Leasehold and Commonhold Reform

Ruth Cadbury Excerpts

Tuesday 20th December 2016 Commons Chamber

[Ruth Cadbury (Brentford and Isleworth) (Lab)]

Before I start, Madam Deputy Speaker, I would like, on behalf of the Opposition Front Bench, to wish you, your staff and all the staff of the House all the very best for Christmas and a very happy new year.

I congratulate my hon. Friend the Member for Poplar and Limehouse (Jim Fitzpatrick) and the hon. Member for Worthing West (Sir Peter Bottomley) on securing this important debate, and thank them for their work with the all-party parliamentary group on leasehold reform. I thank the Leasehold Knowledge Partnership and the House of Commons Library for the work they have done in supporting me and other Members in preparing for this debate.

The majority of people in this country aspire to own their own home, and for those lucky enough already to own a home or to be able to buy, a leasehold property often suits their needs better than a freehold house. Long leaseholders are in a landlord-tenant relationship with the freeholder. The rights and obligations of the two parties are governed by the terms of the lease agreement, which is supplemented by statutory provision. When it works, leasehold is fine—the hon. Members for Plymouth, Sutton and Devonport (Oliver Colvile) and for Worthing West spoke of their personal experiences—because there are transparent charges, well-itemised and properly justified service charges, appropriate resale values, and so on.

Homeowners want and deserve security and safety, but this debate shows that for far too many, their dreams of home ownership have turned into a nightmare. When one has worked hard to save up to buy a home, and budgeted to pay for servicing any loan and other costs that one reasonably expects, one should expect security and then to be able to plan for one’s future.

Probably all MPs represent leaseholders of one category or another. As we have heard, many MPs have examples from their casework of issues that have been brought to this debate. Too often,

“leasehold property sells buyers short at every step.”

Those are not my words; they were in an excellent article in a paper I do not usually read—the Daily Mail—in September 2015. Leaseholders are finding problems they had not expected when they bought their home. I think that “duped” was the word used by my hon. Friend the Member for Ellesmere Port and Neston (Justin Madders). These are some of the examples that we have heard about: managing agents imposing arbitrary and multiple charges; lack of transparency of service charges that are way overpriced; estate owners such as those mentioned by my hon. Friend the Member for Poplar and Limehouse having no right to a tribunal on charges; unexplained and unforeseen increases year on year—sadly, in my experience in Brentford, housing associations are sometimes among the worst culprits; and the cost of extending leases when they drop below the 70-year, or even 60-year, period. I was pleased to learn a bit more about hedonic regression from the hon. Member for Worthing West; I thank him for that.

We have heard about exorbitant charges for capital works on common parts, with little advice on how to pay. Too often, sadly, local authority landlords are some of the worst culprits in this regard.

[Mr Gareth Thomas (Harrow West) (Lab/Co-op)]

I apologise to the House for being unable to be here for the start of the debate. May I offer my hon. Friend another example that demonstrates why the leasehold system needs reform? The residents of Platinum House, owned by Luke and Brian Comer, in my constituency have sought to secure the right to manage, yet the owners have used a whole series of tricks to delay the exercise of that right. Does she think that is a further example of the need for reform?

[Ruth Cadbury]

I thank my hon. Friend for that excellent additional example where the right to manage has been proved not to be as simple and straightforward as it should be. Too many people who want to manage their property collectively with their neighbours are finding it too difficult and costly with too many hurdles.

We have seen many complicated hurdles put in the way of leaseholders exercising their right to manage or the right to enfranchise. Dispute resolution procedures are complicated and costly. Lessees are having to pay the landlord’s legal costs. Resale charges are up to 20%, which then suppresses resale values. I ought to declare an interest in that this happens particularly in the retirement sector, and my mother has just bought a flat in a retirement community. There are the questionable tie-ups between freeholders and managing agents, and the solicitors they recommend, as mentioned by my hon. Friend the Member for Ellesmere Port and Neston. There is the scandal of lease forfeiture, again brought to the debate by the hon. Member for Worthing West. New homes on their own plots are being sold by volume housebuilders on 999-year leases when they could be freeholdings. Despite advice given to many first-time buyers in these instances, I must say that no, 999-year leases and freeholds are not one and the same thing.

[Sir Peter Bottomley]

Another illustration of this issue comes from a CBRE report of 2013 saying that some people who are developing property with leaseholds are now selling the freehold in advance so that they escape the responsibility of offering it to the leaseholders after two years.

[Ruth Cadbury]

That is yet another example of poor practice—and that would be a generous term.

