Question for Short Debate
Asked by
To ask Her Majesty’s Government what plans they have to reform leasehold legislation.
My Lords, in preparing for this short debate I have, as usual, been grateful to the House of Lords Library for its research. I am also grateful to the Consumers’ Association’s Which? and to the liberal think tank, CentreForum.
The previous occasion on which I spoke about leasehold reform at any length was during the passage of the Commonhold and Leasehold Reform Act 2002. However, in 2014, further reform is still needed and is very much a live concern for the millions of people living in leasehold properties. The issue continues to be raised in both Houses of Parliament.
Leasehold is the norm for many people, particularly those living in urban areas. The majority of new homes being built are flats, bringing the whole matter of leasehold further to the fore. The current system vests too much power in the hands of freeholders. As a Liberal, I always want to devolve power to as many people as possible, so I want to see leaseholders having a proper say in the management of their homes.
What is the problem? England and Wales are almost unique in operating a system of leasehold tenure on many bought properties. The system is aimed mainly at the need to ensure the upkeep and management of communal areas and, sometimes, to enforce positive covenants affecting all the residents. CentreForum’s report, Reforming Leasehold for the 21st Century, described leasehold as a “quasi-feudal system”.
One of the biggest problems is that most freeholders do not manage the properties themselves but employ management agencies to carry out their duties. These agencies have no legal responsibility to the leaseholders, and therefore have very little incentive to provide a reasonable service. In addition, these management agencies face very little competition. If leaseholders are dissatisfied with the services provided by these agents, there is nothing that they can do unless they can persuade the freeholder to make a change. The right to manage is a little known provision which allows leaseholders to manage a group of properties without having to buy the freehold. However, it requires 50% of leaseholders to support such a move. CentreForum suggests that, to encourage the take-up of this system, service charges should include information about the right to manage.
Usually, leaseholders have little or no contact with the freeholder; everything is done through the agents. There is an option to take cases for change to the leasehold valuation tribunal, but it can be a very time-consuming process and there are issues around costs. One of the big problems that often face leaseholders is unexpected major works. Leaseholders can find themselves in severe financial difficulty simply because the owners—or, very often, the managers—decide, for example, to replace all the windows, with little notice or consultation, leaving leaseholders with an unexpected major bill.
Which? Money highlighted other areas of concern in a 2011 article based on consumers’ evidence. One such area was the cost of insurance. Which? Money had unearthed examples of leaseholders saving up to 60% on their insurance premiums simply by cutting out the middleman and arranging their own cover. There have been suggestions that managing agents take a cut on arranging insurance and that they are not interested in getting a good deal. There is a lot of evidence around this and I am sure that my noble friend Lady Gardner will highlight some of these issues. In short, however, a lack of transparency around charges and no independent regulation has meant that there is very little pressure on agents to give leaseholders a fair deal.
As I indicated in my opening remarks, more and more people are living in leasehold properties than ever before. In 2012, an estimated 5 million people were living in 2.5 million leasehold properties in England and Wales. An estimate of the total charges they are paying comes to about £2.5 billion. In the 10 years to 2012, the number of cases of dissatisfaction that leaseholders have taken to the leasehold valuation tribunal has increased by 400%.
Has anything been done to assist leaseholders? During the passage of the Enterprise and Regulatory Reform Act 2013, the coalition Government accepted arguments that stronger protection was needed for leaseholders. I am pleased that, as a result, all letting and management agents now have to belong to a recognised redress system—I expect the Minister will give us an update on that. Also, the Leasehold Reform (Amendment) Act 2014 became law last month. It was a private Member’s initiative that the Government supported, which removes the requirement for a tenant to sign any notice of claim to a new lease in person. This is particularly helpful to anybody with a disability.
I am also aware that the Government committed to spending up to £2 million every year between 2011 and 2015 on a tenant empowerment programme for tenants in social housing. The Minister will no doubt expand on this when she responds. I know too that the Government have asked the Office of Fair Trading to undertake a market study into property management services. However, it is very disappointing that the study will not include an assessment of the legal framework that underpins freehold and leasehold management arrangements in England and Wales. The study also excludes local authority and social housing; the reason given for this by the Government was, they said, because registered social landlords will be responding to the needs of residents. I wonder if that is really a good enough reason, particularly when you can now find—in new developments—private ownership, shared ownership and social housing all in one building. I will be interested in the Minister’s comments on this.
