Freehold and Leasehold Reform

Rachel Maclean Excerpts

Wednesday 5th July 2023 Westminster Hall

[Jeremy Corbyn (Islington North) (Ind)]

It is a pleasure to take part in the debate. I thank the hon. Member for Dartford (Gareth Johnson) for securing it, and every one of us could amplify everything he said with very similar experiences from our own communities, even though the areas we live in are often very different geographically.

My constituency is spread between about 40% social rented, 30% owner-occupation and 30% in the private rented sector. The debate is essentially about owner-occupation and leaseholds, but within that 30% very few, or certainly a declining number, are in what I would call traditional freehold properties—where somebody owns the house and land, and their costs are their mortgage, if they have one, and all the relevant bills, but there are no service charges because there is no other involvement.

Any place that is now sold in my constituency as a single-family home inevitably gets bought by a property company and is divided up into a number of flats. Dividing a place up into flats is not of itself wrong, but the quality of the conversion is often a problem as is the resulting ownership issue. In my constituency, people who have bought a flat either in a new development or in a converted property are suffering appalling levels of stress; they believed they were going to have to pay a reasonable ground rent and reasonable service charges and management fees but then find after a very short time living there that they have no control whatsoever over any of those issues.

The system is very badly designed. Indeed, perhaps it was not designed at all, but it is so badly in existence that there is a positive incentive to manage badly, charge extortionately and be abusive towards those who live in these leasehold properties. This has been recounted by the hon. Members for St Ives (Derek Thomas), for Ellesmere Port and Neston (Justin Madders) and for Dartford and I can absolutely relate to it.

Many people have got in touch with me about this and I want to give an example. In a sense, the business model of those who buy into the leasehold sector is appalling and offers incentives in all the wrong directions. There are five examples of that. The company that owns the property sets out charges to the leaseholders in the property and will directly benefit from having unnecessary work done in the building. Totally unnecessary work is created by the management company, and the leaseholder has no say in whether it is done and no say in the contractor who does it, yet they have to pay for it. There is an incentive for the company to choose the most expensive contractor and then charge on for it. Some of these companies are also incredibly litigious and threaten to take flat owners to court to start proceedings for repossession as soon as there is any element of late payment. Remember that many people who buy leasehold flats for the first time are young and have young families. They are in the most expensive and difficult times of their lives, and there is the greatest pressure on them as a result, so the stress levels are huge. The companies consistently use the same small set of suppliers across many of their properties, and those suppliers are also complicit in the running up or invoicing of ridiculously high charges across their whole estate portfolio. When residents try to communicate with the companies, they get fobbed off, blocked, or threatened with legal action and legal letters. The stress levels are appalling.

Let me give an example about electricity:

“In our most recent service charge 3 months ago, we were collectively billed £4k for commons parts electricity”—

the common parts have the amazing total of 10 LED lightbulbs in them, and:

“This was 10x the estimated expense for the period. Upon inspection it became clear that the power provider…chosen for us failed to take a single meter reading for the entire year and ‘estimated’ our bill.”

When the residents highlighted that, the company demanded they pay the total figure anyway. They are now in dispute over it.

There are many examples of excessive charges for minor or often unnecessary works or, as the hon. Member for Dartford pointed out, ludicrous charges for the almost non-existent cleaning of common parts. That can be just running a hoover over the carpet once a month, yet people are told to pay several hundred pounds a year for that kind of thing. It is the same with refuse collection, rubbish collection and so on. There must be some big changes to that.

The last testimony I will give is from somebody who bought a flat that they believed would be affordable. They then discovered that the company was

“proposing decorating works on our building at a cost of £19800. We received a quote of £7600 for exactly the same work from a local contractor. Although we nominated this contractor, as is our right, they have chosen to go ahead with the company that they always use. We can challenge this at tribunal but we would need £8-£10000 upfront costs”.

They have to pay that even to get a hearing. If ever there was an area that needed substantial investigation and reform, it is surely this one. People feel disempowered, angry and frustrated. They cannot sell and cannot move, and they have no idea what charges are coming down the road.

