was rectified, or indeed ensured that, in the first place, financial bonds had been in place under the section 104 agreements and the section 106 agreement for the drainage in the road.

That is the worst example, but it is not the only one that has come to my attention. Other cases from my constituency include a developer that is charging residents extortionate fees for the maintenance of a shared ground source heat pump, but has kept the Government’s renewable heat incentive by putting it in a private company. The developer runs the management company and has failed to hold an annual general meeting or provide detailed accounts for the residents.

In another example, there appears to be a total disregard of the Companies Act 2006. In this instance, once again the drainage and road are not at an acceptable standard, and the developer claims the management company is dormant, despite having contracted limited maintenance work to a third party. It has not held an AGM, and there is no opportunity for the homeowners to challenge the arrangement. The developer ignores all correspondence, and the homeowners do not have the resources to take him to court.

The problem is not unique to North Shropshire but impacts people across the UK. Indeed, since being granted this debate, I have been contacted by freeholders from across the country who have explained that they are being fleeced by management companies, having initially been told that they would simply have to pay for the upkeep of the grass. These people find themselves in an inescapable position. For many, there is no use turning to their original conveyancing solicitor for assistance, because that solicitor was recommended to them by the developer, which offered a discount if they used that solicitor. In addition, as I have mentioned, many homeowners are first-time buyers, and starting legal proceedings retrospectively is simply out of the question on a cost basis. As a result, freeholders are left with nowhere to turn, paying extortionate fees and with their dreams of a new home shattered.

It is important to note that the cost to the resident is not only financial. A support group called HorNet has explained to me that, on top of the burden of paying the fees, homeowners often come into dispute with other members of the public, who may abuse or damage the very infrastructure, such as the play equipment, that the homeowners are paying such huge annual fees to upkeep.

[Justin Madders]

The hon. Lady raises an interesting point. Constituents have told me that people who walk their dogs on the land for which they are paying an estate management charge should not be allowed to do so, because those people have come from another estate, where they are not paying the charge. This whole model is set up to be divisive and turn communities against each other, is it not?

[Helen Morgan]

The hon. Gentleman is exactly right, and that also raises questions of liability. HorNet describes one example in which it asked the local authority to comment on whether the local authority or the freeholders would be liable if a member of the public was injured on land maintained by the freeholders—for example, by falling off the play equipment used by the public. The council responded that it did not know. There is therefore an additional level of stress for these freeholders, as well as the potentially divisive elements that the hon. Gentleman raises.

As they stand, the agreements are a bit of a legislative desert, and they are a source of incredible stress and risk for residents. Frankly, they are a bit of a money-printing machine for unscrupulous developers that seek to exploit homebuyers. What is frustrating is that the Government have on numerous occasions considered that this area of legislation desperately needs reform, yet we have made no progress to protect freeholders from the situation.

In 2017, the Government launched a consultation to tackle unfair practices in the leasehold market and promised to legislate to ensure that freeholders would be able to access rights equivalent to leaseholders’ to challenge the reasonableness of such charges. In 2018 they launched another consultation, “Implementing reforms to the leasehold system in England”, which promised that the consultation requirements and obligations of the provider of services must be provided also to freeholders and that freeholders would have the ability to challenge the reasonableness of the payments at a first-tier tribunal.

In 2019 came the Government’s second report, “Implementing reforms to the leasehold system in England”, promising equal rights for leaseholders and freeholders when it came to challenging management fees. Those consultations and reports have been encouraging. Some 76% of those asked in 2019 agreed that freeholders should have the right to challenge such fees, but we have seen no progress at all in the legislation.

It is the responsibility of the Government to honour their promises made in 2017, 2018 and 2019. In March this year, when responding to a parliamentary question from the right hon. Member for Elmet and Rothwell (Alec Shelbrooke), the Secretary of State promised to legislate on this issue “when parliamentary time allows”.

I do not think I need to make it any clearer to the Minister that the delay in legislating is directly affecting people stuck in freehold arrangements. It is unnerving to think about how much money they have been forced to pay to scandalous management companies because of those delays. From where we are today there is no end in sight for them. They are chained to these agreements. They cannot dispute the payments legally, nor sell their homes. They are truly trapped.

We have been promised by the Secretary of State that the leasehold reform Bill will be introduced after the King’s Speech. There remains an opportunity to ease the situation, as the Levelling-up and Regeneration Bill passes through the other place. Could local authorities be encouraged to ensure that there is a plan for the adoption of roads, street lights and play areas, and that either section 106 or community infrastructure levy moneys are obtained from developers to ensure that they can be upkept in the future?

Could local authorities be given clear guidance to outline where a shared management company may not be a suitable solution; how planning conditions can be used to ensure that suitable financial bonds are in place for the adoption of drainage and roads and pavements; and how injunctions should be used where a significant failure emerges on a development, such as in the case of the Brambles, which I have outlined? Will the Government bring pressure to bear on the legal sector to ensure that there is no conflict of interest when a homeowner buys a house, and outlaw sweeteners promoting the use of a connected conveyancer?

