NLC RESPONSE TO LEASEHOLD CONSULTATION.

NLC RESPONSE TO GOVERNMENT’S LEASEHOLD REFORM CONSULTATION 26/11/2018

Implementing the ban on the unjustified use of leasehold in new build houses

Q1: Do you have views on any further means to implement the ban on unjustified new residential long leases being granted on non-exempt houses?
A1: Yes
If you do, please explain:
The NLC supports the ban on new leasehold houses but is concerned by the softening of language, introduction of proposed exemptions and the proposed cap on ground rents of £10. The previous Secretary of State for Housing, Communities and Local Government, Sajid Javid, was unequivocal in his desire to ban leasehold houses and reduce ground rents to zero. Government needs to be strong in the face of fierce lobbying by those with a vested interest in keeping the status quo. Creating exemptions and a leasehold asset give those who have already abused the leasehold system for financial gain, further opportunities and loopholes to continue such practices.
Changes in legislation for leasehold properties also provide an opportunity to legislate against new money making schemes that developers have used to replace the income they expect to lose from the banning of leasehold homes and zero ground rent, including:
• A ban on fee generating permissions on supposed “freehold houses” (also known as “fleecehold”).
• A ban on estate rentcharges on freehold houses.
• Legislation to force the adoption of public services by Local Authorities, This will prevent the growth of income streams of estate management fees that developers can and will sell on.
Government needs to act on these newer abuses of consumers to ensure that other new build scandals don’t fall closely on the heels of the leasehold scandal.

Q2: Do you have any views on how to provide appropriate redress for the home owners should (a) a long lease be incorrectly granted upon a house or (b) a long lease be granted at a ground rent in excess of the cap, after the legislation has taken effect?
If you do, please explain.
A2: In both cases, appropriate redress should be provided by the developer who has broken the law. There should be no costs to the consumers, who are not at fault. Care should also be taken that developers are not simply pointing the finger at the conveyancing solicitors for failing to point out their dubious business practices. This has been a common feature of the current leasehold scandal.
Introduction of a mandatory point of sale document, similar to the type of “Key Features” documents seen in financial services, could help prevent breaches of legislation in the first place.
Q3: To ensure there is a workable definition of a ‘house’, we would welcome your views on the type of arrangements and structures which should or should not be considered to be a ‘house’ for the purpose of the ban on new leasehold houses.
A3: The vast majority of houses can be identified as such. Simplicity is key to prevent the creation of loopholes that can be exploited. Anomalies can be dealt with as and when they arise that can then be used to supplement your definition and set case law.
Q4: With the exception of community-led housing, do you agree that any exemptions provided which allow the continued granting of new long leases on houses should have their ground rents restricted as proposed?
A4: No
If you do not agree, please explain why.
The NLC does not support an exemption for community-led housing or any other type of houses. Creating exemptions gives those who have previously abused and exploited the leasehold system more wriggle room to continue to do the same. Countries all over the world have community-led housing without the need for leasehold.
The question pre-supposes that the NLC supports exemptions and the £10 proposal for ground rent restriction. We do not.
Ground rent must be no more than a peppercorn. Any financial value, no matter how small, creates an asset class in ground rents. At £10, you give freeholders and management companies ammunition that it will cost more than £10 to collect and therefore needs to be higher. You will also face lobbying and challenges from an inflationary perspective, as a fixed financial amount does not increase in line with inflation. It is a short slippery slope down from there to decide that it should be “reasonable”, rather than £10, and we will soon be back to where we are now. The tribunal system is not fit for purpose and does not give leaseholders effective dispute resolution.
Leading property barrister Philip Rainey tweeted on 18th October 2018: “£10 is NOT “nominal”. Clearly driving force is to justify keeping £10 ground rents in right-to-buy leases which are paid to local govt. £10 fixed is a danger to #leaseholders but no use to investors. Peppercorn rent please.”
Ground rent is a charge for no service. If developers need funds to maintain services; they should be charged to residents via a transparent and clear service charge. The distinction between ground rents and service/estate management charges is deliberately blurred by those wishing to retain ground rents. This needs to stop.
Q5: Are there any other conditions that should be applied to exemptions from the leasehold house ban to make them acceptable to consumers?
A5: No
If yes, please explain what these conditions are.
Q6: Do you agree that there should be an exemption for shared ownership houses?
A6: No
If you do not agree, please explain why, including what alternatives to leasehold
arrangements could be employed to fulfil the requirements of shared ownership houses.
Shared ownership has already been reported by the Times as “what could be the next housing scandal” (The Times Shared Ownership scandal). Ground rent is a charge for no service. If developers need funds to maintain services; they should be charged to residents via a transparent and clear service charge. The distinction between ground rents and service/estate management charges is deliberately blurred by those wishing to retain ground rents. This needs to stop. Those in shared ownership should be clear about the expected increases in service charges.
Leasehold is a feudal tenure used in only a handful of countries around the world. Other countries have similar challenges with helping home owners onto the housing ladder without using leasehold tenure. It is essential that what is seen by Government as a central pillar of fixing the broken housing market does not continue to fuel this outdated archaic leasehold system. Commonhold can be adopted and other countries will have alternative models that can be implemented.
Q7: Do you agree that there should be an exemption for community-led housing developments such as Community Land Trusts, cohousing and cooperatives?
A7: No
If you do not agree, please explain why, including what alternatives to leasehold arrangements could be employed to fulfil the requirements of community-led housing.
The NLC does not support an exemption for community-led housing. Creating exemptions gives those who have previously abused and exploited the leasehold system more wriggle room to continue to do the same. Countries all over the world have community-led housing without the need for leasehold.
Q8: We would welcome views on the features or characteristics that should be included within a definition of community-led housing for the purpose of an exemption.
A8: We do not consider this question to be applicable given we do not support an exemption for community-led housing.
Q9: Do you agree that there should be an exemption for land held inalienably by the National Trust and excepted sites on Crown land?
A9: No
If you do not, please explain why, including what alternatives to leasehold arrangements could be employed to fulfil the requirements of the National Trust and owners of Crown land.
Countries all over the world have housing in National Parks and in areas of outstanding beauty without the need for leasehold. If the National Trust and the Crown do not want to sell the properties or the land then properties can be rented out on a long term basis. With this model, tenants are clear that they are renting, unlike leasehold, where many leaseholders find out they are tenants after they have bought the property.
Q10: Do you agree that the law should be amended to allow the inclusion of newly created freeholds within existing estate management schemes?
A10: Yes
If you do not agree, please explain why.
Q11: Are you aware of any other exceptional circumstances why houses cannot be provided on a freehold basis that should be considered for an exemption, in order to protect the public interest or support public policy goals?
A11: No
If yes, please state what further exemptions may be required and why, and if possible provide examples or further evidence.
Please include your evidence of how prevalent this issue may be (for example, the number of developments/units likely to be affected) and why alternative arrangements to leasehold cannot be employed, as well as how such a development might be defined for the purposes of an exemption.
Q12: Do you agree that there should be no further transitional arrangements after the commencement of the legislation to permit the sale of leasehold houses?
A12: Yes
If not, please explain why transitional arrangements are needed and what they should be
Implementing the reduction of future ground rents to a nominal value
In answering Yes to this question we assume that you mean there should be no further transitional arrangements after the commencement of legislation to ban the sale of leasehold houses.

