The following document was handed to MPs and Lords who attended the LKP leasehold meeting at Westminster yesterday:
From ‘legal torture’ to £1 million repayments to leaseholders
A briefing by the Leasehold Knowledge Partnership and the Campaign Against Retirement Leasehold Exploitation
The meeting has been kindly hosted by Sir Peter Bottomley MP, who will speak together with Baroness Gardner of Parkes. Representatives of AgeUK, the British Property Federation, CentreForum, HML Holdings, and the London Assembly will also be in attendance, some of whom will be speaking along with speakers Sebastian O’Kelly and Martin Boyd from LKP
Actions being supported by LKP
- For the Government to enable sections 152 and 156 of the Commonhold and Leasehold Reform Act 2002.
- To address the unfairness in Leasehold Valuation Tribunals where leaseholders legal fees are capped at £500, whereas those of the freeholder are unlimited (and can be reclaimed in the residents’ service charges after a win).
- Parliament intend for “right to manage” to be a right: unless there is a compelling reason to oppose it, leaseholders should be granted RTM. But Leasehold Valuation Tribunals are often being used to thwart RTM on trifling grounds. The Government is urged to review and remove the anomalies in the RTM legislation.
- Leasehold managing agents need statutory licensing and regulation. This regulation needs to be entirely separate from the existing compromised trade bodies.
Speaker: Sebastian O’Kelly – LKP
The purpose of this meeting is to demonstrate that there is an urgent need to revisit leasehold reform – a view shared by leaseholders, managing agents and even by freeholders themselves (in the form of the British Property Federation).
We have also invited three organisations which this year have produced reports into the issue: the London Assembly, the CentreForum think tank and Age UK. We have also invited Robert Plumb, CEO of HML Holdings plc, whose company manages 33,500 flats and houses.
This year has been a busy one in leasehold: with Baroness Gardner of Parkes initiating two Lords debates, and Sir Peter Bottomley one in the Commons. There have been two Channel Four ‘Dispatches’ documentaries: on general leasehold and retirement.
The trade body ARMA is attempting to put its house in order – after years of silence in the face of leasehold abuses – and a managing agent with a major London company went off to prison for 30 months in July for stealing £122,000 of leaseholders’ funds.
The prime minster himself has been involved: attempting to disentangle a retirement development of mixed leasehold and freehold properties in Burford in his Witney constituency.
LKP wholly supports Baroness Gardner in believing that the best starting point for reforming leasehold would be to stop building any more of it; build commonhold, instead.
In spite of Parliament’s many efforts to reform leasehold – including allowing leaseholders to compulsorily purchase the freehold (enfranchisement) or sack the freeholders’ appointed managing agent and appoint their own (right to manage) – home-owners remain in a position of vulnerability.
The most vulnerable of all to monetising freeholders are the old and poor.
Speaker: Chris Paterson – CentreForum
The political think-tank CentreForum’s report, ‘A New Lease of Life’, looked into the state of leasehold issues across the country, in both the residential, social and retirement sectors. In their research they interviewed a wide range of interested parties, including the Department of Communities and Local Government who oversee this issue.
The report was published in August 2012. The particular issue for consideration today is one of the main conclusions of that report, i.e. the urgent need for regulation of managing agents. The report proposes various funding options including a £2 per leaseholder levy to support an independent regulator, which would be completely unconnected with any of the existing trade bodies.
Read a copy of the full report HERE
Speaker: Steve O’Connell – The London Assembly
The London Assembly’s report ‘Highly Charged’, which was published in March this year looks into the problems of leasehold faced in the capital. It stated that over 500,000 London leaseholders pay more than half a billion a year in service charges. Leasehold complaints have risen sharply and with many more leasehold properties likely to be built, there is going to be growing pressure for reform. Steve O’Connell is a London Assembly member for Croydon and Sutton (Conservative).
The report has now received unanimous agreement and support from the four political groups on the Assembly’s Planning and Housing Committee.