We have heard about the difficulties of people who buy park homes. They often do that because they cannot afford bricks and mortar, and park homes look, on the surface, to be an affordable option. We have heard about the charges on owner-occupiers for the “privilege” of modifying their own home, even if they have planning permission. We have heard about buyers who want to purchase the freehold finding it incredibly difficult to do so; some big-name volume housebuilders such as Taylor Wimpey and Bellway have been mentioned. The hon. Member for Kingston and Surbiton (James Berry) raised that matter.

Finally, and perhaps most shocking of all, there is the scandal of what I call the ground rent scam whereby a new asset class has been created as ground rents rise and rise, and properties are being treated as a marketable commodity over the heads of the owner-occupiers. Several hon. Members have mentioned this shocking situation. My hon. Friend the Member for Ellesmere Port and Neston described this national scandal as the PPI of the housebuilding industry.

I am looking forward to the Minister’s response. Before he thinks of saying that the examples brought here today from Members across the House are exceptions that prove the rule, I want to say that they are all too common. The APPG is a new group that has a large membership. A recent survey by LEASE, the Government’s agent, showed that 53% of leaseholders regret their purchase. If there are 4 million leaseholders in this country, and that is probably an underestimate, then 53% of 4 million represents an awful lot of people. Legislation has been changed to benefit far fewer than 2 million people.

Before the Minister thinks of talking about weighing up the relevant benefits to different parties as an excuse to delay radical change and review, I have to ask him whether it is right that people can buy and sell freehold interests and ground rents as a lucrative tradeable asset. The Leasehold Knowledge Partnership suggests that developers alone are now earning an additional £300 million to £500 million a year from ground rent reversionary sales of their head leases and freeholds—and that does not include the buyers and sellers of ground rent funds, such as Ground Rents Income Fund plc, whose website I visited earlier today. This asset class is one of the highest-performing investments for canny investors. I think that following this debate we know why.

Yet hard-working people—those who are doing the right thing by investing their hard-earned cash into buying a home—are being ripped off left, right and centre. The Government must act urgently to stop this gross exploitation of hard-working homeowners who are finding that they cannot sell their homes. In fact, the Government must do more than that. The Labour Government introduced commonhold in the Commonhold and Leasehold Reform Act 2002. My right hon. Friend the Member for Wentworth and Dearne (John Healey), who is here, was a key player in that. Commonhold works in the rest of the world—for example, in Ireland and in most of our ex-colonies—and it could work in the UK. Labour introduced the Act, but we accept that it is unfinished business. The Government should review it, consider amending it, and implement the necessary changes.

We call on the Government immediately to stop the scandal of exploding ground rents, which is the biggest legitimate scam in Britain. They should review how commonhold works and make it work, and also end leasehold tenure. We strongly argue that we need to update, consolidate and simplify all the legislation, not just add another Bill and yet more complexity. The Government should consider revising the law on replacing leasehold forfeiture, as the Law Commission has recommended. We ask the Government to consider proper regulation of managing agents and to simplify the right to manage, so that residents are able jointly to take control of the block in which they live.

[Sir Peter Bottomley]

We need to make it much easier for any individual leaseholder to have access to the contact details of every other leaseholder, not just tenants, so that they can apply for their rights. At the moment, for all sorts of bad reasons, they are blocked from being able to do that. I hope that the Government hear what the hon. Lady is saying and that they will work out practical ways to make things easy.

[Ruth Cadbury]

The Government need to look at that detailed and critical issue. We look forward to not just an acknowledgement of the issues, but a solid commitment from the Minister to look at them. To date, the Government have shown no sense of urgency, just half-hearted promises to end the problem.

Reform of leasehold law is “unfinished business”, in the words of my right hon. Friend the Member for Wentworth and Dearne. There are too many loopholes in too many pieces of legislation, and the balance of power remains with the freeholder and their agents.

A Labour Government would give leaseholders security against rip-off ground rents and end the routine use of leasehold ownership in new developments. Will this Government do that? Labour will cap ground rent charges and set out a plan to end their routine use. We need a clear commitment from the Government. We all owe that to the millions of leaseholders in this country, for now and for the future.

--- Later in debate ---

[Gavin Barwell]

There are a number of different ways in which the issue can be addressed. It is a difficult issue, because although the clear mood in the House is that the practice is unfair, it none the less interacts with the property rights of the freeholder, and those rights have some protection under the European convention on human rights. We need to think about the right way to address the problem. I will certainly reflect on the suggestion that my hon. Friend has made, and other suggestions have been made during the debate.

