Two veteran MPs from rival parties demanded reform to residential leasehold at a packed Westminster meeting yesterday attended by 75 prominent figures in the sector.
Sir Peter Bottomley (Conservative, Worthing West) and Jim Fitzpatrick (Labour, Poplar and Limehouse) jointly hosted the session having both urged amendment to the Housing Bill.
The meeting was attended by retirement developers, leading leasehold lawyers, civil servants, the Leasehold Advisory Service, managing agents, representatives from ARCO and ARMA, as well as prominent leasehold activists were told by the MPs:
“We know urgent change is needed in law and practice on forfeiture, the nuclear weapon in a freeholder’s arsenal.
It turns money disputes into a desperate struggle that can result in leaseholders losing their homes. (Dennis Jackson lost his £800,000 Battersea leasehold flat over a dispute concerning a £7,500 dispute. LKP and MPs had to win a last-minute appeal process to save him.)
The Law Commission reported on the unfairness of forfeiture in 2006, but it still exists.
“If politicians should encourage oldies to downsize, we have to warn them about over-priced retirement flats that can lose value and may come with unfair or unjustified charges. Watch out for ‘research’ saying that downsizing to these properties is a splendid thing.
“Retirement properties can be the single worst residential property investment that you can make. This might be denied by some retirement home builders. Fortunes are spent on marketing (and lobbying). Here is an example.
“To avoid the lease extension business, change to the tenure to commonhold or make leases last 999 years. Retirement housing leases can deliberately be set at 125 or even 99 years.
“This does not catch out the first buyer, or even the second, but almost certainly will the third or fourth.
“Short leases add value to the freehold, the extra windfall for developers if they flog the freehold.
STOP PRESS: The day before the meeting McCarthy and Stone, which pioneered retirement leasehold housing, announced that ALL retirement flats on new schemes would be sold on 999 year leases not the 125 years as at present. This came into effect in August.
This is a huge victory for those seeking reform in this sector – and long overdue. Now developers can build all schemes, retirement and non-retirement with resident-controlled management companies, which would end freeholders monetising the management of sites.
“Property professionals know that the elderly seldom extend their leases: the freeholds are a growing asset. Below 82 years, it will cost around £10,000 to extend the lease of a typical retirement flat; before this point, lease extensions may require just £2,000.
“All blocks of flats should be built with a residents’ management company controlled by the leaseholders: those with the greatest financial stake in a block should in charge from the start.
“Amend S11 of the Leasehold Reform, Housing and Urban development Act 1993 so that leaseholders can discover who their fellow leaseholders are in a block.
“They will then be able to form residents’ associations and, if necessary, unite to take on the freeholder whose financial stake in a block of flats is often minimal compared with the collective value of the leases, yet who also calls the shots.
This reform would greatly expand the number of residents’ associations, and help right-to-manage initiatives.
“Reform right-to-manage legislation to avoid leaseholders facing what may be years of litigation and delay.
“MPs need to know that many in the sector, along with members of the judiciary, appear to believe that the ‘low cost’ property tribunal system is now broken. Judge-made law has resulted in a one-side cost regime in favour of the landlord.
“MPs need reminding that it was research initiated by LKP that revised the official figures in 2014 of leasehold properties from 2-2.5 million to the now accepted 4.1 million privately owned leasehold homes in England.
“Extending right to buy to housing associations could increase this number by 500,000, according to the head of the social housing sector’s National Leaseholder Group.
“It is vital MPs now act to defend flat owners.
“LKP is a minnow with almost no resources. Their work is vital in helping us and government to know how to protect leaseholders, the fastest growing housing sector.”
Additionally, Jim Fitzpatrick urged the reintroduction of compulsory commonhold by 2020.
The meeting also heard presentations by Jonathan Smithers, President of the Law Society & Property Specialist, discuss issues arising in the sale/purchase of a leasehold property, impediments to leasehold conveyancing on chains of transactions and the Law Society’s proposals for developing standards and improving information for prospective buyers of leasehold property. He concluded his talk by welcoming the renewed interest in commonhold; the way forward.
Stephen Lewis, Law Commissioner for England & Wales, provided an update on the Law Commission’s investigation on ‘transfer’ fees within the leasehold sector. He summarised the Commission’s initial findings as they now enter the public phase in the consultation process sponsored by the Department of Communities and Local Government.
Professor Susan Bright, of Oxford Univeristy, & Mark Routley, Solicitor discussed their legislative developments for energy efficiency upgrades. A vital part of the Government’s programme to achieve 80% reduction in carbon emissions by 2050.
Update on Law Commission Event Fees project
3 December 2015, 3.45-5.00 pm
Committee Room 9, Palace of WestminsterStephen Lewis, Law Commissioner for Commercial and Common LawLadies and gentlemen, today I received a complaint. It was from a certain Mrs Bull. Mrs Bull was trying to buy a retirement flat. After speaking to her estate agent, she emailed the company that runs the housing scheme with some questions. Mrs Bull’s email said:Dear Ms Jones
Thank you for your reply.
Just one more query, that the agent could not answer, is the question of the exit fee. Is this an ongoing feature in the contract? I should hate to go ahead and find that this feature is included, yet has been obscured in the agency’s details.The company wrote back, saying – and I quote:
All enquiries should come through the buyer’s solicitor once the lease title has been submitted and the transaction is proceeding.That’s right. Leave it to the solicitor. As Johnathan Smithers has indicated, by the time a home buyer has instructed a solicitor, they have already invested time and money in the purchase. Our research suggests that, by this stage, buyers have set their heart on the property and passed the point of no return. Even if the solicitor finds enormous fees hidden in the lease, it’s too late to pull out.Ladies and gentlemen, it’s time for landlords, managing agents and estate agents to stop burying their heads in the sand.The solicitor stage is too late. Material information about the lease should be disclosed to leasehold buyers from the moment they see a property advertised. Disclosure should take place early, clearly and prominently.