The review was prompted by numerous letters from leaseholder constituents that raised concern over the way the service charge system is operating in London and often harrowing accounts from ordinary people, with limited financial means, who have received bills for tens of thousands of pounds for unexpected or disputed works.
“Highly Charged” identified an unbalanced power relationship between landlords (or their managing agents) and individual leaseholders which needs to be tackled if the poor reputation of this arcane system of property tenure is to be addressed. The report made nine recommendations to a variety of bodies that shape the leasehold service charges in London that seek to improve transparency of the system, so that ordinary leaseholders can be given greater control over the way the communal services to their homes are maintained.
Read a copy of the full report HERE
Speaker: – AgeUK
Tomorrow (October 31) sees the publication of AgeUK’s report on retirement residential issues, ‘Making It Work For Us: A residents’ inquiry into sheltered and retirement housing’.
The report follows the other in concluding there is an urgent need for parliamentary review of the effectiveness of the 2002 Commonhold and Leasehold Reform Act and of what government can do to give greater support to older residents who want to exercise the Right to Manage.
The report also considers the many difficulties faced by retirement leaseholders when faced with service charge disputes.
Read a copy of the full report HERE Please read page 20
Speaker: Martin Boyd – LKP
Leaseholders are faced with complex, conflicting legislation. The government asserts that there are many protections for leaseholders, but has little or no data to assess whether these ‘protections’ are working. The housing minister and his staff stated recently that they were unsure “how robust” the data was in a report produced by ‘Which’ magazine stating there is perhaps as much as £700 million annual overcharged service charges. But the Department of Communities and Local Government has no data of its own, no data to evaluate how much money is ever recovered, and no data to support the assertion by the previous Housing Minister that only a “tiny, tiny” number of problems arise.
The former housing minister (Grant Shapps) stated that he abandoned s152 and s156 of the Commonhold and Leasehold Reform Act 2002 because he did not want to “further burden landlords and managing agents”. One of the purposes of today’s meeting is to show that decision was misinformed. These sections were intended to provide more robust accounting information and greater protection of service charge funds. The hand-out for this briefing shows that the British Property Federation, who represent many of our landlords and developers, continue to support the introduction of s152 and s156. This position is also supported by CentreForum and the London Assembly reports and ARMA (the managing agents trade body).
The Institute of Chartered Accountants England and Wales takes the view that the current legislation, provided under s21 of the 1985 Landlord and Tenant Act, has many weaknesses. They have stated that s21 does not require an accountant to consider either: the reasonableness of the expenses; the completeness of the expenses; the probity of the expenses; or make a comparison with the budget provided to leaseholders.
We need to consider statement of the new housing minister (Mark Prisk) which states “improvements can and should in the first instance be driven by professionals operating in the sector” and “he therefore welcomed current moves towards self-regulation in residential leasehold”.
This is a statement made by relevant Ministers for years; his counterpart stated in the House, 23 years ago: “I do not feel that there is a case for additional coercive action at this stage. I would like first to have an opportunity to test the effect of the voluntary approach…. If that does not occur, no doubt my colleagues at the Department of the Environment will wish to look at this matter again to see what might be done.” After 23 years there is clear evidence that effective self-regulation has not occurred.
For many years it has also been claimed by the Department that there is no clear evidence of there being systemic problems in the sector. The reports from CentreForum, AgeUK and the London Assembly now clearly contradict this view.
Perhaps one of the reasons why the Department is so unclear on this subject is its lack of resources. The relevant DCLG team: oversees leasehold legislation; develops leasehold policy; interfaces with the LVT and now the MoJ; has oversight of the Leasehold Advisory Service (LEASE); interacts with the managing agents and landlords lobby groups and the 2 million leaseholders. It consists of just one staff member, overseen by a manager, who has leasehold as part of a wider brief, and a then a manager above her who has oversight of an even bigger brief.
