Leasehold reform, a never ending story?

Relavity Graph 1

It would be unfair to label Parliament uncaring to the plight of leaseholders. It would also be over simplistic to assume the Noble Lords were the feudalists who always block change. I’ve been browsed the dusty annals of feudal leasehold, well…as far back as 1998 anyway.

BBC news June 1998

As we stand here in 2017 at the seeming dawn of yet more reform it is odd to read the last reform consultation paper issued in November 1998, heralded by the BBC news article above (copy of 1998 paper here).

“Residential Leasehold Reform in England and Wales, A Consultation Paper 1998”

The then Department of Environment, Transport and the Regions (DETR) issued a consultation in November 1998. Taking some highlights…

The Minister’s opening remarks make a good start:

It is totally unsuited to the society of the twentieth – yet alone the twenty-first – century

 

The leasehold tenure is almost unique to England and Wales. It has its roots in the feudal system and gives great powers and privileges to landowners. It is totally unsuited to the society of the twentieth – yet alone the twenty-first – century.” Hilary Armstrong, DETR.

Twenty years on and leasehold is not merely still deeply rooted in England and Wales, it has flourished into ever greater depths of exploitation (if you can flourish downward).

The Minister in 1998 was clear:

The Government believes the leasehold system is fundamentally flawed. It is committed to introducing a new form of tenure for flats – commonhold – which in future will enable the individual flat-owners in a block to own and manage the whole building collectively from the outset. We see commonhold as the best way to tackle the problems faced by many existing residential leaseholders. However, in the meantime we still need to undertake a major overhaul of leasehold law to help the existing two million residential leaseholders in EngLand and Wales.

The government had a plan or five:

  1. make the collective enfranchisement of blocks of flats far easier and reduce the need for expensive professional advice;

  2. give leaseholders of flats a new ‘no fault’ right to manage their block;

  3. subject the activities of managers and managing agents to tighter control;

  4. stamp out insidious new forms of abuse by landlords;

  5. rationalise leaseholders’ rights and the related rules and procedures, to eliminate anomalies, unjustified inconsistencies, and loopholes.

At least number 2 made its way into law – though running an RTMC is not plain sailing due to legal gotchas.

Only one out of five aims achieved? I find it hard to notice any evidence of improvement in the other four.

There were significant pearls in the 1998 consultation:-

The Government is currently disposed to amend landlord and tenant legislation so as to require separate service charge accounts and, where they exist, reserve funds to be maintained for each property, or for each group of properties for which there are common service charges.”

A simple enough legal change with such profound implications for millions of leaseholders paying huge sums of money to third parties – yet this reform, although it got into the CLRA 2002 Act, sat unused until quietly dumped in 2010. No reason was offered that I can find, other than politics. The £leasehold industry had a powerful lobby. Who wants financial transparency in leasehold?

Chapter One of the 1998 consultation is depressing with the benefit of hindsight:

The Government considers that leasehold is a fundamentally unsatisfactory tenure particularly for flats, since the leases for flats tend to provide greater scope for abuse by the landlord. The value of the landlord’s interest in the property is normally far less than the leaseholders’, until the lease nears its end. Yet throughout the life of the lease, the landlord has far more power than the leaseholders. Some landlords use that power responsibly and moderately, but others do not. The worst of them abuse their position to exploit their leaseholders in a wide variety of ways. The reform legislation of the last thirty years has had only limited impact. Paragraph 4.

Yes, and add the reforms of 2002.

Then in paragraph 8 we learn of the many ‘rights’ leaseholders enjoyed:

Leaseholders have also been given a range of further safeguards against bad management. These include:

  1. rights to information about the landlord and about service charges, insurance and related matters;

  2. obligations on the landlord to hold service charge and sinking fund contributions on trust;

  3. rights to challenge before an independent Leasehold Valuation Tribunal (LVT) the reasonableness of service charges, insurance premiums etc;

  4. a right to ask the LVT to appoint a new manager if (for example) the landlord is in breach of his obligations;

  5. a rights to be consulted (in some cases through a recognised tenants’ association) about major works and the selection of contractors, and the employment of a management agent;

  6. a right to have a management audit carried out;

  7. an additional right of compulsory purchase of the freehold, on more favourable terms, if the landlord is in persistent default of his obligations.”