Implementing the reduction of future ground rents to a nominal value
Q13: Are there justifiable reasons why ground rents on newly created leases should not be capped as a general rule at a maximum value of £10 per annum, but instead at a different financial value?
A13: Yes
If so, please explain (a) what that rate should be and (b) your reasons in support of that value. Please provide any evidence to support your reasons.
Ground rent must be no more than a peppercorn. Any financial value, no matter how small, creates an asset class in ground rents. At £10, you give freeholders and management companies ammunition that it will cost more than £10 to collect and therefore needs to be higher. You will also face lobbying and challenges from an inflationary perspective, as a fixed financial amount does not increase in line with inflation. It is a short slippery slope down from there to decide that it should be “reasonable”, rather than £10, and we will soon be back to where we are now. The tribunal system is not fit for purpose and does not give leaseholders effective dispute resolution.
Leading property barrister Philip Rainey tweeted on 18th October 2018: “£10 is NOT “nominal”. Clearly driving force is to justify keeping £10 ground rents in right-to-buy leases which are paid to local govt. £10 fixed is a danger to #leaseholders but no use to investors. Peppercorn rent please.”
Ground rent is a charge for no service. If developers need funds to maintain services; they should be charged to residents via a transparent and clear service charge. The distinction between ground rents and service/estate management charges is deliberately blurred by those wishing to retain ground rents. This needs to stop.

Q14: Are you aware of a separate ground rent being charged in addition to a rent on the retained equity in shared ownership leases?
A14: No
If so, do you know how much ground rent is charged? Can you say how widespread this practice is? If known, what is the justification for such a practice?
Q15: Do you represent a community-led housing provider which does not rely on ground rent income?
A15: No
If so, what alternative methods of funding have proved successful and could be replicated elsewhere?
Q16: Do you agree there is a case for making specialist arrangements permitting the charging of ground rents above £10 per annum for properties in new build retirement developments?
A16: No
Please give your reasons.
Ground rent is a charge for no service. If developers need funds to maintain services; they should be charged to residents via a transparent and clear service charge. The distinction between ground rents and service/estate management charges is deliberately blurred by those wishing to retain ground rents. This needs to stop. Claiming ground rent is necessary for shared services is confusing for consumers, particularly those who are older and potentially more vulnerable. Service charges fund services, and this should be clear to consumers.
If developers building retirement developments do not retain freeholds, then the argument that this income is needed for shared services is flawed.
Q17: What positive or negative impacts does paying ground rents have on older people buying a home in the retirement sector? Please give your reasons and if you think the impacts are negative explain what measures might mitigate them.
Positive impacts
None
Negative impacts
Confusion about what the ground rent is for; particularly confusion between ground rent and service charges.
Simply paying groud rent and late payment fees can be an issue for older people who tend to have more issues with memory loss, mobility issues and can be uncomfortable with technology (e.g. online banking).
Threat of forfeiture.