We should not be under any illusions. The problem does not just concern one company; a number of our larger developers are involved in it. They would do well to remember that they are building homes for people to live in, not investment vehicles for financial institutions. Except in a very few exceptional circumstances, I cannot think of any good reason for houses to be built on a leasehold basis. If the industry does not put a stop to the practice and help existing homeowners, we will look to see what Government can do.

Historically, ground rents were set at around one thousandth of the lease value, sometimes increasing every 25 or 33 years. They existed only to create a contract between the freeholder and the leaseholder. However, in recent years, ground rent levels for new leases have increased, as has the frequency of increases. Research by Direct Line suggested that the average ground rent is now £371 for new builds and £327 for older properties.

My immediate concern is the level and frequency of increases in ground rents. We have heard today about one developer selling a lease with a ground rent starting at just under £300 in 2011 and doubling each decade for 50 years, so that by 2061 the annual cost will reach almost £9,500. The purchaser was not made aware of the escalation by their solicitor, who was recommended by the developer. The purchaser is now unable to sell the property, and the cost of extending the lease or buying the freehold is prohibitive.

Of course, there is a degree of caveat emptor when we buy a new house, but we all know that our housing market is a seller’s market at the moment and the advantage lies firmly with the developer. Just because they can sell desperate people something does not mean that they should be doing so. Institutional and other investors increasingly see ground rents as an alternative to equities and bonds, but leaseholders see no return or value in ground rents, especially when they can rise to onerous levels. Obviously, Members on both sides of the House welcome institutional investment into our housing market, but I would much rather institutional investors put their money into productive projects instead of just hoovering up ground rents because they are seen as a safe bet. Both this House and the Government want to hear more from the developers about what they are going to do to put the situation right.

I turn briefly to commonhold, although Members will probably be aware that the Ministry of Justice is the lead Department for this matter. Commonhold was intended to be a voluntary alternative to long leasehold ownership. As we heard from the hon. Member for Brentford and Isleworth, it was introduced by the last Labour Government in 2002 with good intentions, but it has had very limited take-up. There are several explanations as to why. Developers have not favoured the model, and leaseholders have found it a complicated process. Commonhold can be created only where all the owners of the land in question agree to its creation, so it is for developers to decide whether to build commonhold, or for everyone with a shared interest in an existing block to agree to convert to commonhold and to agree their commonhold community statement.

I know that several Members have pressed strongly for commonhold and continue to do so, arguing that it is a better alternative to leasehold arrangements. Commonhold is one way forward in considering improvements for leaseholders, but we also need to look at what we can do to change the existing system. There have been calls for responsibility for commonhold to be transferred from the Ministry of Justice to my Department. That would require a machinery of government change, and it has been agreed with Ministers that we will have a look at that in the new year.

I hope I have made it clear that the Government accept that there is a lot to do in this area. If the House will forgive me, I would like to say a few words about the things we have already done to improve matters and to ensure that there is easy access to remedies when things go wrong. In the Housing and Planning Act 2016, we introduced two important measures to help leaseholders to exercise their rights and to ensure that they are not ripped off by unscrupulous landlords. Members will probably be familiar with the Landlord and Tenant Act 1985, which allows a tenants association made up of “qualifying tenants” to seek statutory recognition. Such recognition provides the tenants association with additional rights over and above those enjoyed by individual leaseholders, including, crucially, the right to be consulted about the appointment of managing agents, to be notified of works proposed by the landlord and to receive copies of estimates.

[Ruth Cadbury]

I am grateful to the Minister for pointing out the right to be consulted under the Housing and Planning Act 2016. Does that extend to the right to have a veto?

[Gavin Barwell]

The 2016 Act does not give a right to veto, but it gives improved powers to residents associations. Groups have had some difficulties in exercising those powers. If the hon. Lady will give me a second, I will try to explain what we seek to achieve.

Section 130 of the 2016 Act will make a big difference to residents associations, which are finding it difficult to obtain the number of members needed to help them to apply for statutory recognition and the additional rights that that brings. It will do so by requiring a landlord to supply to the secretary of a residents association information that would allow contact to be made with absent leaseholders for the purposes of increasing the association’s membership and therefore its likelihood of achieving recognition.

Another important aspect of the Housing and Planning Act 2016, concerns a landlord’s recovery of litigation costs from leaseholders as administrative charges, which the hon. Member for Poplar and Limehouse raised. He gave a pretty horrific example from his constituency of how that is being abused in a particular case. At present, where a lease allows a landlord to recover the costs of legal proceedings through the service charge, a court or tribunal can decide to restrict the amount that can be recovered in that way. Courts or tribunals do not have similar powers where recovery of the costs of proceedings as an administration charge is permitted by the lease.