Now, I know that this is a room full of experts on leasehold – and I should say, it’s a privilege to speak in front of such an erudite audience. I’m very grateful to Martin Boyd, Sebastian O’Kelly, Jim Fitzpatrick and Sir Peter Bottomley for giving me the chance to speak to you today. What I suggest probably seems obvious to you. But the message does not seem to have got through to many of the people who sell or manage retirement leasehold property.
But I haven’t introduced myself. I’m Stephen Lewis, Law Commissioner for Commercial and Common Law. I’m responsible for the Law Commission’s project on what some people call “exit fees” and what we call “event fees”. These are fees in residential leases, triggered by events such as the sale or sub-letting of the property. Event fees are especially widespread in retirement property. They can be very high. They can be up to 30% of the sale price.
And we think that the law on event fees is in need of reform. It needs to be clarified and modernised to ensure fairness for consumers and fair competition for businesses. And of course, what I’m going to say about transparency in relation to event fees has wider significance for residential leases in general.
I’m going to talk briefly about three themes of our provisional proposals for event fees: transparency, choice and protection. And I’ll try to draw out how the proposals are relevant to bigger questions about the entire leasehold sector.
I would like to say upfront that we are not proposing to ban event fees altogether. We understand and acknowledge that they are an essential element of the financial model for landlords and developers and they do serve a beneficial purpose for income-poor leaseholders because they often cap the amount of the service charges that are payable.
Let’s start with transparency. We provisionally propose that event fees should be disclosed early, clearly and prominently. This means that any advert displaying the price of a flat should also state the event fee. The principles of transparency underlying this proposal apply to all of residential leasehold. For the same reasons, service charges and ground rents should be disclosed up front. Too often, this does not happen.
Our proposals go even further, stating that developers should give realistic worked examples of how much money the resident will have to pay in event fees. However, event fees are not unique in needing worked examples to be better understood. Worked examples could be a good way to help consumers understand any complex pricing structure in residential leasehold.
Transparency is linked to consumer choice. For example, disclosing material information up front allows consumers to make an informed choice. But in leasehold, sometimes legal intervention needs to go further than transparency in order to redress the imbalance of power between landlord and tenant.
That’s why we propose to give consumers a further choice. We say that they should be allowed the choice to pay event fees up front. Right now, consumers sign up to pay a fee far in the future when the property is sold. They don’t know how much that fee will be, because it is a percentage of the property’s future sale price. We suggest that they should have the choice to pay a fixed fee up front instead. Then those who wish to live in a retirement flat are not forced to accept an indeterminate future liability.
So this proposal goes further than protecting consumer choice. It gives consumers an element of protection, which is going to be my final topic before I finish.
There is a difference between event fees that are for a service, and event fees that go into the landlord’s pocket. In many retirement leases, the event fees that are for a service are called “contingency fees”, while the fees for the landlord’s pocket are called “transfer fees”.
We are of the view that there should be more protection of money that is paid in event fees that are described as being for services. Often, the money is supposed to go into a sinking fund. For this reason, we think that the money should be held on trust. The money should be held on trust so that if the landlord goes insolvent, the sinking fund is protected for the leaseholders who live on the site. This would bring retirement leases into line with the position on sinking funds outside of the retirement sector. At the moment, there is no legal requirement to hold sinking funds that are raised by event fees on trust. It is down to the terms of the lease. We provisionally propose a new statutory trust to protect this money.
So I’ve talked about transparency, choice and protection for consumers. The sanction for companies that break the rules in any of these areas will be that the fee does not have to be paid.
However, there is one exception. Unlike with fees that go straight into the landlord’s pocket, we think that where the money goes into a sinking fund, the event fee should still have to be paid even if the leaseholder was not told about it properly when they were buying the property. This is because the sinking fund is for the benefit of all the leaseholders. To say that the fee does not have to be paid would be robbing Peter to pay Paul. There are, however, sanctions against landlords in this event. For example, there are criminal sanctions for the breach of Consumer Protection from Unfair Trading Regulations of 2008.
With this exception, if the rules are broken, the fee shouldn’t be payable.
We would propose the following mechanism for this sanction. The rules would be contained in a stand-alone set of provisions approved by the Department of Communities and Local Government. They would then be adopted in industry codes of practice, like the Association of Retirement Housing Managers code of practice. Because they are approved by DCLG, the rules would apply even to companies that are not members of the trade association.
And we recommend that the codes should have statutory backing, so that if a company breaks the rules about event fees, the event fee will not have to be paid. To do this, we would amend the list of indicatively unfair contract terms in the Consumer Rights Act 2015, the so-called “grey list”. An entry would be added for event fees that do not comply with the relevant code of practice. So where the code had not been complied with, the courts would, in our view, be very likely to find that the event fee term was unfair and unenforceable.
I gave an example at the beginning of my speech about how bad practice surrounding event fees is making life difficult for consumers like Mrs Bull. And I’ve talked about how we want to make her life easier, through transparency, choice and protection. And I’ve explained the sanction we provisionally propose for companies that break the rules.
Now it’s your chance to shape our proposals. The consultation is open until 29 January. We want to hear from as many of you as possible on whether you agree and what you think we should do. And of course, if you have any immediate questions, I’ll be happy to answer them today.