When the leasehold reform Bill is introduced, will cost-effective legal remedies be made available to homeowners already trapped in these arrangements? For example, can they be released from their obligations if annual general meetings are not held, detailed accounts not laid or competitive quotes not obtained for maintenance work? Or could those arrangements be outlawed altogether?

I know the Government are keen to resolve the issue, so I look forward to hearing the Minister’s response. I very much hope she will commit to working with MPs from across the House to ensure that our concerns are fully addressed in the leasehold reform Bill.

--- Later in debate ---

[The Minister of State, Department for Levelling Up, Housing and Communities (Rachel Maclean)]

It is a great pleasure to respond to this debate and to serve under your chairmanship, Dr Huq.

I start by thanking the hon. Member for North Shropshire (Helen Morgan) for securing this debate on an issue that she feels passionately about. Indeed, many of us feel passionately about it, and it is a testament to the persistence and determination of many colleagues in the House that we are again debating this vital issue.

As the hon. Member did during the recent Opposition day debate, she brought to the House’s attention powerful examples from her area; I think that it is particularly on the Brambles estate in Whitchurch where the current system is not working for homeowners. I am hugely frustrated at the situation that those homeowners find themselves in.

I thank my hon. Friends the Members for North East Bedfordshire (Richard Fuller) and for Buckingham (Greg Smith) for the discussions we have had about this issue and for the attention to detail they have brought to our process of scrutinising and preparing the legislation that we very much hope to introduce soon. I will come on to that shortly.

The Opposition Front-Bench spokesperson, the hon. Member for Greenwich and Woolwich (Matthew Pennycook), correctly highlighted the cross-party support on this issue. He has been supportive and constructive in his tone, both today and other occasions. I welcome that, because it makes the case for all of us to pursue the legislation and to ensure that it is brought to the House swiftly.

There was a broad consensus on the need for change. Let me use this opportunity to assure Members that fairness remains at the heart of our ambition for the housing market. We all know that we need to drive up housing supply so that we have the homes that the country needs, but while doing that, we need to ensure that buyers are getting high-quality and safe housing on modern, beautiful estates—if that is what is being built—that they can enjoy for years to come. Unfortunately, too many homeowners who bought their properties in good faith have not had their expectations met.

In the past, as Members have highlighted, it was typical for councils to adopt local infrastructure and shared spaces, but the system has changed in recent years. I recognise that on more and more estates, it is common for the shared spaces to be owned and managed by another party. The ownership of the land varies between developments. On some estates, it is owned and managed by a resident-led management company, often with the support of a managing agent, which provides expertise and services to the residents in the running of the estate. On other estates, the land is owned and managed by private management companies. Some have connections to the original developers; others are third-party companies.

It is often not down to the homeowners themselves to decide which type of management arrangement is in place on the estate. Commonly, that is set by the developer before any of the houses are sold. Either way, as has been pointed out, homeowners on these estates must pay a charge to cover the upkeep of open green spaces, roads, sewerage, drainage and other shared infrastructure, such as balancing ponds and play areas, which have been highlighted. In such circumstances, we must ensure that homeowners get a fair deal and do not end up in a vulnerable position as a result of these arrangements.

My hon. Friend the Member for Buckingham and the hon. Member for North Shropshire called for local authorities to be compelled to adopt all communal facilities on a new estate. It is worth pausing to consider why that does not happen at the moment. Our current planning arrangements exist to support new developments. When a new development is granted planning permission, the local authority can obtain section 106 planning obligations to secure a commitment from the developer. That means that the local authority does not have to adopt and maintain the land at its own expense. Local authorities no doubt take such financial considerations into account when they make these decisions, but it is up to developers and the local planning authority to agree on specific issues such as timescales for development and appropriate funding arrangements, and it is clear to me that, in a lot of cases that have been brought to our attention, that process is breaking down.

The local authority has powers to ensure that the developer builds and maintains communal facilities to the standards and quality set out in the planning permission. It is worth noting that the maintenance of communal areas, and of roads in particular, can be a significant financial burden. This is why it is right that the decision about adoption should rest with the local authority. The Department for Transport has recently issued guidance on the circumstances in which local authorities should be adopting roads. Again, I note that this can be a fraught area in some situations; I have seen that from my correspondence.

We need transparency. We need a system that consistently delivers clarity to potential purchasers and arms them with information about the arrangements for the maintenance of shared spaces on private estates. That information should be set out as part of the conveyancing process. Many already use the freehold management enquiries form, the FME1, published by the Law Society. I know that the form is used widely across the sector, but I have heard that for some buyers the information was not provided, or perhaps not drawn to their attention, at the point of purchase. That may have been the experience of some of the constituents my hon. Friends and colleagues have spoken about.

If a homeowner is unhappy with the service that they received from their conveyancer or solicitor, and the internal complaints process cannot resolve the issue, the legal ombudsman may be able to help. That needs to happen within six months of the homeowner’s final response from their conveyancer or solicitor. My hon. Friend the Member for North East Bedfordshire highlighted the issues with buying and selling homes, the process for which in England and Wales can be expensive, time-consuming and stressful. For that reason, we committed to improving the process in the levelling-up White Paper.

