Work with this leasehold reform Bill, or wait for Utopia? Minimum: another 3 more years

Are well heeled leaseholders in Docklands – who won’t face a shot fired in anger at the property tribunal – right to talk down the Leasehold and Freehold Reform Bill? It is not ideal, for sure. But if it dies – and it may well do so if it drags on to September next year – then we are three years off another attempt. Leaving aside the ditching of mandatory commonhold, there is a lot in the Bill that will make leaseholders’ lives better.

A version of this article appeared on November 27 in the “i” Newspaper:

New leasehold reforms are a welcome relief to millions of powerless tenants

The leasehold racket is coming under scrutiny of Parliament in a set of reforms that are remarkably wide-ranging

By Sebastian O’Kelly

It was 11-years ago that I set up the Leasehold Knowledge Partnership with the aim of killing off the leasehold tenure that is unique to England and Wales, and from last week a major Bill is before Parliament.

On the face of it, it is yet another first aid patch on a system that guarantees multi-billion pound incomes riding on the backs of ordinary families’ home owning dreams.

And it is certainly true that what we really want – abolition – is absent.

We don’t get compulsory commonhold, which is the form of tenure used just about everywhere else in the world in which flat owners part-own their buildings and the land on which it stands, and have to co-operate with their neighbours to manage them.

We don’t get the regulation of property managing agents, who hold billions of pounds of leaseholder service charge funds. Nominally the money is in trust accounts, but how it is spent, and on whom in terms of service provider, is a decision taken by them alone.

The agents’ employer, the freehold owner, once solely the aristocratic families who still own great swathes of our city centres, is now invariably an anonymous private equity punter, often offshore.

After careful consideration, these investors – who elbowed out pension funds from the ground rent game years ago – decide that the best recipient for this money is, in fact, themselves, through related companies providing services or assorted commissions ad nauseam.

Millions of leaseholders have watched powerlessly as their money is plundered by a freeholder enjoying a preponderant position in law as the legal landlord: even though the freehold itself may have cost as little as 1-3% of the total value of a block of flats.

In 2016 the government funded quango the Leasehold Advisory Service found that 57% of leaseholders regretted their decision to buy – and that was before the 10-year doubling ground rent scandal and the ongoing misery – and expense – of the post-Grenfell building safety crisis.

So the way we are selling flats – a market now half the size of 2019 – is not working.

The leasehold racket is coming under scrutiny of Parliament in a reform that is remarkably wide-ranging.

It may just be enough to stop plc housebuilders from selling their properties as leasehold at all.

After all, if leasehold is this toxic after countless efforts at reform, then why not voluntarily sell flats as commonhold, or self-managing with share of freehold as more attractive alternatives?

The Bill is a full-on assault on leasehold’s income streams: a consultation is already underway on existing ground rents, proposing setting them to a peppercorn: which means no monetary value, or zero.

This goes way beyond what the Law Commission recommended, scared off by the prospect of a legal challenge: either a judicial review, or a landlord bankrolled by the sector to take a case all the way to the Supreme Court.

The consultation ends on December 21, and we will wait and see. But all the options considered will drastically reduce ground rents, and the ruinous games played with them.

Then there are service charges.

MPs are bound to attempt amendments to regulate the funds – which is in fact also backed by the Association of Residential Managing Agents – and we are not far off that in the Bill. It proposes that they are presented in a standardised format that can be more easily scrutinised and challenged.

At present, leaseholders in blocks of flats are presented with accounts that are often opaque and late – all the better to get through the limitation periods in case the leaseholders mount a legal challenge.

Insurance commissions – “opaque and excessive” according to government – are also under assault, with the Financial Conduct Authority busy investigating. They are to be replaced with “transparent and fair handling fees”.

Fiddling the service charge and padding insurance costs are endemic to the sector, but unlike the ground rents, which are stated in the lease that was signed by a buyer with legal advice, they are not a legitimate income stream. So MPs can strip them out with no risk of come-back.

The lucrative lease extension and enfranchisement side-line – where the rules were dreamed up by valuers working for the main London estates – is also under assault: at present, leaseholders have to pay all a freeholder’s legal costs when extending a lease, which will end.

Also, instead of 90 years, the statutory lease extension will now be 990 years.

NO ONE SHOULD BE EXTENDING THEIR LEASE RIGHT NOW. ENFRANCHISEMENT IS IN DEEP FREEZE, UNTIL THIS BILL IS PASSED. OR NOT.

Freeholders happily take a final cut when a flat is sold, signing off simple papers that there are no outstanding debts: £500 seems to be about the norm. This is also to be closed off: with a maximum fee and a dictated maximum time-scale.

The second point is important: at LKP, we are used to freeholders angry at obstreperous leaseholders simply delaying or scuppering their flat sales to settle scores.

Most leaseholders’ rebellions are crushed by the imbalanced cost regime of the courts: all leases will give the freeholder his legal costs; whereas leaseholders will never get their legal costs from the landlord.

The Bill proposes scrapping “the presumption that leaseholders pay their freeholders’ legal costs when challenging poor practice that currently acts as a deterrent when leaseholders want to challenge their service charges”.

That is a polite way of putting it. One prime London site where the leaseholders have won back more than £600,000 are seeing the case appealed in January by their landlord to the upper tribunal. Outrageously, the landlord’s appeal costs are being paid out of the service charges: so the leaseholder victims are paying the landlord’s costs to justify his “crime”.

There is this egalitarianism in leasehold: rich or poor you can turned over just as easily by the system.

The leaseholders at one really fancy site, West India Quay in London’s Docklands, where duplex owners are paying more than £30,000 a year in service charges, are being bullied by their landlord with impunity just as much as a pensioner living in 3 Railway Cuttings.

Ruinously expensive litigation is not an attractive option for them – especially given legal wars of attrition against the landlord elsewhere in Docklands.

But the Bill may offer help to this, and other mixed use sites that have residential and commercial uses.

At present, leaseholders cannot take over the management of a site or have a right to buy the freehold if the commercial portion exceeds 25% of the building. The Bill will change this to more than 50%, allowing quite a number of large sites to take control of their own affairs at last.

All in all, the Bill is a pretty devastating charge sheet against existing practices in leasehold. This game has gone on too long, and a first aid bandage won’t cover up its awful reality.

And this Bill is from the more sympathetic Conservative government. Imagine what Labour would come up with, its majority urban MPs aghast at practices in this sector?