At the back of the hand-out you will see we have included examples of some of the ways in which overcharging can occur. This includes a description of 7 items that we would recommend government should consider, in addition to regulation of managing agents.
Why is going to the LVT so difficult?
There is a huge amount of legislation. There is the problem with the Leasehold Advisory Service, who can advise on the law but are unable to offer any support on how to build a case. Lay individuals are effectively expected to learn how to produce a legal bundle, with no guidance. The LVT themselves claim that 60-70% of leaseholders can present their own case if they prepare well. The reality is that a growing number of landlords, both residential, social and retirement, are turning to specialist barristers, creating what Sir Peter Bottomley called “legal torture”. Although the Ministry of Justice letter attached (HERE) to this document states that the LVT looks to provide pro bono services, we are not aware of their work in this area.
Our personal experience of mediation was that the offer was never genuine. We spent four years on legal cases, during which time we were awarded over half a million pounds. Afterwards, the MD of the managing agent who were found to be at fault, wrote to us, lamenting that we had not been able to agree to mediation. Bearing in mind that in our last case the Tribunal found that this managing agent had: behaved “disgracefully”; entered into onerous and related party contracts; not read contracts; and that there had been a “quasi biblical” company structure through which unreasonable profits had been filtered; on what basis can we reasonably expect mediation to have worked?
Does that mean that the LVT works? And did it work for us? Yes, because we were awarded over half a million pounds, and our residents have gone on to save a further half a million pounds under our court appointed managing agent, who replaced the landlords own agent in 2009. But the LVT only works if you totally discount the over 5,000 hours of our own time and £40,000 of our own money spent proving that we had been wrongly charged. This time and money can never be recovered; time and money which is available to very few sites.
Speaker: Rob Plumb – HML Holdings plc
HML is an LKP accredited managing agent with 33,500 properties under management. It is urging regulation of managing agents, greater training and professional standards.
Unregulated leasehold management
The complexity of the service carried out by leasehold residential managing agents, and the degree of impartiality that they need to have, is comparable to that of the legal or the accounting professions. A fundamental part of the reason why these established professions are able to maintain standards is that they require professional qualification, accreditation and have a regulating body that ensures their compliance to a set of standards. Leasehold property managers are not regulated and nor do they need to be accredited or qualified. Leasehold property managers do not need to be impartial. Their services can be carried out by the landlords themselves (or the managing agent that the landlord owns, particularly where the lease empowers the landlord to appoint the agent).
Apart from impartiality a residential managing agent must have a breadth of understanding in many complex areas including:
Legal – The law surrounding leasehold has haphazardly accumulated over many years of legislation and common law and practice. Agents have to be conversant with the numerous additions to Landlord and Tenant law. They need to provide advice to (and in many cases arbitrate between) inexperienced partisan leaseholders and their partisan landlords. Leases themselves have evolved in style and complexity over many years: they are commonly misunderstood by leaseholders; some leases unfairly empower landlords. Seeking the redress that enfranchisement and the fragmented law can afford leaseholders requires considerable expertise and experience.
Building maintenance and safety – Managing agents also need specific training in the maintenance and repair of the fabric of communal buildings that includes complex Health and Safety law.
Financial Management – Managing agents are charged with the responsibility of controlling “in trust” the communal funds of the parties to a lease. Apart from the “duty of care” implications this responsibility imposes there is a high degree of sophisticated accounting expertise required to properly record and report on the financial affairs of leaseholders. The absence of regulation is perplexing when compared to that which is required of other financial institutions such as banks and insurance companies. Regulation of financial services organisation (including ensuring that their officers are “fit and proper”) is as essential to leasehold management as it is to financial services.
Regulation would be a worthwhile investment to ensure fairness for leaseholders.
Speaker: Sir Peter Bottomley MP
Conservative MP for Worthing West, Sir Peter Bottomley has criticised protracted delays facing pensioners in raising their case at Oakland Court as “legal torture”. He has also raised this issue in the Commons and the response from the Ministry of Justice is attached.