We should be particularly concerned about elderly leaseholders. Most sheltered housing developments are sold on a leasehold basis. What assessment have the Government made about how well this sector is functioning? There is quite a lot of anecdotal evidence on this subject but there is a serious lack of authenticated facts. I wonder how the Government are keeping track of what is actually going on in the area of leasehold.
What could we be doing now? The Liberal Democrats have supported the creation of a national register of landlords; without the knowledge of who is leasing property, it is very difficult to take action against rogue and dodgy landlords. We also need to create greater drive towards the use of commonhold, which was introduced more than 10 years ago, particularly given the make-up of our housing stock. The main problem is that commonhold is not available unless 100% of owners agree—this is, of course, difficult to achieve. During the passage of the 2002 Act, I supported my noble friend Lord Goodhart in his lead in moving that the threshold be reduced to 80%. Meanwhile, CentreForum has proposed that, in order to build a critical mass of commonhold properties and to establish the system as part of the norm, all new blocks of flats built after 2020 should be sold as commonhold. As I indicated earlier, we should definitely also have better promotion of and information about the right to manage for people living in leasehold accommodation.
Lastly, it would be good to look at helping leaseholders when they are charged by the freeholder when they want to make improvements. The freeholder can receive a second benefit from this because, invariably, the improvements increase the value of the property. When the lease is then renegotiated or sold at a higher value, the freeholder benefits. CentreForum has proposed that the right to charge for permission to make improvements should only be available when the freeholder can prove that the charge requested would reduce the value of the property.
This is an important area and my noble friend Lady Gardner will give us a lot more vital information about it. I am disappointed that people who I know care about this subject have not been able to be with us for this debate. I hope that, when the Minister responds, we will not hear too many excuses for why we cannot take action in this important area of property ownership.
My Lords, I have asked many Questions in your Lordships’ House but the only Question I have ever asked in all those years on which there was not a single supplementary from any part of the House was about leasehold. No one knew what I was talking about. As I came out into the Lobby after the Question a number of people came up to me and said, “I would have loved to have come in on your Question but I had no idea what it was about”. That is still the problem with leasehold: people really do not understand it until they are already caught up in it, particularly if they are caught up in it in the wrong way because they did not look at the lease before signing it or they were so thrilled with what they found that they put aside any worries about the future. However, it is important that we all begin to understand it more. It affects more than 5 million people, mostly in London but all over the country. Even in political terms, people should be aware that 5 million votes are worth having. It is important.
My interest is declared in the register: I have owned a leasehold flat for a good many years. I bought it for the day when I could not manage stairs—but I still have not got there. At the time, all those years ago, we had a residential porter who took any parcels, let people in and did all sorts of useful things. What happened? The head lessee became a person who was interested only in making a profit out of it. They decided that the flat which the caretaker was living in was too expensive for that money to be wasted like that, so they fired the caretaker and now have someone who comes in for two or three hours a day and the money from that is now in the head lessee’s pocket. There has been too much of this profiteering at the expense of residents in these blocks. For years we had a qualified building surveyor who would look at the block and decide what should be done. No one ever looks at it now and it is ready to disintegrate if they do not get something done pretty quickly.
Important issues arise all the time. There are more than 2 million leaseholders who pay, in all, over half a billion pounds annually in service charges. That is a lot of money. Who is holding the money and how secure is the fund? Many of these issues have now been addressed by the fact that we are to have a redress scheme. I ask the Minister to confirm that that will be in place soon. The process of implementation has been a bit slow when you think about how long ago we passed the scheme.
Transparency is perhaps the biggest problem for everyone. People do not know what they are being charged for and whether or not it is legitimately required. In the block to which I referred, where I have a flat, they organised a new insurance policy without consulting anyone. Whereas last year residents of flats had to pay an excess of £250 on any claim, this year the excess has gone up to £2,500. The head lessee, who had the policy, has renegotiated it without any consultation so that every tenant in the flats will be liable for so much money that he will have to pay very little at all because we will be paying for it in the £2,500—a tenfold increase. I think that that is very unreasonable.