I have dealt with many cases of leaseholders who either bought their place from the local authority under right to buy or who bought it from somebody else who did. They often dispute the capital works charge or service charge. Sometimes they are right and sometimes they are not, but there is a clear process by which they can make that complaint. They can make it to the local authority, which is accountable. It is not always perfect, but there is usually agreement at the end, because there is a degree of accountability. With the companies, there is no accountability whatsoever. Every power lies with the person who has invested money to make a vast return, and the returns that are being made on leasehold properties are enormous.

I hope that the Minister will recognise that the stress that we are expressing—

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

indicated assent.

[Jeremy Corbyn]

I see the Minister nodding; I thank her. I hope that she understands that the issue is not isolated to any one part of the country. The whole country is suffering from this, and we urgently need a serious process of leasehold reform that gives people some power over their own lives and in their own homes.

--- 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, Mr Sharma. I thank my hon. Friend the Member for Dartford (Gareth Johnson) for securing today’s debate, in which there is strong parliamentary interest. As many Members have highlighted, I have spoken about these matters many times in this Chamber and the main Chamber, but I am happy to set out in a lot more detail the Government’s position.

I thank the other Members who have contributed, including my hon. Friends the Members for St Ives (Derek Thomas) and for Congleton (Fiona Bruce), the hon. Member for Ellesmere Port and Neston (Justin Madders), the right hon. Member for Islington North (Jeremy Corbyn), and the hon. Member for Strangford (Jim Shannon), who highlighted many of the things that we can learn from working across our United Kingdom. I am grateful to him, as ever.

There is a broad consensus on the case for change. I want to reassure Members that the Government remain committed to creating a fairer housing system that works for everyone. We will introduce further reforms in this Parliament to address the historical imbalance in the leasehold system.

As this debate has shown, the imbalance stems from the unequal power dynamic inherent in leasehold ownership, in a system with landlords often acting in their own interests and leaseholders bound by a lease that can be decades old and not easily changed. As we have heard today, particularly from my hon. Friend the Member for Dartford, freehold owners may also be subject to the will of third party interests.

We have already taken important steps to address the matter, having introduced the Leasehold Reform (Ground Rent) Bill in May 2021—I thank the hon. Member for Greenwich and Woolwich (Matthew Pennycook) for his and his party’s support in passing that Bill. Since coming into force on 30 June 2022, it has prevented landlords in most new leasehold homes from charging any financial ground rents at all. That was a very important first step, but there is more to do to tackle the power imbalance.

We are committed to improving leasehold tenure—by helping existing leaseholders to better understand and challenge their charges or the services they pay for, take control of their homes or buy their freehold—and to providing a freehold alternative from the outset, with improved rights for those that pay estate charges.

As a tenure, residential leasehold is time-limited and control is shared with the landlord. The leaseholder’s decisions about their home, including the charges that they pay for services, are usually made by someone else—the landlord or the managing agent working for the landlord—but paid for by the leaseholders. The landlord might not even live in the building or have the same priorities and motivations in mind. We have heard multiple examples today about how that negatively impacts leaseholders. My hon. Friend the Member for Congleton is completely right to say that those are decent, hard-working people who have done the right thing and deserve to live in their homes in peace and security. It is the largest asset they are likely to buy, so it is wrong that they are being ripped off—if that is a parliamentary term.

High service charges are being levied for carrying out simple requests. Managing agents are not providing a level of service that leaseholders should expect. Urgent repairs are being neglected, crippling costs are levied for buying out or extending a lease and leaseholders are charged exploitative and increasing ground rents in exchange for no services at all. For freehold homeowners who already have an expectation of control over their properties, we understand the concerns raised today and we will act. We will continue our programme of action to remedy those abuses and provide the vision of home ownership that leaseholders should expect, which is greater control over their own home, greater accountability or involvement in key decisions on what they are paying for and, ultimately, a place of safety, comfort and security for them and their family.

[Gareth Johnson]

The Minister says in her speech that the Government will act to deal with the abuse by management companies and the imposition of fees for freeholders. Does she mean by “act” that legislation can be expected?

[Rachel Maclean]

I ask my hon. Friends and other Members for a little patience while I proceed through my speech. I want to set out precisely the Government’s commitment to legislation because I know that is the question that everybody wants to be answered and I have limited time in which to do that.

