Leasehold Reform

Justin Madders Excerpts

1st reading: House of Commons
Tuesday 7th November 2017 Commons Chamber

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

I beg to move,

That leave be given to bring in a Bill to make provision about the regulation of the purchase of freehold by leaseholders; to introduce a system for establishing the maximum charge for such freehold; to make provision about the award of legal costs in leasehold property tribunal cases; to establish a compensation scheme for cases where misleading particulars have led to certain leasehold agreements; and for connected purposes.

The working title of this Bill is the Leasehold Reform Bill, but it has been suggested to me that a better title might be the Leasehold Emancipation Bill. Although I welcome the Government’s recent consultation on ending unfair leasehold practices, and I urge Ministers to hold their nerve and end this outrageous practice, sadly there is little to suggest that the Government are going to address the ongoing situation of leaseholders, many of whom feel trapped in their homes.

I hope that the genuine cross-party support for this Bill will encourage the Government to facilitate its passage through Parliament, or at least to come up with a Bill of their own to deal with these proposals. On cross-party support, I would like to take this opportunity to pay tribute to the hon. Member for Worthing West (Sir Peter Bottomley) and my hon. Friend the Member for Poplar and Limehouse (Jim Fitzpatrick), who have been true champions of the leasehold community.

The principal aim of the Bill is to deliver a fair and simple mechanism to help tens of thousands of our constituents to escape from their current leasehold agreements. Before I set out how that will work in practice, I will briefly explain the background. Many of my constituents, and those of other hon. Members, have spoken about how they bought what they had thought were their dream homes on new housing developments, built by household names, more often than not in the last decade or so. Many, but not all, of the buyers knew that the property was being sold to them on a leasehold basis. Between the salespeople and the solicitors recommended to them by the developer, however, very few were fully aware of the finer detail of what they were signing up to.

Almost all were left with the impression that they would have first refusal on the freehold of the property and that it would be possible to purchase the freehold for a reasonable price. However, the figures that were quoted for the purchase of the freehold by the salespeople working for the developers bear little relation to the costs that people were quoted later on, because, shortly after they moved in, the freehold of their property was sold, without their knowledge or consent, to a third party that they had never heard of. In many cases, the freehold to their house was moved offshore, so that what they had thought was their home became, in fact, the property of a string of shady companies operating from a tax haven. Often, it is impossible to say who the ultimate beneficiary is.

Under the terms of the lease, to continue to live in their own home, the buyers are charged an annual ground rent, which, in some cases, doubles every 10 years, taking an initially modest sum of a few hundred pounds to an exorbitant annual fee of thousands of pounds within their lifetime. In some cases, that renders the property unsellable.

The ground rent, it should be pointed out, is separate from and in addition to a service or maintenance charge. Although the latter charges pay for something clearly definable, I have never been given a satisfactory answer by a developer as to exactly what ground rent pays for, other than to provide an additional cash cow for the builder and a revenue stream for the freeholder. The person living in the house gets absolutely nothing in return for their annual payments.

When those living in their leasehold home inquire whether the new freehold owner is willing to sell them the freehold of their home, they are often told no. Sometimes, they receive no response at all, and I have had to threaten freeholders with naming them on the Floor of the House just to elicit a response. Such responses are not consistent either: neighbours in almost identical houses in my constituency have been quoted wildly different prices to purchase their freeholds.

My hon. Friend the Member for Kingston upon Hull West and Hessle (Emma Hardy) has brought to my attention such a situation in her constituency. The company, Keepmoat, has asked many residents to pay huge additional sums to avoid their freeholds being sold to a private company. At the same time, others were told the freehold was unavailable, yet a lucky few were actually given theirs for free. Such an inconsistent and unfair approach would no longer be possible under the Bill.

When the leaseholder eventually receives the quote for purchasing the freehold, they are often quoted an astronomical sum and are told that it is non-negotiable. These quotes are always many times higher than any figure the developer’s sales staff have told them. The same has been true when residents of a block of flats have collectively sought to purchase their freehold and take responsibility for the shared areas themselves.

