The implications of the leasehold scandal

Originally published on March 19 as a blog for Inside Housing.

The leasehold scandal will have far-reaching implications for housing that will be felt well beyond the major housebuilders with whom it began.

A report published by the all-party Housing, Communities and Local Government Committee on Tuesday takes as its starting point the doubling ground rents and onerous contract terms faced by buyers of new homes who it says were treated ‘not as homeowners or customers but as a source of steady profit’.

And it also highlights the issue of leaseholders facing huge bills to remove and replace combustible cladding raised in its work on fire safety.

But this report goes well beyond those recent high-profile problems with leasehold and poses some fundamental questions about a tenure that only exists in England and Wales – and they are ones that will require answers by social landlords as well as private sector housebuilders and freeholders.

After receiving over 700 responses, most of them from individual leaseholders, the committee calls on the government to go much further on leasehold reform than it has already, with action on flats as well as houses and existing leases as well as new ones. Campaigners say the report ‘amounts to a demolition of the leasehold system’.

On the housebuilder scandal that began it all, the committee heard claims that buyers were mis-sold their homes in what amounts to ‘the PPI of the housing industry’ and denials from housebuilders that its sales staff made false promises and assurances.

It concludes that: ‘The number of near-identical stories from leaseholders reflects a serious cross-market failure of oversight of sales practices. Some affected leaseholders may have a strong claim that properties were mis-sold.’

On new sales the committee says the government should stick to its original plan of reducing ground rents to zero, rather than its amended one of capping them at £10, on new leaseholds and end developers’ practice of using preferred solicitors.

It also says ministers must do more to help existing victims of the scandal, with a low-interest loan scheme to help leaseholders buy their freehold or extend their leases (it calls this Help to Buy for leaseholders).

And in social housing the committee says the government should create a code of practice for local authorities and housing associations outlining their responsibilities to leaseholders and offering guidance on best practice in major works.

But the MPs also recommend a fundamental shake-up of the whole system of leasehold with much broader implications for the sector.

For starters, on top of an end to leasehold houses, they urge the government to make commonhold the primary model of ownership of flats, bringing England and Wales into line with the strata title and condominium tenures used elsewhere in the world.

They accept that ‘some form of leasehold’ might be required for more complex mixed-use developments and for retirement properties but say ‘there is no reason why the majority of residential buildings could not be held in commonhold’.

That would create problems for shared ownership and for community land trusts, both of which currently rely on leasehold, and for developments where local authorities have sold the land on a long lease, points made in evidence by the National Housing Federation but not actually mentioned in the report.

Housing associations would get a chance to lobby the government on all that but their potential problems do not end there.

For starters, the MPs think it should be clear in the sales process that leasehold is not the same as freehold home ownership:

‘Our view is that it would be more appropriate to refer to this tenure as “lease-rental”. The Government and others may wish to use this terminology in future publications and policy statements.’

That would have major implications for the way we see housing tenure: with 4m existing leasehold properties becoming lease-rented, levels of home ownership could be classified at little more than 50%.

And with housing associations already facing criticism over how they market shared ownership how will they go about selling ‘shared lease-rental’?

The implications do not stop there. The MPs also urge a range of action to protect existing leaseholders with implications for market sale and shared ownership developments

The outrageous practices that have led to leasehold being dubbed ‘fleecehold’ are by no means confined to the Persimmons and Taylor Wimpeys of this world or to the freeholders registered in tax havens.

Consider, for example, these comments from leaseholders raised by Labour MP Seema Malhotra in her evidence to the committee:

• ‘We are used as cash cows, they do as little maintenance as possible. You have to force them to do the maintenance.’
• ‘I pay for communal areas to which I have no access.’
• ‘The service charge has massively increased since its initial amount. I am due to be evicted next week as I cannot afford the increased amount.’
• ‘Service charge for communal repairs have gone up per flat by £2,700 despite the fact that they have never improved the premises.’
• ‘They charge us for £4,000 for parking facilities that do not exist.’

As you may have guessed, all of these comments came from leaseholders of housing associations in London.

Some of these cases may sound like the kind of disputes that can arise in any large development and the NHF argues in its evidence that associations’ leaseholders are better off than those in the private sector because they can seek redress via the Housing Ombudsman.

However, evidence like that should being put by leaseholders and their MPs should be a major concern for associations.

In a similar vein, Labour MP Jim Fitzpatrick, representing the All Party Parliamentary Group on Leasehold and Commonhold Reform, told the committee:

‘There has to be a complete rebalancing of the playing field to enfranchise leaseholders and give them greater rights under regulation against unscrupulous property management companies, which are ripping them off through service charges and refurbishment charges. Housing associations are doing exactly the same in the social sector.’

As Seema Malhotra puts it: ‘We all recognise there is an urgent need for more affordable housing and good models of shared ownership are vital.’

But she adds: ‘The unethical practices we are seeing are letting everyone down and reducing confidence and trust. Addressing these issues and bringing about system change will be clearly helped through strengthening the law and codes of practice.’

The government is still deciding how to reform leasehold and it remains to be seen whether it will accept the committee’s recommendations for more radical action.

Whatever happens, though, the after-effects of a scandal that began with the greed of a few major housebuilders will be felt across the housing sector.