My hon. Friends the Members for Dartford and for Congleton pointed out that freeholders on new estates must pay charges towards the maintenance or upkeep of communal areas. The obligation to pay those charges might be provided by a deed of covenant or through an estate rent charge that forms part of the purchase contract. The Government believe that when buying a home, it should be clear to potential purchasers what the arrangements are for the maintenance of roads and upkeep of open spaces, public or otherwise. That information is most often set out in a freehold management inquiry form, which is published by the Law Society and widely used across the sector. However, I know that that information was not provided to some, or perhaps not drawn to their attention, at the point of purchase. Furthermore, in many cases contracts do not specify, limit or cap those freeholder charges. To compound matters, when people receive an invoice, they are not provided with information about what the charges cover. Much as with leaseholders, that lack of transparency, both at the homebuying stage and when people have settled into their property, leaves homeowners in a vulnerable position and is something that the Government intend to address.

Leaseholders already have certain protections and rights that will enable them to hold management companies to account. Freehold homeowners have no equivalent, even though they might be paying for the same or similar services, as highlighted in the remarks by my hon. Friends. The current situation is unfair. Where they are required to contribute, it is not appropriate that people have limited rights to challenge those costs, and we are committed to introducing legislation to plug that gap. We intend to create a new statutory regime for freehold homeowners based on the rights that leaseholders have, ensuring that estate management charges are reasonably incurred, that services provided are of an acceptable standard and that there is a right to challenge the reasonableness of charges at the property tribunal.

We will also give a right to change the provider of maintenance services by applying to the tribunal for the appointment of a manager. That might be useful if a homeowner is dissatisfied with the service they are receiving or there is a significant failure by the estate management provider in meeting their obligations. We will also consider the option of introducing a right to manage for freehold homeowners. It is not only estate management charges that need to be reasonable; that principle must also apply to administration fees that individual homeowners may face in their dealings with the estate management company.

Turning back to leaseholders, as highlighted by the hon. Member for Ellesmere Port and Neston and the right hon. Member for Islington North, there is a similar situation. Leaseholders complain of unreasonable and excessive service charges and we strongly believe that service charges should be transparent and communicated effectively, with a clear route to challenge or redress if things go wrong. Many landlords and managing agents already demonstrate good practice and provide relevant information, but too many do not and are failing to provide sufficient information or clarity to leaseholders, especially over fees and service charges.

We recognise that the existing statutory requirements do not go far enough to enable leaseholders to identify and challenge unfair costs. That is why we will take action to support and empower leasehold homeowners. We will take action to increase service charge transparency to help leaseholders better understand what they are paying for, make it harder for landlords or managing agents to hide rip-off charges and enable leaseholders to more effectively challenge unreasonable fees or charges. I also want leaseholders to know that they can seek free advice from an organisation funded by the Government, the Leasehold Advisory Service, if they are concerned about charges that they are asked to pay.

[Jeremy Corbyn]

That sounds like a very promising development. Is the Minister aware that there is sometimes a problem with the ability to challenge because of legal processes or the enormous costs involved, so some people, such as the residents I was referring to, do not have the power to make a challenge even though that would be very justified?

[Rachel Maclean]

I thank the right hon. Gentleman for that point and he is absolutely right. He will hear about some of the things we are going to do to make it easier and fairer and not as expensive to challenge, and I shall to set out some more detail now.

When leaseholders challenge their landlord, we know, as the right hon. Gentleman said, that they are sometimes subject to unjustified legal costs, and we are committed to ensuring that leaseholders are not subject to them and, where appropriate, can claim the legal costs from the landlord, which certainly seems fairer than the current situation. Currently, if set out in the lease, leaseholders might be liable to pay their landlord’s legal costs regardless of the outcome of a dispute—even if they win the case. That is a classic case of heads you win, tails you lose. Also, the circumstances in which a leaseholder can claim their own legal costs from a landlord are currently very limited. That may lead to leaseholders facing higher bills than the charges being challenged in the first place and can deter leaseholders from taking their concerns to the courts or property tribunal, as the right hon. Gentleman says.

