Leasehold and ground rents could be scrapped under new recommendations

Leasehold homeowners trapped in unsellable properties have finally been offered some respite, with a new select committee report calling for an overhaul of the entire leasehold system.

The Housing, Communities and Local Government (HCLG) committee has this morning released a damning report into leasehold housing, specifically focusing on the issues facing existing leaseholders who have found themselves living in unsellable and unmortgageable homes.

The committee says developers, freeholders and managing agents have been treating homeowners as a 'source of steady profit', and has encouraged the Law Commission to investigate mis-selling of homes with punitive ground rent clauses and make recommendations for compensating existing leaseholders.

It has also called for the widespread introduction of a commonhold system - where owners of flats have equal shares of a freehold and manage it together - to replace the current leasehold system in England and Wales.

Here, we assess the report's key findings and explain the biggest issues facing leasehold homeowners.

HCLG committee issues damning leasehold report

The select committee, which consists of a range of MPs, says the government should do the following:

• Ensure that commonhold becomes the primary model of ownership of flats in England and Wales;
• Require ground rents on new leases to be set at a peppercorn level (of no financial value);
• Introduce legislation to restrict onerous 'permission fees' (where the leaseholder pays charges to make changes to a property);
• Require that permission fees are only ever included in freehold deeds when absolutely necessary (although the committee sees no need to have them at all);
• Introduce a standard form for service charges, which clearly identifies what the fees are for;
• Introduce low-interest loans to allow leaseholders to extend their leases if they cannot afford to do so.

The committee also says that the Competition and Markets Authority (CMA) should investigate mis-selling claims, and that the Law Commission should outline a process that will make buying the freehold of a property substantially cheaper.

Which? has been at the forefront of reporting on issues facing leaseholders, and submitted a formal response to the HCLG committee's call for evidence.

Leasehold: the big issues

Last July, Which? conducted the most substantial investigation of its kind into problems with leasehold homes, and uncovered a range of issues that left homeowners stuck with unsellable properties. These included:

• Clauses where annual ground rents doubled every 10 years, which could result in an annual charge of £250 rising to nearly £10,000 in 50 years. In many cases, leaseholders claim their solicitors never informed them of these clauses when they purchased the property.
• Developers selling off freeholds to third-party investment companies without informing the leaseholder, who should have had first refusal.
• Freeholders charging significant 'permission fees' to allow leaseholders to make changes or renovations to their properties.
• Mortgage providers refusing to lend on leasehold homes with punitive clauses in their leases.

Until now, the government has primarily focused on preventing new-build houses being sold as leasehold in the future (traditionally, only flats were sold as leasehold). While it has made some broad promises about making the process of buying a freehold easier, it has so far offered no clear method of redress for existing leaseholders.

Now though, the HCLG committee has put the ball firmly in the government's court, with its report requiring a formal response within two months.

• Find out more:the differences between leasehold and freehold ownership

Make commonhold the 'primary model of ownership'

The committee says there is no reason why the majority of residential flats can't be held in 'commonhold' rather than leasehold tenure.

Commonhold involves each person in a block of flats owning a share of the freehold and managing the upkeep of the building themselves by setting up a management committee.

The report says this form of ownership would be a positive move as commonhold properties are free from ground rents and lease extensions. It also says that there is no proof that professional freeholders currently provide a better service than leaseholders could provide themselves.

Scrapping punitive ground rent clauses

The report says that developers have 'sought to use their market dominance to exploit customers' by hitting them with onerous ground rent doubling clauses.

Developers deny claims of mis-selling, but the committee says the 'number of near-identical stories from leaseholders reflects a serious cross-market failure of oversight of sales practices'.

The report then recommends that the CMA investigates mis-selling and makes recommendations for compensation to existing leaseholders.

The table below from our investigation into the leasehold scandal shows just one example received by Which? of how doubling ground rent clauses can make leasehold properties unsellable.

Leasehold reform: what's next?

While the HCLG committee is forthright in its claims that the leasehold system needs a significant overhaul, it remains to be seen if and when this will come to fruition.

The report's claim that it would be 'legally possible' to introduce legislation to remove onerous ground rent clauses puts pressure on the government to act, but it does provide the caveat that 'freeholders would probably need to be compensated'. With so many affected parties, the process of introducing legislation could be very complicated.

As it stands, the government, CMA and Law Commission each have two months to respond to the report's recommendations.