In 2009, in supporting better regulation, the British Property Federation drew our attention to the fact that Sections 152 and 154 of the 2002 Act were due to be in force at that time. They are still not in force. I ask the Minister what is happening with those sections. They are protective provisions and, as they are part of our law, they should come into force.
Leaseholders are entitled to know how their money is spent and transparency is one of the major issues. Sir Peter Bottomley has done quite a lot in the Commons on this issue. People are entitled to ask questions and get answers that are honest and can be established. There have been too many occasions—cases on the record—where people have found that they are making payments for things such as service charges but half of that money goes into the pocket of the head lessee or freeholder, who has made a deal with or even owned the builders or insurance company used. It is all quite wrong that that sort of thing should be happening and that leaseholders do not get honest answers when they ask about it. It is all being covered up all the time.
In 2007, Mark Prisk—a previous Housing Minister—put down an amendment to the then Consumers, Estate Agents and Redress Bill. He talked about “rogue” and “unscrupulous” agents and how the industry,
“now handles over £12 billion of people’s money annually”—[Official Report, Commons, Consumers, Estate Agents and Redress Bill Committee, 24/4/ 07; col.191]—
and so on. I am therefore glad that, last year, we at least agreed the amendment to the Enterprise and Regulatory Reform Act which has brought in registration of managing agents. Although that will be very welcome, I ask the Minister to confirm that it is still online to come in this year. It really has been a fair time already. There are good agents but protection for leaseholders is at a pretty low level and, as I said, there is no protection until that comes in, along with a redress scheme, which will be very valuable.
As the noble Baroness, Lady Maddock, said, I am a great supporter of commonhold developments. Leasehold property exists only in the UK and Hawaii. It is therefore pretty rare, and I do not consider it acceptable. However, the point about the 100% requirement is that 100% of the people in an existing block of leasehold flats need to want to change. That is very wrong. I have had Parliamentary Answers from different Ministers at different times which say that, “Yes, it is wrong and it should not be; it is impossible”. They say it is impossible to get 100%, and I am quite sure that that is right. All you have to have is a rogue landlord paying one person to abstain or deny and you have lost your 100%. A simple majority would be all right, but even a bit more than that might be possible. There are so many of these blocks where people live overseas and getting hold of them is not easy.
Sitting suspended for a Division in the House.
My Lords, please excuse me if I repeat something that I said earlier because running in and out does not help. It is high time that we had a consolidation Act. Since 1985 we have had about a dozen new housing-related Acts—I have been in the House since 1981 so have participated in every one of them—and each one has changed parts of the previous one. It has reached the point where even solicitors specialising in these matters have to consult Act after Act to be sure of the present legal position. The law should be clear, simple and capable of being understood by ordinary people. The Government should ask the Law Commission to review all these property Acts with a view to consolidating them. It would be better for the country and better for everyone. However, the Law Commission does nothing unless the Government ask it to because the Government have to meet the costs. The Law Commission does nothing now under any other circumstances.
Having served on an industrial tribunal for 20 years, I am a great believer in the tribunal system. Something has gone very wrong with leasehold valuation tribunals since the basic £500 maximum that you were asked to pay has been changed to a £500 minimum to bring your case at all, and with possibly very heavy costs after that. We also have the practice, which I have mentioned in the House before, whereby, win or lose, the head lessee or freeholder charges his costs in the tribunal back to the leaseholders. That was never the intention. The intention was that a leaseholder would not normally have to meet any costs and this would be a basis on which everyone could present their own cases. There is now a new tribunal system, as from last October, and I think we will be hearing a lot of dissatisfaction about this very shortly.
Rereading Hansard from the time made me wonder where the leaseholder tribunals went so wrong. The intention was for this to be a simple and inexpensive system. I am really quite surprised to find problems because I drew attention to the possible dangers at the time and half those dangers have arisen. Leasehold property has really complex arrangements. I would like to see it abolished but, on the other hand, that is a long way off. Every little bit of progress helps and it is important that we press on and teach people more about what it is all about.
My Lords, I should draw attention to my interests, as recorded in the register, as the owner of a leasehold property.
I begin by congratulating the noble Baroness, Lady Maddock, on securing this debate, if not the usual channels on its timing. We might have been advantaged if we had enjoyed the benefit of the seminar kindly organised for next week by the noble Lord, Lord Best, although we should thank him for circulating the related information from Which?.
