Agents and developers in the firing line as MPs call for overhaul of the leasehold system

MPs have called for a Competition and Markets Authority (CMA) investigation into mis-selling in the leasehold sector in a scathing report that has implications for developers, solicitors and estate agents.

The Housing, Communities and Local Government Committee launched an inquiry into leasehold reform last year, assessing the adequacy of the Government’s work and what further interventions were needed.

MPs warn that the balance of power in existing leases, legislation and public policy is “too heavily weighted against leaseholders”.

Its report this morning calls for the CMA to investigate mis-selling in the leasehold sector within the next six months and, where appropriate, make recommendations for appropriate compensation, with the option of letting leaseholders purchase the freehold.

A spokesman for the committee said a mis-selling inquiry would focus on developers, but said agents and solicitors would also have to make changes so they are more transparent and so buyers are clear about the terms of a property’s lease.

MPs have also suggested the Government should require the use of a standardised key features document, to be provided at the start of the sales process by a developer or estate agent, which should outline the tenure of a property, the length of any lease, any ground rent or permission fees, and – where appropriate – a price at which the developer is willing to sell the freehold within six months.

The report said: “It is clear that many of the leaseholders we heard from were not aware of the differences between freehold and leasehold at the point of purchase, in particular the additional costs and obligations that come with a leasehold property.”

Another proposal is for the Government to prohibit the offering of financial incentives to persuade a customer to use a particular solicitor.

MPs said ground rents have in some cases increased to a level leaving properties unsellable and unmortgageable, while permission fees have been levied far beyond the reasonable cost of administration.

Both should be subject to legislation that establishes when they can be used and how they should be calculated, the report said.

The Government is urged in the report to revert to its original plan and require ground rents on newly-established leases to be set at a peppercorn value rather than the currently proposed £10.

Those with onerous ground rents in existing leases could also legally have them removed and limited to 0.1% of the present value of a property, up to a maximum of £250 per year, the report claims.

Clive Betts, chairman of the committee, said there is no reasonable case for a new-build house to be sold as leasehold and called for commonhold to be the primary model for flats.

“We found that the leasehold system often fails to provide an effective system for managing multi-occupancy residential properties, and believe that a commonhold model would be more appropriate in most circumstances.

“Buildings require effective management to ensure they are kept up to a sufficient standard of repair, but to spread responsibility for covering the costs. Yet in too many cases, leasehold has failed to do this, and acted primarily as means of providing a steady income for developers, freeholders or managing agents.

“In the worst cases, people have been left trapped in unsellable and unmortgageable homes, needing permission or having to pay high fees for even minor cosmetic changes. More common are opaque service charges and poor levels of maintenance, with no reasonable means for leaseholders to challenge or query how their buildings are managed. Financially, the buck always seems to stop with the leaseholders and there is little they can do about it.

“Over the course of this inquiry we have heard a number of claims that individuals have been mis-sold.

“Developers are adamant that they have not deliberately misled buyers with false promises or partial sales information. However, the pattern of near-identical stories demonstrates significant failings in the process.

“A mandatory document detailing standardised key features of the sale would help prevent such cases being repeated. The CMA should also investigate these claims and, where necessary, decide on appropriate compensation.”

Sebastian O’Kelly, director of campaign group the Leasehold Knowledge Partnership, described the report as a “demolition of the leasehold system”.

He said: “We have campaigned since January 2012 to see a parliamentary report turn such a clear-eye to this murky and exploitative corner of the housing market. The report is a huge vindication of our efforts.

“The report is devastating about how developers have taken their customers – and us, the wider taxpayers – for a ride by squirrelling in an investment asset in the homes of ordinary families.

“It is clear that MPs think that developer-recommended solicitors have been little more than stooges: dumping their supposed clients in onerous lease terms. Some of these – the doubling ground rents – have made these properties unsellable.”

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10 Comments

  1. GPL

     

    Do what Scotland did years ago, effectively banish our version of Leasehold – however, it’s much easier for politicians to keep kicking those cans around parliament as they coast towards their generous tax-payer funded pensions.

    An excerpt detailing Scotland’s system….

