Today’s Conveyancer Feature: The Leasehold Problem
Along with rising property prices and the growing reports of property fraud, leasehold problems have been a frequent feature in both conveyancing and mainstream reports over the past year.
This article will explore the progression of leaseholds and reform proposals, as well as highlighting the views of industry experts on both the problems with the system and what should be taken into account going forward.
- The leasehold problem: a brief history
- Governmental recognition
- The root of the problem
- Leasehold issues: Barriers to information
- Leasehold issues: Consumer confusion over conveyancing
- Leasehold issues: Shared responsibility
- Leasehold issues: Impact of advice
- Leasehold reform: Steps in the right direction
- Leasehold reform: A call to action
The leasehold problem: a brief history
Whilst it was first highlighted in January 2017, the problems for some consumers are ongoing, having to deal with doubling ground rents and leaps in freehold purchase price.
Although there have been key developments towards reform and concerted efforts to improve the system going forward, these have been criticised for not going far enough. Reports of suffering leasehold residents are still being published, and despite the praise that the changes have received, they are also clearly focused on leasehold residents of the future. What happens to those who are currently dealing with the leasehold repercussions is less clear.
In January 2017, issues regarding onerous terms in leasehold contracts were brought to the attention of the media.
Apparently unclear as to what the contracts entailed, many leasehold residents discovered onerous terms which they had to abide by. Exposed to the whims of the freeholder, residents contested that they had been put at an advantage, having to comply with terms such as rent doubling every ten years. This, they argued, meant their property would be incredibly difficult to sell later down the line.
Although there is a legal right for leasehold residents to purchase their freehold after two years, this also posed problems for those hoping to own their home. Whilst they had initially been quoted a particular price by the original builder, many developers sought to sell this freehold on to third-party investors. For homebuilders such as Bellway and Taylor Wimpey, this has been another valuable stream of income. For many residents, however, it saw the price they were initially quoted surge.
Whilst it’s predominant aim was to set out plans to boost the housing supply, the Housing White Paper also looked at tackling unfair leasehold terms and improve safeguards within the private rented sector. Forming part of Sajid Javid’s intention of fixing the broken housing market, the Secretary of State for Communities and Local Government went on to state the White Paper’s purpose was to “help homeowners of tomorrow” – but what about those of today?
Theresa May’s decision to hold a snap general election in June saw leasehold problems return to the headlines, with all major parties including key reform measures within their respective manifestos. June also saw the Legal Sector Group publish their proposals for leasehold reform, outlining their suggestions to Housing Minister Alok Sharma before presenting them to the Law Commission.
July, however, was arguably the month where the most significant changes to the leasehold system were put forward, with a ban on leasehold homes being proposed by the Government. A consultation paper – ‘Tackling Unfair Practices in the Leasehold Market’ – was also launched, aiming to set out a number of issues in the market, and seek feedback from both the public and professionals.
A key issue highlighted in the consultation related to the responsibility of solicitors involved, drawing on the need to use a specific solicitor to handle the purchase. The conveyancing community were quick to respond, with the majority dismissing accusations that their actions alone could have prevented the problems for affected leaseholders.
The root of the problem
Although problems regarding leaseholds have recently come to the fore, a number of professionals within the industry have highlighted that the problem is not a new one. However, as Peter Pownell, Licenced Conveyancer at Morecrofts explained, it may not be the leasehold itself which is the problem.
“Having been in conveyancing since 1968, leasehold as a concept has never been a particular problem. Problems have only arisen in respect of greedy developers selling properties under leases that contain totally unreasonable rent reviews.”
He went on to mention that leasehold homes often appealed to first-time buyers due to them being under the guise of affordability. However, this initial price would not account for the freehold, especially in cases where it would be sold on to investors.
“These are supposedly making new properties more affordable to first-time buyers, but then the developers are selling off the freehold reversions to investors who then seek to make money on selling the freehold to the owners of the properties at ridiculous premiums.”
Other professionals take a more cautious stance by advising to avoid leaseholds altogether. David Pett of MJP Conveyancing stated: “My starting point on leasehold property has always been to steer well away. They are more expensive to maintain; the cost of maintenance is uncertain and there is always a risk that when it comes to sell, they prove harder to shift.”
Leasehold issues: Barriers to information
Despite cost being a frequently criticised aspect of the leasehold scandal, this may not only be in regard to ground rent or freehold price. The financial cost of services such as information provision and confirmation of payments has been highlighted as a further barrier to market clarity, putting consumers at a further disadvantage.
On this issue, Mike Bowen of Jevons Riley & Pope stated: “The worst thing that has happened over the years (excluding the excessive regulation) is the insidious charges made by managers of properties for providing information and other services.”
Also highlighting this obstacle for consumers, Peter Pownell stated: “An additional problem is rip off leasehold agents charging phenomenal costs for confirming ground rent has been paid, granting licence to assign and consents for alterations.”
However, Sharon Bains of Enact Conveyancing suggested that this practice may be difficult to reverse given how accustomed management companies had grown to charging for these additional fees. The Senior Team Lawyer stated: “Despite challenging the myriad of additional, hidden costs of purchasing and selling a leasehold property, many landlords and professional management companies have grown too accustomed to being able to set out non-negotiable menus of extortionate fees and costs.”