Instead of the simple purchase of the freehold for a set price that the developer led them to expect they could take advantage of, the leaseholder enters the convoluted and expensive process called enfranchisement. This is a process of incessant horse-trading, which at present exists to establish correct valuations and provides a lucrative market for surveyors and lawyers. The provisions of the lease often require the person wishing to buy the freehold to pay the freeholder’s costs in dealing with the application. We have the indefensible situation of people footing the bill for the costs of professionals, whose job is actually to maximise the amount of money they will take off those people.

The Bill’s first aim is to introduce a simple and fair scheme, with a clear and transparent statutory pricing model, and the amount for a leaseholder to purchase their freehold would be capped at no more than 10 times the annual ground rent. At the moment, leaseholders are often quoted costs of over 100 times the ground rent to purchase the freehold. We can change this: such a system already exists in many other countries, including Scotland and Northern Ireland, and I believe it is time that people in England and Wales had the same rights.

Such a system would involve a simple formula for calculating the value of the freehold, based on the ground rent and the number of years left on the lease, with a cap on the maximum payable. This would be set out in statute so that everybody knows at the outset what they are dealing with. While this would come as very bad news for surveyors and lawyers in this field, it would provide a mechanism to enable our constituents finally to own their own homes in a straightforward way and provide security for their futures. Currently, too many leaseholders are prevented from exercising their rights because they cannot afford to do so. One recent example was of a retired couple paying £38,000 to buy their freehold. Such people are being ripped off when they first buy the house, and then ripped off again when they try to buy the freehold.

The Bill’s second provision seeks to rebalance the awarding of costs at leasehold property tribunals. The system as it stands reinforces the existing imbalance of power between the leaseholder and freeholder, and the Bill ensures that a leaseholder will not have to pay the freeholder’s costs just to enforce their own rights under the lease.

Finally, I have deep concerns about both the information provided to purchasers by developers and the advice given by solicitors. Solicitors are often recommended by the developer, which is why I am calling for a statutory compensation scheme. I have labelled this scandal “the PPI of the house building industry”, and that phrase has caught on precisely because of the similarities. We need a similar process to compensate those who have fallen victim to this scam.

In some cases, I have evidence that developers insisted that purchasers used solicitors nominated by them if the sale was to go ahead, or offered large incentives, including paying for the leaseholder’s legal fees. In many other cases, buyers were put under pressure to use a recommended solicitor because they were told that there was a short window of time available to complete the purchase and that only a solicitor from its panel would be able to complete the relevant searches within this timeframe. This has meant that many of my constituents ended up using firms whose advice on these leases was that they were standard documents. Such a document may have been standard for that particular development, but that does not make it fair or reasonable.

The third element of my Bill therefore seeks to establish in law a system of compensation where misleading particulars have led to certain leasehold agreements. Alongside this, I would expect there to be a full independent inquiry to look at the relationships between developers, freeholders, finance companies and conveyancers and to establish how a system was allowed to develop that has left so many innocent people feeling ripped off. It is time we held to account the guilty men and women who must have known that this scam would ultimately be at the cost of their customers.

The leasehold scandal is one from which nobody emerges with credit. The Government, lenders, freeholders and lawyers have all played a role, but I must reserve the lion’s share of the obloquy for developers who have deliberately and systematically created a set of toxic assets, with those left in the lurch finding that the biggest purchase of their life is a pup. When people bought their houses, they thought they were doing just that—buying their home. They never contemplated for a moment that the true owner of their home was actually someone—they might never know their identity—who could then sell on their interest in the property to somebody else without their knowledge or consent. We need to give people the chance to escape that trap fairly.

It will take years for the stench of ignominy that envelops guilty developers to wear off, but this Bill may help in that process. Until we come up with an effective way to release people from the shackles of leasehold, the authors of this injustice will never be forgiven. I commend this motion to the House.

Question put and agreed to.

Ordered,

That Justin Madders, Jim Fitzpatrick, Sir Peter Bottomley, David Hanson, Ian Austin, Mary Glindon, Justin Tomlinson, Ruth George, Antoinette Sandbach, Bill Esterson, Gareth Thomas and Derek Twigg present the Bill.

Justin Madders accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 2 February 2018, and to be printed (Bill 121).