By Harry Scoffin
The Estates Gazette has recently provided insight into the thinking of the obfuscators of the leasehold sector.
The opinion piece makes delicious reading for leasehold campaigners and others pushing for fairness in this murky corner of the housing market.
The volume and pace of proposed reforms to leasehold property ownership is commendable. From disillusioned members of “generation rent” to those who purchased a leasehold family home only to find it subject to onerous ground rent provisions, the issues span many sections of society. But are we in danger of falling into a moral panic?
Published behind a paywall in late May, three lawyers at the real estates and construction group of international law firm Taylor Wessing give an overview of the latest developments in leasehold reform. They begin positively:
“The volume and pace of proposed reforms to leasehold property ownership is commendable. From disillusioned members of “generation rent” to those who purchased a leasehold family home only to find it subject to onerous ground rent provisions, the issues span many sections of society.”
They then suggest that the new-found interest in long leasehold law by politicians threatens to create “a moral panic”:
“Well-intentioned legislation may provide newsworthy soundbites, but the volume of proposed reform is so fast that it risks becoming incoherent. Even the largest developers need to work hard to follow every proposal.”
Poor old housebuilders…
There is certainly a sense that the level of leaseholder engagement in public consultations has spooked those who make their money from trapping innocent consumer homebuyers under feudal leasehold rules.
Overthrowing England’s leasehold system. One consultation at a time …
September 2017’s Tackling unfair practices in the leasehold market, initiated by Sajid Javid when he was Communities Secretary, let the genie out of the bottle. Government said that it “received a staggering response with over 6,000 replies, demonstrating the strength of interest in this issue.”
Protecting consumers in the letting and managing agent market, which closed in November 2017, achieved 1,793 responses.
At the May 2019 APPG meeting, Law Commissioner Professor Nick Hopkins said:
“We’ve had around 1,100 responses to our enfranchisement consultation, around 300 on right to manage and 1,550 on commonhold. And for that type of project that is an exceptionally high number of responses.”
Speaking before the Institute of Residential Property Management’s 2019 conference in June, Professor Hopkins noted that responses to the commonhold consultation was 500% above average.
November 2018’s Implementing reforms to the leasehold system received over 1,200 replies. In the foreword to the government’s official response, which included the leasehold houses ban, James Brokenshire claimed that “your views have also enabled me to refine our plans to ensure no monetary value is attached to future ground rents”.
Communities Select Committee chair Clive Betts MP has said that the cross-party group’s investigation into the leasehold sector attracted the most number of responses from the general public of any investigation it has conducted in its history.
Earlier in the year, it was revealed that the powers that be successfully threatened the Law Commission with judicial review.
Yes, judicial review.
It was claimed that the deadline for the body’s consultation on enfranchisement was too short.
The perfect essay crisis …
The sector presumably needed more time to come up with persuasive arguments to scupper meaningful reform. This is despite having armies of people paid to respond to calls for evidence and artfully lobby government behind closed doors.
According to Sunday Times property journalist Martina Lees:
“It’s too early to sue, but a freedom of information request shows that lawyers acting for at least two major groups of freeholders have already threatened the Law Commission with “judicial review” if it did not delay its enfranchisement consultation deadline.
“There is a risk that the consultation will be subject to judicial review on the grounds of procedural impropriety,” according to a letter by Winkworth Sherwood, which says it acts for institutional freeholders, freehold management companies and developers. “We reserve the right to commence judicial review proceedings,” wrote the Alan Mattey Group, which owns about 25,000 freeholds. Earl Cadogan’s Knightsbridge estate and William Astor’s Long Harbour group – but no leaseholders – were also among those writing to ask for more time. The deadline was indeed extended.”
Katie Kendrick doesn’t like “just moaning”. So when the right to own her family’s brand new leasehold house was sold from underneath them, the Cheshire nurse started a Facebook campaign to abolish the system that made this legal.
Public pledge ‘demonstrates a fundamental misunderstanding’
Lisa Bevan, Edward Cooper and Katherine Lang at Taylor Wessing give Estates Gazette readers a criticism of the government’s good behaviour pledge we haven’t heard before.
They suggest that developers, freeholders and managing agents, who have not already signed, will not want to put their name to the initiative out of fear it could taint their reputation.
It is yet another argument in favour of a firm legislative approach to addressing unfair leasehold terms.
Government should throw its weight behind the effort by Eddie Hughes MP to lower existing ground rents to 0.1% of the existing property price, up to £250 per annum.
