Reforms proposed to tackle abuse of leasehold system

A group of MPs have tabled proposals for changes to the leasehold system in England and Wales which sees some homeowners saddled with high charges and leaves them unable to re-mortgage or sell their properties.

A newly published report has found that the current system treats property owners unfairly and is unfairly balanced in favour of freeholders. It also reveals that some developers have imposed ‘onerous’ ground rents when it comes to leases of new build flats and houses. The Housing, Communities and Local Government Committee uncovered cases of mis-selling, leading to calls for an investigation and recommendations that compensation payments be made.

Why has the current system come in for criticism?

Under the current system, many leaseholders pay ground rent to the person that owns the building, who is known as the freeholder. While some freeholders are private individuals, in some cases the freehold will be held by developers who own the land on which new build properties have been constructed.

The report found that some developers and freeholders are treating leaseholders as a source of ‘steady profit'. In response, the committee has proposed the establishment of ‘commonhold' as the primary form of ownership for flats to tackle those abusing the current system for profit.

MPs also want to end the practice of leaseholders being charged high ground rents, with recommendations that these rents be limited to 0.1% of the property’s value and be capped at £250 or in line with inflation.

It was also discovered that leaseholders are finding themselves subject to high and unclear service charges, one-off bills and permissions charges. The report also found evidence of inadequate advisory services, imbalanced dispute resolution mechanisms and unreasonable costs to extend the leasehold or to enfranchisement, the process whereby a share of the freehold is purchased.

What changes does the report recommend?

In addition to capping the capping of ground rents and the establishing of commonhold ownership, the report recommends that the Competition and Markets Authority investigate mis-selling in the leasehold sector. In cases where this is shown, there should be a system of compensation for those who have been forced to pay out unfairly. There are also recommendations that developers be prohibited from offering financial incentives that may persuade customers to use the services of a particular solicitor, and that ground rents for newly established leases be set at a peppercorn rate. There are also calls to make enfranchisement substantially cheaper and that the term leasehold be changed to "lease-rental" to reflect better what consumers are buying into.

Leasehold reform campaigner Louie Burns welcomed the report, stating: “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.

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