    ”In Scotland, we historically had our own form of property tenure called ‘feuhold’. This was previously the most common form of land tenure in Scotland, as conveyancing in Scots law was dominated by feudalism.
    However, legislation passed by the Scottish parliament, including the Abolition of Feudal Tenure (Scotland) Act 2000, and the Tenements (Scotland) Act 2004, effectively brought feuhold to an end.Now nearly all property is held under a tenure known as ‘Outright or Absolute Ownership’, including apartments and tenements. This is comparable to ‘Freehold’.
    Furthermore, the Long Leases (Scotland) Act 2012 automatically converted remaining long leases over 175 years to outright ownership. However, there are still a handful of isolated cases where leasehold properties remain in Scotland.”
     

     

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  2. ArthurHouse02

    With all respect to the people looking into this, is a purchaser does not understand the different between leasehold and freehold and thus bought the property when otherwise they would not have, then the sole responsibility lies with the purchasers solicitor.

    As estate agents we are there to clarify the important issues, length of lease, charges etc, but we do not offer legal advice and obviously are not qualified to give advice based on the content of a lease. We are also not there to thoroughly advise on the downside of buying a leasehold property, this again is down to the solicitors.

    Do not be dragging agents into this just because we are easy targets, we are here to sell properties not to give legal advice because a buyers solicitor is too lazy to sit down and thoroughly explain the situation to their client.

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    1. Will2

      I have to say whilst I appreciate fully your stance agents hold themselves out to be property experts and as such should be able to explain to prospective purchasers to broad difference and why the leasehold/freehold systems exist. As a professional you have a wider moral duty than a  second hand house/flat salesman.  The answer is MOST propsective purchasers do not know the difference between freehold and leasehold. For them it may be a once in a lifetime purchase.  I accept you may not be qualified to, or probably experienced in understanding the exact meanings of lease terms but a broad explanation of the tenures should be within your scope as a professional estate agent. I accept also fully that it is for solicitors to enlighten purchasers of the full terms of the lease etc once they have been appointed.  So in my (probably unpopular) opinion if you just flog property you do not need to have an understanding of the legal systems of tenure but if you are a professional estate agent you should be able to guide purchasers in understanding the  main tenures. This is my view the difference between a professional estate agent and what I might call a house flogger.  OK give me those dislikes!!!

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      1. Benfield

        Leasehold serves a purpose in giving collective responsibilities and protections to all leaseholders. It’s the rip off costs of Ground Rent and extending leases that are a disgrace. 999 yr leases and Peppercorn rent should be the norm.

        The right for Leasees to pick their own Managing Agents wouldn’t be a bad idea too, stop any ‘dodgy’ freeholders appointing a woeful Managing Agent, who turn out to be in bed together so to speak.

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        1. Will2

          Benfield I totally agree with you.

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      2. ArthurHouse02

        Nope no dislike, your comment is completely fair. Any good estate agent should be able to thoroughly discuss the differences between freehold and leasehold with a potential purchaser, also any issues like lease extensions, flying freeholds, communal areas etc, plus be able to provide a simple to understand overview of the charges, ground rent building insurance maintenance etc….and of course length of lease remaining

        But after all this we still act for the vendor, our role is to sell the property and whilst not wanting to lead a purchaser into a sale they may want to pull out of later it is someone elses role to take them through the fine detail of the lease etc.

        I just see another route for government to bash estate agents, rather than actually look at the route of the problem which is developers building properties that should not be leasehold and then selling the freeholds on. Doubling ground rents, and looking much closer as to the role solicitors in tow with the developer though “acting” for the purchaser, play in advising their client as to what they are getting involved in.

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  3. Anthony Kerrigan

    Our Industry is an easy target, because this whole practice is wrong. I can see no valid reason why houses are ever sold as leasehold. There are some in our industry that are profiteering from this badly written legislation. I can however see issues for all blocks of flats being commonhold, OK maybe for smaller blocks, but not practical when it is a big block.