We should also congratulate the noble Baroness, Lady Gardner, on her continuing display of expertise and persistence in this area, and indeed on educating noble Lords, including me, over the months and years.
One of the recent questions posed to the Minister at the other end and reiterated today by the noble Baroness, Lady Gardner, was whether the Government have any plans to consolidate the current legislation relating to leasehold and commonhold interests. Given the plethora of legislation touching on these issues, this does not seem an unreasonable request. Of course, we have added to that legislation recently but in a helpful way through the Leasehold Reform (Amendment) Act, which has made easier the processes of collective enfranchisement and leasehold extension. Consolidation would not just be a matter of legislative tidiness; it could contribute to addressing one of the oft-cited bugbears about the sector, which is that it is complex—it has been described as quasi-feudal today by the noble Baroness, Lady Maddock—and is not always fully understood by those who engage in it or, seemingly, by their advisers.
We have also added to the body of law via the Enterprise and Regulatory Reform Act, mentioned by other noble Lords, concerning access to redress schemes relating to letting agencies and managing agents. This was successfully campaigned for by my noble friend Lady Hayter and others, and eventually accepted by the Government. Like other participants in this debate, perhaps I may ask the Minister to give us an update on where these matters currently lie. The redress schemes are not a substitute for proper comprehensive regulation but are a step along the way.
Our deliberations are also taking place in advance of the outcome of the OFT market study into residential property management services, including, I understand, circumstances where the freeholder is a local authority or a housing association. We support this market study and await its outcome later this year, but our preference would have been for a wider study to encompass letting agents and indeed an assessment of the legal framework which underpins freehold and leasehold arrangements in England and Wales. It is this legal framework and the intermediaries that it can engender which are the source of the problems that are oft-cited and have been referred to in our brief debate today.
The typical arrangements are familiar to us all. Leaseholders have the right to occupy and use a flat, including subletting, for the term of the lease. They would generally be responsible for everything within the four walls of the property. The structure, land and communal parts will be owned by the freeholder, who will typically meet the related maintenance and repair obligations and other services via a managing agent, with recharges to the leaseholders by way of a service charge. As we have heard, the managing agent has no legal responsibility to the leaseholders. These flows and relationships are at the heart of the debate that we are having today.
Of course, there are variations on these arrangements, with leaseholders collectively owning the freehold through a collective enfranchisement arrangement. Do the Government consider that there are any residual barriers to these rights being used effectively?
There is also commonhold, which has also been referred to—a system of ownership which allows individuals to own properties with common ownership in perpetuity and collectively to control their management. However, as Which? points out, this has not taken hold as a form of ownership. It muses that this may be because developers have an interest in both developing and then managing leasehold property. The 100% requirement for converting existing leasehold properties to this basis would seem unduly restrictive in practice. We support Which?’s desire for this issue to be covered by the market study.
Whatever the precise formulation, we know that the residential leasehold market is huge. The Association of Residential Managing Agents—ARMA—estimates that there are between 1.6 million and 1.8 million flats in England and Wales. Some estimates put that figure considerably higher: 5 million was the figure referred to before. Given the inexorable growth of the private rented sector and the buy-to-let market, those numbers look bound to increase. We have heard that currently leaseholders might spend in the region of £2.5 billion a year in service charges. In terms of market concentration, ARMA claims over 300 corporate members that, between them, manage around 900,000 flats. About a dozen members are national companies with major portfolios of between 20,000 and 100,000 units. These numbers illustrate why the market study is appropriate.
The scope of the study is about determining: whether managing agents and freeholders have the same interests as leaseholders in keeping down maintenance costs and buildings insurance, and how best value can be achieved; whether leaseholders can sufficiently influence the appointment of managing agents or the extent of their services; whether the market for managing agents is competitive and whether there are practical barriers to switching providers; whether the choice of contractors to provide services is influenced by financial commissions—with insurance in particular—and associated company agreements; and whether there are barriers to leaseholders exercising their right to manage their own property. It touches on a number of the key issues and effectively considers the extent to which the lack of statutory regulation can exacerbate market deficiencies.
