A highly-anticipated report found leaseholders have been unfairly treated by a system which was balanced in favour of freeholders. It discovered some developers had imposed ‘onerous’ ground rents on leases of new build flats and houses.
The Housing, Communities and Local Government Committee also uncovered cases of mis-selling and is calling for an investigation into this and for recommendations to be made on compensation.
Many leaseholders own flats and pay ground rent to a freeholder, who owns the building. However, there are also cases where the freehold is owned by developers who own the land on which a new build property has been built.
Improving leaseholders’ circumstances
The report found the leaseholders were being treated as source of ‘steady profit’ by the developers and freeholders. As such, the committee said it wanted the Government to establish ‘commonhold’ as the primary model of ownership for flats in England and Wales as one of the main reforms for tackling the abuse of the leasehold system.
It also wants to put an end to leaseholders being charged high ground rents. It said they should be limited to 0.1% of the property’s value and capped at a maximum of £250 or lined to the rate of inflation.
The committee also found leaseholders were being hit with high and unclear service charges and one-off bills as well as unfair permission charges. There was also evidence of imbalanced dispute mechanisms, inadequate advisory services and unreasonable costs to enfranchise (to purchase a share of the freehold) or extend leases.
Louie Burns, a leasehold reform campaigner and managing director of enfranchisement specialists the Leasehold Group, welcomed the report, which he thought offered recommendations which would improve leaseholders’ circumstances.
He said: “For years we have been calling for reforms that will limit ground rents, tackle unfair service charges and permission fees, outlaw the sale of leasehold houses and the mis-selling of leasehold properties, and address the systemic imbalances of power that have favoured freeholders’ interests for far too long.
“Freeholders have been arguing that their human rights will be affected if their contractual income streams are reduced. It is particularly encouraging that the select committee has supported leaseholders’ human rights to pay a lower premium to enfranchise and called on Government to remove onerous terms from existing leases.”
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Report recommendations
- The Government should establish commonhold as the primary model of ownership of flats.
- The Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for compensation.
- Developers should be prohibited from offering financial incentives to persuade customers to use a particular solicitor
- Ground rents should be limited to 0.1% of a property’s value, and never higher than £250 or linked to the rate of inflation (Retail Price Index).
- Ground rents on newly established leases to be set at a peppercorn (i.e. zero financial value).
- The Government should introduce legislation to restrict onerous permission fees in existing leases.
- The Government must legislate to require that freeholders’ tribunal costs can never be recovered through the service charge, or any other means, when the leaseholder has won the case.
- The Law Commission should recommend a process that will make enfranchisement substantially cheaper, even if that represents a transfer of power from freeholders to leaseholders.
- The term leasehold should be changed to “lease-rental”, which is a far better reflection of what consumers are actually buying into when the purchase a lease on a residential property.
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