UPDATE 1 March 2023
The MPs’ debate yesterday was a small affair, with very few Tory MPs as the prime minister was addressing the 1922 Committee at the same time.
It was called by Barry Gardiner, Labour MP for Brent North, who decried the unfairness of marriage value and named a string of freeholders and managing agents in detailed examples in his constituency, including Freshwater, ABC Estates, FirstPort (“fraudluent” etc) and others.
We will prudently wait for the written record to report in more detail.
Mr Gardiner also paid tribute to leaseholder activists of the 1990s, when he himself was deeply engaged in leasehold, including the late Nigel Wilkins, a former employee of the FSA.
Other MPs who spoke were Justin Madders, co-patron of LKP, who raised insurance issues and unfair legal costs, Florence Eshalomi, Matthew Pennycook and Mike Amesbury (“Abolish, don’t polish leasehold”).
Sir Peter Bottomley pointed out that not all freeholders were aristocratic family trusts and offshore private equity punters: the Wellcome Trust pressed its enfranchisement advantages in the Upper Tribunal, Stephen McPartland, who has been so committed with the cladding issue, Andy Carter, who raised Warrington managed estates issues and criticised the CMA mis-selling investigation and Tom Hunt, who raised Railpen.
LibDem Munira Wilson raised two cases in her Twickenham constituency.
Lee Rowley, housing minister, pledged backing for reform of leasehold, but did not undertake to a King’s Speech commitment.
Full report to follow.
Westminster Hall debate – 28 February 2023 / 4:30pm
Leasehold Knowledge Partnership, the leaseholders’ charity, briefing on leaseholders and managing agents
The vast majority of leaseholders live in blocks of flats where the freehold owning entity is the landlord and it appoints a manager of its choice.
In no sense are the leaseholders the customer of the managing agents in these circumstances: the property manager does its employers bidding, or it gets its marching orders and is replaced.
The freehold owning entity, invariably with anonymous beneficial owners and often based offshore, often employs the managing agent appointed by the housebuilder who built the block.
These property managers are the bigger managing agents with 100,000 – 200,000 flats under management.
None of these companies are big through consumer choice and preference. They have grown through acquisitions and through appointment by commercialising landlord interests and developers.
Some blocks of flats are controlled by leaseholders, either by a residents’ management company set up in the lease, or through a right to manage company, established by the leaseholders themselves. There are only c5,000 RTM companies on Companies House records.
What’s the main job of managing agents for housebuilders?
To serve the interests of the entity that employs them.
Developer appointed managing agents have signally failed to point out build defects in new blocks of flats, as the elementary omissions and errors revealed since Grenfell make clear.
Indeed, one might believe that a prime task of a developer appointed manager is to ensure that the snagging defects of a building are not revealed within the time-scale of the warranty provision – after which date, the bill can be presented to leaseholders.
Managing agents are obliging to housebuilders, as they seek appointment to new sites. There is a clear commercial incentive for them not to highlight build defects.
Similarly, housebuilders expect the appointed managing agent to absorb the management costs of void flats that have yet to be sold. So for a while, the managing agent manages a site at a loss to itself. But it has every opportunity to monetise and put right this loss in time.
What’s the main job of a managing agent for freeholders?
To ensure that the building produces an acceptable income stream to the entity that employs it.
Property management has abundant opportunity under the leasehold system to monetise a block of flats: through padding bills; through preferred contractors (which may be related businesses); through commissions as, say, 15% oversight of major works; energy commissions and organising building insurance.
Insurance in leasehold, where leaseholders pay all the costs but are not party to the contract and cannot see the commissions involved, is being investigated by the Financial Conduct Authority. Others may be surprised this situation has continued as long as it has.
Although billions of pounds of leaseholders’ money sits in “trust” bank accounts, anyone can set up as a property manager in this unregulated sector.
Essentially, a residential building of leaseholders is run entirely at the landlord’s discretion and leaseholders have the protections of going to court (the property tribunal) to dispute service charges, commissions, major works bills etc.
The leaseholders can dispute these sums, which can be for millions, but will never get their legal costs even if successful. On the other hand, the landlord almost always gets his legal costs as administrative charges under the lease.
So the system of legal redress in leasehold is inequitable and there is no equality of arms.
This is surprising, as the collective value of all leases accounts for 97-99% of the value of a block of flats. Yet, the ownership of the freehold, which is worth only of a fraction of the leases, ensures power of management remains entirely the landlord’s.
Are managing agents all bad?
Of course not. LKP actually accredits managing agents that work for leaseholder controlled companies and seeks new business from them.
Professional property managers are essential, especially as modern blocks of flats are now highly complex, in engineering as well as law.
Many managing agents are professional, knowledgeable and highly trained.
The problem is that they are not employed and held to account by the people who ultimately do all the paying: the leaseholders.
In what other area of business would the majority shareholders be so completely disempowered?
This arrangement astonishes foreign nationals who own leasehold properties in England and Wales, which alone in the world persist in this flawed system.
Are freeholders all bad?
They are completely unnecessary. In the past, pension funds were attracted to the long term modest incomes of ground rent portfolios. Private equity has pushed the pensions funds aside over the past two decades.
This is a regressive and damaging arrangement. Affluent, often offshore, private equity punters are hitching a ride on the homes and aspirations of millions of people.
As billions has been spent via Help To Buy to get first-timers on the housing ladder, it could be argued that these punters have been helped by taxpayers with their investments as well.
Are there any good freeholders?
The otherwise saintly Wellcome Trust spent £114,000 to get back £6,000 of unpaid service charges by a litigant in person in this case in Onslow Square:
Forfeiture was avoided because of LKP’s intervention. The matter was closed down with an NDA.
The case perhaps indicates the state of mind of professional property managers. The only person in court who did not know that she was going to be ruined by this case was, sadly, the litigant in person.
Does leasehold need to be reformed?
No, it needs to be ended.
All previous reforms have not succeeded in making leasehold work properly. We need to stop creating more of it and adopt the commonhold tenure that exists, with variation, in virtually all other jurisdictions.
The Leasehold Reform (Ground Rents) Act 2022 was a fundamental reform: ending the creation of new ground rents, which are the only unarguable income streams in leasehold.
It also ended the entire racket of informal lease extension: negotiating extensions to leases with (often very ill informed) leasehold owners, and introducing punitive new ground rents. That is stopped.
The remaining reforms are outlined by the Law Commission and need to be enacted: the reform the enfranchisement process of buying freeholds and extending leases and ending current nonsense such as leaseholders presently have to pay all the landlord’s legal costs in this process.
Right to manage requires reform as does draconian forfeiture, whereby leaseholders lose the entire asset and landlords obtain a massive windfall. Finally, commonhold needs to be made the only form of tenure under which flats can be sold, giving flat owners security of tenure, ending the current position of them being tenants in law, and ensuring that they have equal rights with owners of freehold houses.
|Calls to action|
Statutory regulation of managing agents
Bring in the leasehold reforms outlined by the Law Commission
Urge the Financial Conduct Authority to be robust in its investigation into leasehold insurance