A number of other important issues have been highlighted but are not covered. There is the broad issue of the advice that consumers get about owning leasehold property, especially around the length of the lease, the ground rent, restrictive covenants and how service charges are determined. Again, as Which? pointed out, it would be helpful if the market study covered the effectiveness of the leasehold valuation tribunal and the government-funded leasehold advisory service, particularly in circumstances where the number of cases before the tribunal has increased dramatically. Obviously, one clear way to improve standards in the sector—a matter we were working on before the last general election—is a regulatory regime for managing agents. At present, anyone can set up as a managing agent without any relevant qualifications or experience.
Perhaps the Minister could say why the Government consider that a satisfactory state of affairs. What are the problems for government in requiring all managing agents to meet minimum standards of competency and professionalism, to have to declare all commissions received and to follow a code of conduct, particularly on the issue of transparency, which has been raised? Would the Minister accept that that would be an effective way of tackling inflated service charges and challenge connected company exploitation? We should applaud the efforts of ARMA in introducing a voluntary scheme as a step along the way to statutory regulation.
The focus of my presentation so far has been on the relationship between leaseholders and freeholders and their responsibilities and obligations—effectively the leaseholder as the customer. It is impossible to consider comprehensively the issue of leasehold reform without reflecting on the private rented sector more generally where the tenant might be seen as the customer. These relationships will sometimes be between tenant and freeholder, and sometimes between tenant and leaseholder, and thereby governed to an extent by the lease. As the Government acknowledge, the private rented sector comprise some 16.5% of all households, amounting to some 3.8 million homes in England, including some 1.1 million families with children. It is bound to grow and play an important role in meeting housing need.
We want to see a private rented sector that provides decent, safe, and secure homes at a price that people can afford. However, at present too many landlords prey on vulnerable tenants and too much of the private rented stock is non-decent. This undermines the work of the majority of landlords who strive to do the right thing. That is why we wish to develop a national register of private landlords—it is good that we have common cause with the Liberal Democrats, at least on that—designed to assist local authorities in their work, as well as helping HMRC, for example, push back against tax evasion in this sector.
We know that the leasehold/freehold divide has been a source of tension over many years. It is true that legislation over the decades has improved statutory rights for lessees but there remain serious practical issues which regulation can and should address.
I am grateful to my noble friend Lady Maddock for securing this debate this afternoon. Although there have been very few speakers in today’s debate, we have covered quite a bit of ground. I will certainly do my best to respond to all the points that have been raised. However, I may need to supplement my response with a letter and I will do that if necessary.
The noble Baroness, Lady Gardner, estimated that there were about 5 million leasehold properties in England. The Government estimate 3 million, but that certainly makes up a significant proportion of the housing market. I should declare from the start that I am an owner-occupier of a leasehold flat and I understand, as someone living in a property that is part of this regime, that it can be a complex and technical legal system. I certainly recognise along with others who have spoken today that it can cause problems for leaseholders and freeholders alike. But not everyone who owns a leasehold property experiences a lot of problems. What is important is that we strike the right balance in a way that recognises and protects the rights and interests of both leaseholders and freeholders and that we make sure that these rights are kept up to date with changing realities without making things more complicated, burdensome or expensive.
As the noble Lord, Lord McKenzie, just acknowledged, where we can make changes that are perhaps small in and of themselves, we do so where we think that that will be beneficial to people. The most recent example was when the Government supported a Private Member’s Bill that cleared up an important anomaly. Until that Bill, leaseholders who were unable personally to sign certain legal forms could not extend their leases or take part in buying the freehold. That small change will make a big difference to many elderly or vulnerable people, who will be able to appoint someone to sign on their behalf in the future.
My honourable friend and colleague the Housing Minister, Kris Hopkins, is already aware of some concerns about the leasehold sector that have been raised with him by Members of the other place. He is keen to listen to concerns, hear what people have to say and explore whether there is any possibility of addressing problems within the sector. Today’s debate is timely and I intend to report back to him on the points that are raised.
In addition to responding to the questions that have been asked, I think that it is important to remind noble Lords what the Government have done and are doing to make sure that the system is working effectively, that it is—to refer to the point powerfully made by my noble friend Lady Gardner—simple to understand and that it delivers high standards and easy access to remedies when things go wrong.