Speaker: Baroness Gardner of Parkes
Baroness Gardner has instigated two debates in the Lords this year on leasehold issues. She is passionately interested in exposing leasehold abuses and urges commonhold as an alternative form of residential tenure. She will speak on the issue which follows on from her debates in the House of Lords.
What/who are LKP / Campaign against Residential Leasehold Exploitation?
Campaign against Residential Leasehold Exploitation is a group which has been campaigning for four years against the abuses in retirement leasehold. Its members were instrumental in initiating the Office of Fair Trading investigation of “exit” fees.
LKP was formed to look at the issues in the broader residential sector. It has now begun to accredit managing agents who are not linked to, or owned by, the large freehold companies. They sign up to open accounting and fair dealing, and are thoroughly vetted before being accredited. If there is a transgression, the disciplinary process will be public, but this has never happened.
More information can be found here:
Examples of Leasehold overcharges
- Exit fees on sale, and sub-letting fees (which the Office of Fair Trading stated in August 2012 to be wrong, but which it has not ruled out).
- Notional rent for the house managers flat/common parts. There is often no contractual basis for this (it emerged as a charge in the 1990s). An example of this was the £137,000 ‘legal torture’ action in Worthing.
- Insurance commissions, or inflated insurance costs, which the leaseholders must pay, but regarding which – as the freeholder places the insurance – they have no right to demand details of commissions and other costs. These limitations are imposed under FSA rules.
- Utility contracts, where utility providers offer inducement fees to managing agents to place utility contracts for blocks under their management. They are rewarded with non site specific discounts, which are not visible or passed on to leaseholders.
- Inflating the sums involved in contracting out major projects, such as those reported in the recent ‘Dispatches’ programme; or contracts where a payback is made to the landlord when expenditure with a particular supplier passes a certain value; while not passing the discount back to the leaseholders.
- Owning the company that actually carries out the work. Failing to go to the open market.
- Misapplication of costs to favour one group of leaseholders over another e.g. choosing to suppress commercial tenants costs.
- Payments to third parties to carry out works that should be covered within the managing agents fees.
Abuses in the Leasehold Sector
Parliament has made many efforts at reform, including allowing leaseholders to compulsorily purchase the freehold (enfranchisement) or sack the freeholders’ appointed managing agent and appoint their own (Right To Manage).
Nonetheless, large amounts of leaseholders’ money are controlled and spent by others, and the scope for abuses is wide.
For relatively small outlay, freeholders can control millions of pounds. For example, all the flats of a prime central London development would sell for, say, £1 billion to buyers. The developer then sells on the freehold (he is supposed to offer it to the residents first, but that is easily avoided) for, say £10 million to a freehold-owning company. That company can then appoint the managing agent (itself, for example), place the insurance through its own broker (ditto), CCTV contract (ditto), electronic door entry system (ditto). These inter-company contracts were the cause of the £1 million payback at St George’s Wharf, Vauxhall, and £500,000 at Charter Quay, Kingston. There have also been two £700,000 plus awards in Nottingham. There are examples of insurance contracts being padded to the tune of over 50 per cent.
The new Association of Residential Managing Agents’ code proposes that these commissions be declared if leaseholders ask about them. They should be declared on the annual management contract as a matter of course.
In retirement developments the leasehold protections are even more difficult to realise, and there is often the added complication of a resident house manager. They often discourage residents from exercising right to manage to ingratiate themselves with existing employees and have understandable concerns about their future. (Their employment is, in fact, transferred to the residents’ management company following a successful right to manage application.)
Dubious income streams flourish in leasehold and are essential to corporate profits and securitisation.
Leasehold leaves residents in a permanent state of vulnerability in spite of all the efforts to reform it and the best solution would be to stop building more of it and build commonhold instead. This is what exists elsewhere in the world – including Scotland, Ireland.