Q18: Do you agree with our approach to the treatment of mixed use leases?
A18: Yes

Q19: Are there any other circumstances in which mixed use (a) should be within scope of the policy or (b) excluded from the scope of the policy?
A19: Mixed use leases must not be open to abuses seen to date. Ground rent should be a peppercorn and good reasons must be given as to why more than 25% of a building is reserved for commercial use to counter any collective enfranchisement claim.
Please explain your reasons.
Q20: Do you agree with the circumstances set out in paragraphs 3.34 to 3.37 in which a capped ground rent will apply in replacement leases?
A20: Yes, but capped ground rent must be a peppercorn.
Are there any other circumstances in which it should or should not apply? Please explain why.
No
Q21: Do you agree there should be no further transitional period after commencement of the legislation permitting ground rents above £10 per annum?
A21: No
If not, please explain why.
We agree that there should be no further transitional period after commencement of the legislation, but do not accept your £10 proposal for reasons given above. Ground rent must be restricted to a peppercorn.

Implementing measures to ensure that the charges that freeholders must pay towards the maintenance of communal areas are fairer and more transparent
Q22: Should we provide freeholders with a right to change the management of the services covered by an estate rent charge or contained within a deed of covenant arrangement?
A22: Yes
If so, what should this look like?
Government should legislate against the creation of private estates without good reason. Local Authorities should be forced to adopt public areas and developers must remunerate them to be able to do this. This will eradicate most of the problem going forwards as there will be no incentive for developers to create a token area of land and sell off another income stream.
Legislation should ensure that existing freeholders have freedom of choice to change the management of their services in a straightforward way at minimal cost. Developers must not be able to contract home owners into deals with management companies that they cannot escape from.
The tribunal system needs a complete overhaul and is unfit for purpose. Abusive management companies know that there is a premium they can apply to management costs below which it is not worth pursuing through tribunal. They also can repeatedly increase management charges on an annual basis knowing that many leaseholders (and freeholders) will not have the time and energy to keep going to tribunal every year.

Implementing measures to ensure that the charges that freeholders must pay towards the maintenance of communal areas are fairer and more transparent
Q23: What will be the impact of these proposals (paragraphs 4.8 to 4.10) on companies or bodies that provide the long term management of communal areas and facilities?
A23: This is currently a poorly legislated area and the NLC has numerous examples of freeholders being overcharged, exploited and abused by management companies providing little to no service. A regulator with teeth is required to hold these companies to account. Legislation should include an end to estate rent charges and force the adoption of communal areas by local authorities. If this area is not subject to much stronger legislation and protection for consumers, this will be the next housing scandal.
Q24: What would constitute a reasonable deadline for managing agents and freeholders to provide leasehold information?
A24: Less than 10 working days
Q25: What would constitute a reasonable maximum fee for managing agents and freeholders to provide leasehold information?
A25: Less than £100
Q26: What would constitute a reasonable fee for managing agents and freeholders to update leasehold information within 6 months of it first being provided?
A26:
If more than £50 – please specify the fee:
Fees should be minimal. If given a minimal fee amount, companies will adjust and streamline their processes to ensure they are as efficient as possible and make as much margin as they can.

Further Information/Evidence

The NLC welcomes the banning of new leasehold houses and urges the Government to remain committed to banning all leasehold houses and capping ground rent at a peppercorn. The NLC is campaigning for the abolition of leasehold; replaced with freehold houses and commonhold flats and apartments.
The NLC urges the Government to do more to help existing leaseholders as the current work on leasehold reform being undertaken by MHCLG and the Law Commission do not go far enough. Mortgage lenders are tightening mortgage lending criteria, including those for leasehold properties where ground rent exceeds 0.1% of property value. There needs to be recognition that ground rents that exceed 0.1% are onerous and the Government must undertake a full independent inquiry into the widespread and systematic mis-selling of leasehold properties. Developers, many of whom have made huge profits and awarded senior Executives multi-million pound bonuses, must be held to account for the creation and sale of onerous leases. Current redress schemes go nowhere near far enough. We recognise that the Government is committed to increasing the supply of housing and thus must act to force developers and freeholders to change lease terms to bring the thousands of leasehold properties that are now unmortgageable and unsellable back into the supply chain. Onerous lease terms could be viewed as unfair contract terms and the leases converted to freeholds. Freeholders will undoubtedly want compensation for this and it should come from the developers who have profited from their creation.