First, perhaps I may highlight the complexity. It is important to remind noble Lords that to help leaseholders to navigate the leasehold system, the Government provide access to free, independent legal advice and information through the Leasehold Advisory Service. My noble friend Lady Gardner of Parkes, as well as my noble friend Lady Maddock and the noble Lord, Lord McKenzie, sought to draw some comparisons with commonhold. They highlighted what the Commonhold and Leasehold Reform Act 2002 offered as an alternative to leasehold for properties such as flats.
In the past few weeks, in answering different questions and responding to a couple of debates on this topic, I have studied more about this subject than ever before and have improved my understanding. It is important to make the point that, when buying a property or a home in a building that is shared with other properties, it is difficult to conceive of a system that will be perfect and address everybody’s competing needs and rights. Although commonhold certainly offers some advantages, it also has some disadvantages. When people own leasehold properties, it is possible for them to challenge some of the decisions which are put forward and which may affect them, whereas once you are in a commonhold situation, it is very difficult, if you are in a minority, to challenge decisions made by the majority of commonholders in that block.
My noble friend referred to conversion from leasehold to commonhold and asked why that has not happened so far. We do not have any plans to review the rule that requires a 100% sign-up to commonhold from the different property owners in a block. We think that that is right, and it was debated in great detail during the passage of the legislation. As someone who owns a property in a block, I feel that, if such a significant change were proposed, everybody with a property in the block would want the decision on it to be unanimous.
As we know, commonhold rather than leasehold is also available as the tenure for new constructions, but there has not been a great deal of take-up on that. One thing that I can claim a little credit for is that I have asked my department to press a bit harder, through the forum that it holds on a regular basis with the construction industry, in exploring why the industry is not pursuing commonhold as an option.
While I am on the subject of commonhold and conversions, I should respond to a point made by the noble Lord, Lord McKenzie, about barriers to collective enfranchisement. That is obviously a slightly different arrangement, going from leasehold to freehold. Collective enfranchisement requires a number of criteria to be met, but these protect the interests of both leaseholders and freeholders. We are not aware of any residual barriers to collective enfranchisement at present.
I move on to the costs associated with leasehold, which is often raised as a concern for leaseholders, and it has certainly been raised by noble Lords today, in the context of public sector—that is, local authority—landlords where people have bought a former local authority property. We have recently consulted on proposals to cap excessive service charges for leaseholders living in former local authority properties whose landlords—that is, local authorities—benefit from Decent Homes funding, and we will be responding to that consultation shortly. We certainly remain open and receptive to further proposals to make sure that public sector leaseholders have fair and reasonable charges. My noble friend Lady Maddock asked about the OFT market study on property management services and I can confirm that it includes management in local authority and other social sectors in its work.
We are running out of time rapidly. This is such a wide and diverse topic that I cannot do it justice in the time available.
On the quality of service provided through managing agents, codes of practice have to be approved by the Secretary of State, and my department is currently working with the Association of Retirement Housing Managers and the Royal Institution of Chartered Surveyors on updating the codes. We also support initiatives to raise standards and the quality of service across the residential leasehold management sector. We welcome the self-regulatory scheme being introduced by the Association of Residential Managing Agents to raise the professional standards of its members. We will be watching with interest to see how effective and successful it is.
On the right to manage, I say to my noble friend Lady Maddock that 4,000 right-to-manage companies are registered at the moment, but her point about raising leaseholders’ awareness of this option is interesting and I have taken particular note of it.
Transparency and the information that is available to leaseholders is an important issue, which was raised by all noble Lords. Where leaseholders do not already receive service charge information as a condition of their lease, they have a legal right to ask for a summary of the relevant costs from their landlord. However, some interesting points were made on transparency and I shall reflect on them further.
My time is up, but as I have a few minutes left and have some issues to address before the next debate is due to start—
For the information of the Committee, the next debate will start at 3 pm.
My Lords, we had a communication from the Government Whips’ Office that these debates were to be rolling, because of the vote.
My sincere apologies to the Committee. That is my mistake completely and I offer my apologies. I have gone over my time. There is a considerable amount more information that I can provide, which I will do in a letter to follow up this debate.
The key point that I want to make in conclusion is that, while we do not have plans to reform the legislation in this area, my honourable friend the Housing Minister is very interested in the concerns that are being raised and we certainly look forward to hearing further following the meeting that will be chaired by the noble Lord, Lord Best, which was referred to. I am grateful to all noble Lords for their patience today.