We have committed to work with industry to ensure that potential buyers have access to the critical information that they need in an accurate and timely format. That will help them to make an informed decision about whether to purchase a property, reducing the likelihood of the sale falling through. Some of that work is already taking place, but the Government are committed to continuing to create a fair and just housing system for everybody.

Too often, once a homeowner has moved into their home, they are asked to pay charges without an effective breakdown of what they cover. This is a matter of basic fairness and justice. Homeowners deserve to know what they are paying for on their estate. As with leaseholders, a lack of transparency, both at the homebuying stage and when people are settled in their property, leaves homeowners in an unfair and often vulnerable position.

[Helen Morgan]

That is the crux of the matter. If rogue management companies acting in bad faith do not provide that information and do not have an AGM, there is no remedy for homeowners to challenge what they are up to, or to take control of the situation. If those basic Companies Act requirements are not being fulfilled, could there be some legislative remedy for homeowners that does not involve them incurring the enormous expense of going to court? For example, could they take on the management of the company if basic Companies Act requirements are not complied with?

[Rachel Maclean]

I thank the hon. Member again for reminding us of this issue. I hope that she will bear with me, as I am coming on to our intended legislative remedy, through which we intend to drive up transparency for homeowners. Better transparency will help people to be better informed about buying a home on a managed estate and empower them to question or challenge the charges when they are billed. Alongside that, they must have better rights to challenge, as the hon. Member just said.

Freeholders on managed estates are currently at a disadvantage compared even with leaseholders, for whom the system is not perfect by a long way, regarding their ability to challenge costs and poor service. Leaseholders already have certain protections and rights that enable them to hold landlords and management companies to account, yet freehold homeowners have no such equivalent, although they may be paying for very similar services. The situation is clearly unfair, and we are committed to introducing legislation to plug the gap.

Let me come on to what we intend to do, which I am sure Members are keen to hear. We intend to create a new statutory regime for freehold homeowners based on the rights that leaseholders have. We will give homeowners the right to challenge the reasonableness of the estate management charges at the first-tier tribunal, and the right to change the provider of management services by applying to the tribunal to appoint a new manager. That will be an important power when a homeowner is unhappy with the service that they are receiving and there is a significant failure by the estate management provider in meeting its obligations.

The hon. Member for North Shropshire mentioned existing homeowner rights, which will depend on the ownership of the land and the terms of the transfer. People should seek independent advice on the options available to them. For example, if a management company is not complying with its obligations, homeowners may be able to use contract law and make an application to the county court for an injunction for specific performance. That will require the management company to comply with its obligations.

Resident-led management companies are independent companies to which residents are appointed as directors. Sometimes the articles of association, which set out how the company will run, will specify that homeowners are automatically part of the company and so can vote at the AGM. Homeowners may also be able to call extraordinary general meetings, and they can apply for an injunction for specific performance if the company is not complying with the articles of association of any management agreement. But we know we must do more, which is why we will consider introducing a right to manage for freehold homeowners. That will follow from our consideration of the Law Commission’s report and recommendations on changes to the right to manage for leaseholders.

It is not only estate management charges that need to be reasonable. As I mentioned in last week’s Westminster Hall debate, the principle must also apply to the administration fees that individual homeowners may face in their dealings with estate management companies. Therefore, we will legislate to require that all administration charges must be reasonable, which will mean that they may be challenged at the first-tier tribunal.

I want briefly to mention the Competition and Markets Authority’s house building market study.

--- Later in debate ---

[Helen Morgan]

I thank the Minister and the shadow Minister, the hon. Member for Greenwich and Woolwich (Matthew Pennycook), for their comments, and I thank the hon. Members for North East Bedfordshire (Richard Fuller) and for Buckingham (Greg Smith) for coming along for the graveyard shift on a Thursday afternoon. I also thank you, Dr Huq, for chairing the debate.

The Minister’s comments are welcome. I am particularly pleased to hear that freeholders will be given equivalent rights to leaseholders to go to the first-tier tribunal. She has heard today, as I am sure she has in other debates on the subject, that for the people who are trapped in these situations, what should have been their dream purchase—a new build home that comes ready-made, without the need for renovation or extensive work—and something they hoped would be simple has turned into a nightmare. We really cannot have legislation soon enough.

The hon. Member for Buckingham made a really good point about what should be considered standard shared areas that should be adopted by the council, and what might be considered over and above and normally subject to the arrangements we have been discussing. I agree with him and urge the Minister to consider making it mandatory for councils to adopt the things we consider to be standard—the roads, pavements and streetlights, for example. The hon. Member for North East Bedfordshire made some good, practical comments on transparency, which I certainly support. I urge the Minister to take those on board too, and to bring legislation forward as soon as possible.

Question put and agreed to.

Resolved,

That this House has considered freehold estate management fees.