Leasehold issues: Consumer confusion over conveyancing
Although contract terms have largely been deemed as confusing, others have suggested that this consumer uncertainty extends to the conveyancing process as a whole. A report released earlier this year highlighted the lack of consumer awareness around leaseholds, including that residents do not truly own their home if they are renting. Interestingly, the report revealed that just over half (58%) of respondents were aware of the duration of their existing lease, suggesting a need to increase awareness around all aspects of the system, as opposed to just terms.
Drawing on this and the need to improve consumer understanding was Rob Hailstone. The CEO and founder of Bold Legal Group (BLG) suggested that in order to reduce the risk of consumers being unhappy with their property agreement, the public need to be educated on the conveyancing process as a whole.
“The consultation has certainly prompted public and mainstream media debate. But I have to say, in all of the coverage over the summer, one thing has often stood out to me; an apparent lack of public emphasis on the importance of conveyancing within the wider context of buying a property.
“It’s not been unusual to hear discussion about builders and estate agents, but I haven’t heard too many people recognising the work that their conveyancer did for them. In fact, I’ve heard some people describe conveyancing as the “boring” part of the house buying process, apparently not realising that the leasehold details should be revealed during this “boring” part. It seems that conveyancing isn’t widely understood by the public. There is still some element of mystery to it. As a profession, we have some work to do in educating the public about the importance of conveyancing.”
Leasehold issues: Shared responsibility
As mentioned earlier in the article, there has been professional speculation as to what the scandal could mean for the solicitors involved. Whilst action may be taken by leasehold residents affected, they may be quick to assume the role of the conveyancer and overlook the shared responsibility of the housebuilder and estate agents involved.
Considering the situation should an allegation be brought was Jenny Screech. The Legal Professions Executive at Howden stated: “Prior to bringing a formal allegation of negligence, there are a myriad of issues that claimants and their solicitors need to work through including limitation, scope of duty, breach, causation, measure of loss, mitigation, and aggregation. Each case will turn on its own facts and it is too early to tell how the situation will develop.
“Given the media focus on this issue, it is reasonable to conclude that any hint of an allegation (e.g. a file request from a client) could lead to a claim, so we urge a precautionary approach. If you do receive a letter of claim, or intimation of claim you should notify your insurers in the usual way.”
Leasehold issues: impact of advice
Even where onerous contract terms or a future rent rise are mentioned, this may not always lead to the buyer being put off entering the contract. According to a survey conducted by BLG, just 55% of respondents stated that they had seen a buyer withdraw after they had alerted them to this.
Jenny Screech added: “Even if you believe you have given the correct advice, a former client may still ‘take a punt’. Unmeritorious claims are common in these situations, but insurers should with managing them. Where an insurer responds to a notification by stating that they do not consider the matter amounts to a circumstance, the firm involved has at least put a marker down, and the issue can be revisited if it develops.”
Whilst onerous clauses have been abolished, she highlighted that second-hand property may still be affected by complex terms. As a result, she went on to highlight the continued need for robust risk management procedures to be implemented where leaseholds are being dealt with.
“Documentation should be reviewed to ensure that advice regarding the onerous nature of a ground rent clause and its potential impact on value is abundantly clear, with absolutely no room for misunderstanding or doubt on the part of a client – whether purchaser or lender.”
Leasehold reform: Steps in the right direction
Moving forward, the majority of professionals expressed a positive view, stating that changes were moving in the right direction.
Highlighting the role of the Legal Sector Group in the push for reform, Mike Bowen stated: “We put together a wish list that included amongst other proposals dealing with the doubling ground rents, leasehold houses, management charges, insurance issues and many other small points all of which will make life fairer and better for the consumer (and incidentally lawyers and in some cases managing agents).”
“It is encouraging to see that the Queens speech and recent consultation papers show we are making progress. The Law Commission are looking at these proposals shortly. UK Finances new guidance also helps with the problems of leasehold houses and ground rents.”
Leasehold reform: A call to action
Looking beyond speculation and supporting the view to ban leasehold homes, Peter Pownell stated: “It is about time leaseholds for houses were phased out with restrictions put on apartments and flat leases, as well as existing leaseholds, so that only reasonable administration charges can be charged and give more clarity to the Landlord & Tenant Act 1988.”
Also drawing attention to the need for greater clarity, David Pett commented on the need for measures to help those who are currently dealing with problems arising from leasehold homes, not just protecting those of the future.
“The need for reform is well overdue and I am really hoping that the proposals, which could become law as soon as 2018, do not stop at limiting the sale of new build leasehold, and the reservation and increase of ground rents. There needs to be help for those who already find themselves trapped in the grip of leasehold property. There also needs to be more fairness and transparency introduced into the administration of leases to curb extortionate fees for producing leasehold information and registering new owners.”
Sharon Bains similarly highlighted the importance of taking practical action, stating: “The key will be to not only look at new leasehold properties, but also to lay out a comprehensive process to remedy existing leases, as well as be prepared to address any proposals to levy similar, unfair practices under the guise of setting up freeholds with management companies.”
She also highlighted the need for conveyancers to be considered in the reform, especially given their central role in the transaction process.
“Whilst consultation processes are invaluable, it is essential to make sure that the reforms take into account, and action, the experiences of conveyancers who battle with the issues arising from such leases, possibly by forming a technical committee comprised of experienced conveyancers, lenders and Land Registry.”