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    1. MsMoPo

      I’m very relieved that I’m in a small block, but why do you think big blocks would have a problem – down to the numbers needing to come to an agreement or is there more to it than that? Thanks

       

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  4. TwitterSalisPropNews

    Let’s pretend people are not adopting the modern way for finding out things ( ‘hey Alexa/Siri what is leasehold’ or just Googling ‘what is leasehold’) and we then see the steps a buyer takes in purchasing a leasehold:

    1. first looking on Rightmove as to what they can afford – but they can see an explanation of leasehold and freehold https://www.rightmove.co.uk/advice/buyer/buying-a-property/ways-to-own-property/

    2. they visit a specific property listing of a leasehold property on the estate agent’s website  – no information about leasehold, no detail about how many years left on the lease, never seen a copy of the seller’s registered title or lease

    3. they apply for a mortgage over it – no leasehold fact sheets given to them (nothing attached to the lender’s valuation either) as if they do not understand their lease the lease could be forfeited….lender and buyer. same hymn sheet

    4. they have a survey carried out – pages and pages of generic information (much of which is disclaimer) but no leasehold information given, certainly not how extending a lease involves a surveyor and can be expensive

    5. finally, they decide, “yes, a leasehold is for me that is the deal I want” ….and an offer is accepted

    Deal in place, they ask the lawyers to convey it.

    6. conveyancers involved.

    There is then something seriously wrong with the system, heads in the hands for sure, when everyone involved at 1-5 are excused and the sole responsibility is asserted to lay with the purchasers solicitor!?

    That is the point, conveyancers already can bail out valuers’ and estate agents’ misdescriptions and inaccurate assumptions. How often do estate agents even read the seller’s lease?! No where close to enough information is provided at an early stage. No purchaser should ever reach a conveyancer clueless about what a leasehold is, how long is the lease, what the ground rent is (and how and when it can rise) what the annual service charge is, what the tenants covenants are (can they have pets, or let it out!?), and how a lease can be lost through forfeiture.

    True, from a conveyancing point of view, the Property Information Forms could have much more useful information attached to them. Take the leasehold information form – it’s of no use at all frankly as what counts is what the landlord says in the LPE1 – so that form could be redesigned to educate a buyer.

    Thankfully, conveyancers keep their files for 12 years+ (even indefinitely) so their files will speak volumes, as sure, there will be some conveyancers who will have bee far to brief, but I cannot believe – even giving the parties 1-5 above a free pass for some reason –  that there will be many conveyancers, even the volume ones, who will be shown to have failed to tell the buyer all the examples about about their lease and leasehold.

    Problem is, when you want a property, we don’t care what the EPC says, what the survey says, or what our lawyer warns/tells us. We want to move in all smiley happy. Another reason repetitive multiple sets of information at every stage 1-6 should be given to an intending buyer. Not by party 6 alone!? Conveyancers can always improve the content of their information, as can every single party 1-5 above.

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    1. qweasdzxc

      You get a survey and pass details of a property to your mortgage company before you have had an offer accepted and instructed your solicitor? Have you ever been involved in a property purchase?

      Step 0 should be to get a Mortgage in Principle

      In steps 1/2 the estate agents details should include the details of the lease – see page 7 of https://www.propertymark.co.uk/media/1043356/ntseat-guidance-on-property-sales.pdf. A lot of agents don’t seem to comply with these

      Step 2a should be visit property & make offer

      Step 2b should be to instruct solicitor/conveyancer

      In steps 3/4, the lease should be considered when valuing the property. A leasehold with ground rent doubling every 10 years should have a much lower valuation than the same property sold a a freehold.

      It should not be up to the vendor’s agent to explain to the buyer the full details of the lease beyond the simple basics of length, ground rent, service charge etc. The buyer’s solicitor and surveyor should be the people who are checking these things. In particular, I don’t think it is the agent’s responsibility to check whether pets are allowed or the property can be let. Would you expect them to highlight that there is no right of support clause for a leasehold flat? Or to know that that isn’t required for an ex-local authority flat?

       

      If I was an agent, then I would be including the lease on my leasehold listings, highlighting the current years left and ground rent. I would then have given all the lease terms to the potential buyers.

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