Whether on freehold estates or in leasehold or commonhold blocks, we are committed to raising professionalism and standards among all property agents, protecting consumers while defending the reputation of good agents from the actions of rogue operatives. I know that my hon. Friend the Member for Dartford has been working on that issue in his constituency, and I can assure him that I will continue to work with industry—I have regular dialogue with it—on improving best practice across the sector, including on codes of practice for property owners.

Ground rent was particularly highlighted by the hon. Member for Ellesmere Port and Neston, and we are concerned about the escalating costs of ground rents for leaseholders who still pay them. As many will know, we asked the Competition and Markets Authority to investigate the potential mis-selling of homes and unfair terms in the sector and it has been successful in securing commitments benefiting over 20,000 leaseholders, including removing doubling ground rents.

Both enfranchisement and the right to manage help give leaseholders greater control. In most cases managing agents would still be used, but they would be accountable to leaseholders directly, rather than a third-party landlord, ensuring that interests are aligned. For those who want greater control over their homes, many leaseholders find the process for extending their lease or buying their freehold prohibitively expensive, complex or lacking in transparency and we equally understand that many right-to-manage applications fail on technicalities attributed to overly detailed procedure, which is why we asked the Law Commission to look into that. It has since published reports on enfranchisement, valuation and the right to manage.

To reduce the cost of enfranchisement, we are committed to tackling the problems with these existing arrangements at their root. We will abolish marriage value and cap ground rents in enfranchisement calculations, so that leaseholders who currently pay onerous ground rents do not also have to pay an onerous premium to buy their freehold. These changes will result in substantial savings for leaseholders, particularly those with less than 80 years left on their lease. These changes will also make sure that sufficient compensation is paid to landlords to reflect their legitimate property interests.

To make the process simpler and more transparent, we will introduce an online calculator to help leaseholders understand what they will pay to extend their lease or buy it out, and the Government are committed to reforms to improve access to the existing right to manage, whereby leaseholders may take over the management of their block without having to buy the freehold. We want to make the process of exercising the right to manage simpler, quicker and more flexible, and make the operation of it more effective. To that end, we are carefully considering the detail of the Law Commission’s recommendations.

To give homeowners greater control, we want to make sure that the benefits of freehold ownership are extended as far as possible. We remain committed to banning the sale of new leasehold houses so that, where possible, all new houses are provided as freehold from the outset. For flatted developments, we want to reinvigorate commonhold so that it can become a mainstream and widespread freehold alternative to leasehold for both new and existing flats. Again, we are reviewing the Law Commission’s detailed recommendations, which propose legal fixes that will make commonhold a desirable alternative in more and more settings. We have established the Commonhold Council, made up of consumer and housing industry experts, to advise the Government on how to prepare both consumers and the market for the widespread use of commonhold. Furthermore, the Leasehold Reform (Ground Rent) Act 2022 is levelling the playing field for future commonholds as well as benefiting new homeowners. It removes ground rents from new leaseholds, and the associated financial incentives for developers to build leasehold over commonhold, where ground rents were never permitted.

I thank my hon. Friend the Member for Dartford for prompting such a vital debate and everybody for their contributions, and I am pleased that we have been able to discuss these issues properly. We plan to introduce reforms in the King’s Speech, which will take place in the autumn, so the reforms should take place within this Parliament. I recognise that every single Member would like a more detailed timeline, but I will continue to have these discussions, as Members have implored, both with my colleagues in the Department and with those across other channels who are responsible for tabling legislation.

[Fiona Bruce]

Would the Minister be willing to have a discussion with the residents I have referred to in more than one debate? I would be very grateful.

[Rachel Maclean]

Of course. I would be absolutely delighted to meet my hon. Friend’s residents. I implore her to contact my office so that we can arrange that as soon as we can.

I hope this debate has demonstrated to the House, leaseholders and homeowners on freehold estates across the country our continued commitment to reform and to making things better. I am grateful to Members across the House, campaign groups and members of the public for highlighting the difficulties that homeowners face. As I am sure Members can appreciate, this is a significant undertaking, and I look forward to coming to the House with more detail as soon as I am able to.