Hot Topic Highlight - Pledge to End Leasehold Abuse

Posted on 02 / 05 / 19
by Jen Lemen

Hot Topic Highlight - Pledge to End Leasehold Abuse

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What is today's blog about?

This week, Jane Forsyth BA (Hons) MRICS, FIRPM discusses the recent pledge to crack down on leasehold abuse. You can also read the pledge in full and the Government's announcement online.

A Chartered Surveyor, qualified (non-practising) solicitor and a Fellow of the IRPM, Jane has a wide range of experience in the leasehold and lettings sectors and contributed towards the Law Commission’s research prior to its recent Right to Manage Consultation.

What is the pledge?

The industry pledge to stop leaseholders being trapped in “toxic leasehold deals” was announced by the Communities Secretary, the Right Hon James Brokenshire MP, on 28th March 2019. It aims to protect existing and future leaseholders from perceived abuses.

What is the significance of the pledge?

The residential leasehold sector has become a political hot topic, attracting media attention and increased awareness of some of the issues associated with it. This government-backed industry pledge is the latest measure intended to protect leaseholders.

Other recent proposals include a review of the Right to Manage, reinvigorating Commonhold as an alternative to leasehold, the regulation of managing agents, capping new ground rents and banning leasehold as a tenure for most new build houses.

Who has signed the pledge?

More than forty property developers and freeholders have signed the pledge. These include some of the ‘big players’ such as Bovis Homes, Redrow Homes, Taylor Wimpey, Barratt Homes and Persimmon.

Other signatories include industry bodies such as the RICS and the Home Builders Federation.

What have the signatories pledged to do?

The pledge aims to tackle controversial ground rent clauses, which can see ground rents doubling within a relatively short period of time. Freeholder and developer signatories have all promised not to insert into any future leases a clause whereby ground rent doubles  more frequently than every twenty years.

What have freeholder signatories pledged to do?

Freeholder signatories have also pledged to assist both existing and future leaseholders by, for example:

  • Offering ground rent increases linked to inflation via the Retail Prices Index if the existing leases contain a clause whereby ground rent doubles more frequently than every twenty years
  • Ensuring the acquisition by leaseholders of the freehold of their home or the extension of their lease is “uncomplicated, transparent and fair”
  • Supporting those leaseholders that wish to exercise their statutory rights to take over the collective management of their blocks
  • Ensuring complaint and redress processes are timely, transparent and fair
  • Working with other freeholders and stakeholders to develop a comprehensive Code of Practice, “which establishes the responsibilities of freeholders and enshrines the highest standards for the management and maintenance of properties”

What have developer signatories pledged to do?

The promises by those developers who have signed-up include:

  • Taking all necessary steps to ensure that a potential leaseholder is advised of all relevant costs associated with the lease before the lease is signed, and that these are presented clearly and transparently, and in plain English
  • Informing leaseholders in advance of any planned change in the ownership of their freehold

Do any of the pledges relate to leasehold management?

Yes - signatories also include RICS, ARMA and various managing agents - and some of the pledges do relate to the management of leasehold properties:

  • Managing agents should act fairly and transparently in relation to leaseholders, and should be regulated by a formal industry body such as the RICS or ARMA
  • Residents’ Management Companies and Right to Manage Companies without a managing agent should conduct themselves by the standards outlined by the industry bodies mentioned above
  • Managing agents appointed to collect ground rents should assist leaseholders, freeholders or developers who are seeking to vary leases with ground rents which double more frequently than every twenty years

Will potential leaseholders be more informed about their purchase?

Buyers new to leasehold do not always know what is involved. As part of the effort to make leasehold fairer and more transparent, the pledge therefore extends to the purchase process. As a result, legal advisers should ensure potential leaseholders are aware of the costs associated with the lease before they sign, with options for redress if they believe there has been a breach of this requirement or if their legal adviser omitted to inform them about an important aspect of the lease.

Have there been any other announcements?

Alongside the industry pledge, the Communities Secretary announced measures to tackle “the legal loopholes” that can result in leaseholders paying their freeholder’s legal costs via service charges if there is a service charge dispute.

Leases often allow the landlord to charge to service charges their legal costs incurred in relation to a court or tribunal case. This means that leaseholders may ultimately pay those costs even if they have successfully challenged their service charge at, for example, the First-tier Tribunal (Property Chamber).

Leaseholders do have an existing right under section 20 C of the Landlord and Tenant Act 1985 to apply to the Tribunal to prevent the landlord from recovering their legal costs through the service charges, and the announcement mentions raising awareness of this.

What about event fees?

Event fees are another controversial area, typically affecting retirement homes, and the government announcement included an update on proposed measures. Event fees are payable in circumstances specified in the lease, such as a sale, sub-letting or other change of occupancy.

The Law Commission has been investigating event fees and found that they may not be readily apparent in a complex lease, they can be unexpected (for example when a spouse or carer moves into the property), and that leaseholders may fail to understand the implications of the fees.

The Commission did acknowledge that event fees may be beneficial, as they may defer some of the costs until the leaseholder comes to sell, and it recommended that event fees be regulated by a new Code of Practice.

The government says it accepts the majority of the Law Commission’s recommendations, including a new statutory code of practice and a requirement that developers and estate agents make event fees clear to prospective purchasers so they can make an informed decision at an early stage.

How have the announcements been received?

The sector has been responding to the announcements, with some interesting points raised.

While the pledge is welcomed by some, disappointment has been expressed that the government trusts developers and freeholders to address issues, particularly regarding ground rents, rather than legislating to prevent abuses.

Furthermore, linking ground rent increases to the RPI does not necessarily cap them at affordable levels, if, for example, the ground rent is already disproportionate to the value of the property.

The move to further limit the recovery of legal costs through service charges has received some positive responses. However, Residents’ Management Companies and Right to Manage Companies, which are unlikely to have any assets of value and usually have no significant source of income other than service charges, may be unable to fund a legal defence if they are unable to recover the costs of doing so from service charges.

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N.b. nothing in this article constitutes legal or financial advice.