His private member’s bill already boasts the support of some of the key players on the Communities Select Committee.
Backing the cap would be a pragmatic move.
£250 is not the zero financial value that many campaigners desire, but it would probably resist a human rights challenge from the ground rent grazers.
It should be enough to avoid major property devaluation of the existing stock. This is important because without a crackdown on existing ground rents, a two-tier system will open up.
In Estates Gazette, it is claimed that managing agents are already “heavily regulated through their own professional codes of practice and conduct, and so perhaps this pledge demonstrates a fundamental misunderstanding of the complexities of the industry.”
What would be the point of statutory regulation of managing agents then?
Why has government commissioned Lord Best to head a working group to look into how to formulate a new service charges regime and drive up standards across the sector?
Surely if rogue landlords and managing agents were exceedingly rare, there would be no need for Lord Best’s work?
And why is Nigel Glen, of the Association of Residential Managing Agents, calling for strict regulation? Only on Friday, Mr Glen told the BBC:
“It is crying out for regulation. It is crazy that – I use myself as an example – I set up with a business partner in a back bedroom and, a week later, I was handed half a million pounds of someone else’s money. And all I had to do was form a company.
It should be mandatory to have a license to operate. We think it should be criminal to operate in that market if you do not have that license to operate.”
Leaving buyers in mixed-use developments high and dry
As public outrage intensifies as the true face of leasehold is revealed, the industry’s arguments for keeping it going have become ever more sophisticated.
It is clear that the sector knows which way the wind is blowing. Forget fighting over the piddling leasehold sites.
They are pushing to ensure the Law Commission’s final recommendations on enfranchisement and commonhold conversion are conservative enough to ensure leasehold survives for the big mixed-use city schemes. These, of course, provide the most lucrative opportunities for developers and those who use service charges as a profit centre.
This is confirmed by the Estates Gazette op-ed, which said that there has been pushback on plans to reform the commonhold legislation to make it compatible with mixed-use developments “as this is a step too far until the system of commonhold becomes more established.”
It draws attention to the Communities Select Committee’s misstep over mixed-use. The group’s report suggested that “the most complex, mixed-use developments would continue to require some form of leasehold ownership”.
The industry’s self-serving concern around the complexity of mixed-use actually led to the select committee proposing to exempt such developments from legislation capping ground rents on new-builds at zero financial value (see above). Thankfully, government hasn’t fallen for the trick:
“… mixed-use developments will be subject to the policy. The management and supervision of mixed-use developments is no different to that of single use developments. The costs of management and supervision are generally recoverable under the leases from residential leaseholders through the service charge and from commercial tenants in either the same way or as a part of the rent. The Government does not accept that ground rents are necessary in mixed-use developments.”
If anything, leaseholders in mixed-use schemes are more vulnerable to unscrupulous practices than those in predominately residential buildings.
An investor who gains the freehold of a mixed-use building can use his total control of the service charges from the residential floors to subsidise his commercial operations on the site.
Of course he’s not supposed to do this, but the ease with which service charge accounts can be delayed and fudged, and residential spending conflated with commercial makes it a temptation few will resist.
The Taylor Wessing lawyers suggest that opening up collective enfranchisement to leaseholders on mixed-use sites, “with the landlord taking a lease back on any non-residential units”, represents a “potential loss of management control … [which] will be worrying for landlords of mixed-use estates.”
We know why.
Leaseholders would then have the option to go nuclear and achieve self-determination. They could finally free themselves from this form of financial servitude where they are forever compensating the freeholder for living on their land.
No more third-party landlord aggressively monetising every element of their building.
Here’s hoping the Law Commission will drop support for the arbitrary 25% rule on non-residential premises in its final report.
Project fear narrative
The three lawyers seem to end their comment piece on a rather ominous note. There is a suggestion of mounting job losses if government goes too far on leasehold and commonhold.
“The BFP states that commercial real estate contributes £94bn to the UK economy – that’s more than 5% of GDP. If any reforms unduly stifle development or encourage international investors to look elsewhere, then will they be counterproductive?
In the meantime, developers are in a difficult position – they need a wide-ranging awareness of the proposed reforms, without yet knowing their full extent. They can make representations to the government, but it remains to be seen whether these will be heeded.”
Only time will tell as to whether the voice of the corporate lobbyist has trumped that of the consumer and voter. At least the scare tactics haven’t been working so far.