Statement from the Ministry of Justice provided for the LKP briefing
The introduction of the new Property Chamber is being overseen by a national Project Board. It hopes to launch the Chamber in Spring 2013; however the Project Board is currently discussing the precise date and it will be announced to all stakeholders (of which the TPC is one) as soon as possible.
With the status of the rules consultation, the responses received are currently being considered in depth along with whether any revisions are required to the draft Rules as a consequence
NOTE the proposed draft rules for the new Property Chamber (PC) propose that it remains a primarily a “no cost” environment but proposes lifting the £500 cost limit when a party has acted vexatiously or unreasonably. This change potentially re balances the system where most leases allow the landlord to pass on his reasonable legal costs, unless limited by the Tribunal, but provide no comparable right for leaseholders.
Statement from the BPF provided for the LKP briefing (attached)
The British Property Federation (BPF) who represent many of the large landlords and developers have confirmed their support for the implementation of s152 and s156 subject to reasonable amendments to the draft wording as set out. Their support for the licensing of managing agents and for the development of Commonhold, subject to a review of the anomalies contained in the original Act.
A full copy of the BPF statement can be read HERE
Letter from the Under Secretary of State for the Ministry of Justice (attached)
Provided in response to the question asked by Sir Peter Bottomley in the House of Commons 17th July 2012.
Factual correction to the letter. LEASE provides free advice to all parties including landlords managing agents and their solicitors. It does not provide representation or advice to leaseholders on building a case at the LVT or “navigating the LVT process”, other than via limited training and drop in sessions it now runs at the London LVT offices. It does however sell training courses to professionals in the industry: surveyors, solicitors, managing agents and landlords, where speakers offer advice on the more complex aspects of the law, case history and issues such as how best to present a case at the LVT.
LKP specific technical recommendations for short-term action:
- The formation of a Residents Association (RA) to challenge the landlord is often one of the most difficult and time consuming processes, because the current guidelines mandate that 60% of leaseholders must be registered for a RA to become recognised. Reaching this level can take years. There appears no logic in this figure as a recognised RA has no real powers. The proposition that a majority is needed to somehow avoid the potential of two rival RA’s is far fetched. The Secretary of State has powers to amend the 60% figure. We would recommend this be changed immediately to no more than 40%, as allowed under s29 Landlord and Tenant Act 1985.
- Even finding owners in many large modern developments can be very difficult for a group wishing to form an RA, take RTM or seek enfranchisement. Many owners live abroad or sublet their apartments and are billed via an alternative address. We would urge the Minister to consider amending s11 of the Leasehold Reform Housing and Urban Development Act 1993 to make clear what address information can be made available to an RA, including the provision of alternative billing addresses, to avoid the problem of landlords claiming restrictions under the Data Protection Act.
- In addition, or as an alternative to item 2, for the Minister to amend regulations to allow an RA the right to require the managing agents to send out a one page letter from the residents association asking leaseholders to join the RA, every year, to accompany the service charge demand.
- For the Minister to look to commence s152 and s156 of the Commonhold and Leasehold Reform Act 2002, taking into consideration the recommendations of the BPF. For the Minister also to consider under s152 allowing a recognised RA, rather then the managing agent, to nominate the external accountant/auditor to review the accounts, and that if the RA chooses it may vote to spend a larger sum on the audit, recoverable via the service charge, to satisfy themselves as to the accuracy and reasonableness of the charges.
- To urgently review the RTM legislation under the Commonhold and Leasehold Reform Act 2002 and to remove the many anomalies which limit the automatic right, in ways not envisaged under the Act. In particular to review the position in relation to leasehold houses, freehold houses on leasehold managed developments, and large mixed use sites across multiple blocks.
- To review the Commonhold and Leasehold Reform Act 2002 with a view to removing the many anomalies which has resulted in less than a 100 Commonhold units being built since the Act came into force.
- For the Ministry of Justice to go forward with the proposed rules of the new Property Chamber, which seek to remove the cap on costs recoverable by the parties under the circumstances proposed.