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Christopher Howarth is a senior researcher working in the House of Commons. Prior to this he worked for Open Europe, as a Conservative Foreign Affairs Adviser and senior researcher to a Shadow Europe Minister.

Prior to 1993, the owners of flats had virtually no rights. They could not extend their leases, nor could they collectively buy out their landlord: they had an asset with an expiry date and one they had little control over. The Normans would have recognised the system, indeed the word “freeholder”, ‘free from the hold of a lord’ was first evidenced in the Doomsday book and “lease” is of French origin.

John Major took the first step to rebalance this system, introducing rights to lease extensions and collective enfranchisement, now if 50 per cent of leaseholders in a block could agree to buy out the landlord, they can. This small step provoked the Duke of Westminster to resign from the Conservative Party; academic debate into competing property rights – and disappointingly little change.

Nearly a quarter of a century later, leasehold is in rude health. There are perhaps four million leasehold properties in the UK. 70 per cent of them are flats, and 57 per cent are owner-occupied. In large areas of the country, for those lucky enough to afford it, owning a leasehold flat is the closest they can come to owning their own property. Some flats are in blocks which now come with a share of freehold, many are not. For these “homeowners”, being a leaseholder is little more than being a glorified tenant, with little influence over their property’s management or with any legal redress against spiralling costs and bad, or even corrupt, landowners and managing agents.

Yet while in the UK the idea of leaseholders and freeholders are as ubiquitous as flat owners complaints about their managing agents, it is worth considering that most of the world, including other common-law jurisdictions, either have never had leasehold property, or have since got rid of it. Yet in the UK leasehold is expanding. Ninety per cent of all new properties in London are leasehold, and 40 per cent in England and Wales). These new “owners” form a miserable third tier in terms of property rights, below that of freeholder and Social Housing Tenants, but above renters, who as a consolation can at lease move on with their capital intact. Why is the situation so bad?

Lack of legal redress to leaseholders

If a landlord or his managing agents take liberties with their leaseholders, a leaseholder has no practical recourse to law. This may sound like an odd statement, given there is a whole Residential Property Tribunal dedicated to solving these disputes, but in practice the tribunal should be avoided like the plague, for a number of reasons:

  • The Tribunal is not a Court. It does not have the time or interest for long and complex cases, does not take evidence on oath and is easily swayed by the legal firepower at the disposal of large landlords. It’s a small legal world, and the money and careers (of tribunal judges) are made defending landlords, not small leaseholders.
  • If a leaseholders wins (or loses), he may have to pay the landlord’s costs. This may seem odd, considering that if the leaseholder wins the tribunal has no power to award costs in his favour, but it stems from the fact that the majority of leases stipulate the leaseholder will pay all legal costs.  This is a very serious and real danger to a leaseholder. There are cases where leaseholders collectively have had to pay £300,000 in costs but, if an individual takes a case to the Tribunal, they may get hit with the whole whack – £76,000 in one case, allowing the Landlord to take possession of the flat. In another particularly bad case notified to MPs, the Wellcome Trust (a large London Landlord) charged a Leaseholder £94,905 for having partially won a case relating to a few thousand pounds of spiralling annual service charge bill – again threatening to force the leaseholder out of her flat (The landlord had argued it was reasonable to spend £1/4 million a year for a 5 acre garden). And of course if you challenge the legal cost as unreasonable you, will get another bill.

Leaseholders to pay more to extend leases.

Another example of the way in which the Tribunal services the interests of landlords can be gleaned from the recent “Parthenia (Mundy) Case”. A calculation for the extension of the leases (favourable to landlords) was originally put forward by the Grosvenor estate in 1996 and was accepted by the Tribunal. A challenge to it in 2016 pitted three individual leaseholders and their new model against a range of property interests including the Wellcome Trust, relying (amusingly) on the evidence from Professor Colin Lizieri, Grosvenor Professor of Real Estate Finance. You may imagine the outcome: the cost of lease extensions has gone up.

So dramatic was the reversal in leaseholders fortunes springing from this one judgement that Peter Bottomley argued in Parliament that “I hope that the appeal succeeds, and that the Government will make sure that if it does not, the decision in the Mundy case will be reversed by statute.”