Do leaseholders in reality experience these rights?

I have elsewhere mentioned the hapless lessee who went all the way to the Court of Appeal for basic information only to be chastised that the government never expected landlords to face civil injunctions even if they committed criminal offences.

Holding service charges on trust was no protection when I found buried in a trial balance (not transparent on the annual accounts naturally) that one of our agents had transferred funds to their own company account, presumably as a cashflow ‘loan’. No cost invoice was attached.

The word “independent” applied to tribunals chaired by industry insiders is a stretch?

Can’t say whether appointing a manager works as we were advised against the ‘blame route’ and when we did go to tribunal they seemed oblivious to the truly horrific state of the accounts as evidence of shocking mismanagement. Not a single criticism was levied, perhaps because the barrister acting for the landlord seemed to run the hearing.

Right to be consulted? Please. We formed an RTA once with a nice certificate supplied by the property tribunal service to prove it (the landlord having refused to recognise us). Our landlord and agent at the time either ignored all our queries or pretended they had answered them. We wasted valuable months of our lives collectively on the pointless farce of forming an RTA. Got that tee shirt too.

What would an expensive audit achieve? Never had that explained to me.

I wonder if any leaseholders have ever managed to achieve compulsory purchase of their freehold die to their landlord’s bad performance? I must keep looking.

But the next paragraph (9) adds a dose of reality: “All this protection looks good on paper. Quite. In fact, paragraph 9 spells out the bitter reality. A reality that still applied in 2017. The DETR may no longer exist, but multifarious exploitations and the DETR’s own prophesy of new abuses certainly does.

Paragraph 10 (bear in mind this was the government in 1998) makes for bizarre reading:

The Government believes that the time has now come for a comprehensive reform of leasehold law. This should:

make the collective enfranchisement of blocks of flats far easier and reduce the need for expensive professional advice;

give leaseholders of flats a new ‘no fault’ right to manage their block;

subject the activities of managers and managing agents to tighter control;

stamp out insidious new forms of abuse by landlords;

rationalise leaseholders’ rights and the related rules and procedures, to eliminate anomalies, unjustified inconsistencies, and loopholes.

No need for expensive advice? The 2002 Act introduced a cynical process to help the landlord trouser even more profit and charge all his costs to the leaseholder. Reading the Hansard debates of the time reveals that the government insisted on marriage value over the protests of the Lords! How marriage value has any legitimacy beats me. The freehold can change hands for less than 5% of total value. Why does the freeholder deserve any share of the uplift in the lease value at the expense of the lessee paying for the deal? Bear in mind we start with a 99 year lease and add 90 more. Not 900 years. Since 2002 the cost of lease extensions has rocketed, first because of Spirelli and latterly because of Mundy. Freeholders need do nothing but wait for the courts to find new ways to fill their pockets.

What tighter controls were placed on managing agents? Sorry, beats me there too.

Insidious new forms of abuse? Oh, like doubling ground rents, selling houses leasehold, or backdating informal lease extensions to the original lease date, or the wide spread frustration of rights to a statutory extension over an informal one, which I notice LEASE suggests offers more “choice”. Seems the reforms did not stamp out many new forms of abuse?

I will end for now with paragraph 12:

In parallel with these reforms, the Government remains committed to the introduction of a new ‘common hold’ tenure. This will provide a far more satisfactory structure of ownership and management than leasehold for blocks of flats and other interdependent buildings with shared services and common parts.

What is extraordinary about all this laudable commitment is how the government seemed to know what needed doing and why, but failed to do it anyway.

What was the point of the Commonhold legislation that (a) required 100% agreement of all flats AND the freeholder to convert over from leasehold, or required the developers to choose to build commonhold?

It is not as if legislators at the time did not point out the fatal flaw in the criteria, but the government pressed on regardless. All those hours wasted perusing the clauses of a bill that few to no landlords would bother to follow. Profit is profit, after all.

 Sorry about the print quality of the 1998 paper. It was the only version Google offered. Perhaps the government of the time hoped nobody would read it?

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