Freehold Estate Management Fees

Justin Madders 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.