Spiralling costs

Landlords have little incentive to keep costs down. They need not fear the residential tribunal ruling against them, and their agents are often paid a percentage of whatever they spend. This is no surprise. However, that is with an honest landlord and managing agent. Greater problems arise when managing agents fall into bad practices – tendering for major works to a small group of friendly contractors; taking commissions for inflated products such as building insurance; keeping poor and un-transparent or no records. Managing agents can (lawfully) keep money from many properties in the same bank account, refuse to hand over bank statements or even disclose the management contract under which they are paid. Costs to leaseholders can go up, and there is no recourse to law.

Leaseholders are trapped

If you cannot challenge an extortionate service charge, a wrongly calculated charge or shoddy management in the Tribunal, what happens if you refuse to pay the Bill? This, again, is a road to nowhere. A landlord can be assured of getting paid. They can threaten to take the property back (forfeiture) or – a common practice if the leaseholder has a mortgage – tell the leaseholder’s bank, who will then pay them directly and add it to their mortgage.

Existing rights do not work

While opportunities for abuse are legion, leaseholders current rights are not sufficient. A leaseholder acting with half of his neighbours cab go to a court and buy the landlord out. They can also apply to take on the management. However, this is often not possible.  Tracking leaseholders who are often not resident and gaining approval is often impossible, especially when commercial landlords decide to use to law to obstruct it, or indeed own leasehold flats (and votes) themselves.

The case for reform

The good news is that this Conservative Government seems committed to back up the rights of leaseholders and has opened a consultation for ways of “Tackling unfair practices in the leasehold market”. So far, this consultation has mostly focused on the scandal of the abuse of “ground rents”, but it could provide an opportunity to do far more, and really turn leaseholders into property owners, thus fulfilling John Major’s desire to add them as fully paid-up members of a property owning democracy. The following are some simple proposals that would increase the security of a leaseholder in the face of a bad landlord.

  1. Separate Trust bank accounts. Entitle leaseholders to have the money for their sinking fund and expenses kept in a separate bank account to which they are allowed to see the statements. This would reduce the scope for money moving between properties, cross-subsidising a landlord’s properties or simply disappearing. [This was passed by Parliament in 2002 (Leasehold Reform Act 2002 Section 156) but for some reason was never brought into force]
  2. Transparency. There is no reason why a leaseholder should not see key documents relating to the management of their property – for instance, those relating to tendering of services, the management contract and key contracts, so they can provide alternative quotes. Without transparency regarding statements and contracts, the ability to go to the Tribunal is practically worthless. With complex and partial information disclosed, a leaseholder will never be able to prove a case – a fact of which landlords are well aware.
  3. Reverse the Parthenia (Mundy) Case. A part of giving leaseholders security is to prevent vagaries in the Tribunal system leading to huge swings in the cost to extending their leases. This case should be overridden by Parliament.
  4. Reform the Tribunal costs system. Landlords should not be able to recover their legal costs in the Tribunal by designating them as administrative costs, and adding them to the service charge of an individual or property. A reformed Tribunal should either be costs-neutral, or allow both sides to claim costs. This would change the behaviour of landlords, and increase the chances of settlements or the solving problems pre litigation.
  5. Enhance the chances of enfranchisement and the Right to manage. A lower threshold for enfranchisement should be adopted particularly in cases where the leaseholders in a block are difficult to trace ,or are in fact the landlord.
  6. Place the RICS code for managing agents on a statutory footing. While managing agents are supposed to follow best practice there is little to force them and no recourse if they don’t. The RICS code has many sensible suggestions, separate bank accounts, fixed fees over % fees etc but no power to enforce it. Placing it into legislation would have a positive effect on managing agents and their Landlords.
  7. Stop the creation of new leaseholds. While the existing leaseholds are a problem, there is no good reason to build more. Not legislate that all flats should be ‘share of freehold’ from the off. The proliferation of Government schemes for shared ownership has if anything made matters worse: this should stop.

Will it happen?

The property lobby is very well-resourced, and has fought off many previous such attempts to improve leaseholder rights. There are many institutions with property portfolios represented in the Lords, and there is a whole legal industry lobby designed to service them, as well as the prevalence of donations from property entrepreneurs and companies.

However, there is every hope that this Government will act. There is a big political prize to be had for the Conservative Party to improving the rights of millions of property owners and bringing them up to equality with those who own their own house free from the hold of a Lord.

 

49 comments for: Christopher Howarth: It’s time to end the great leasehold service charge rip-off

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