On Wednesday the leasehold “industry” was given the opportunity to persuade Housing Minister Mark Prisk that it has cleaned up its act with new codes of practice and consumer charters.

The representation was largely from the commercial interests of leasehold and from the trade bodies that serve them. But there were also members of Parliament, such as Sir Peter Bottomley, Justin Tomlinson and Baroness Gardner of Parkes, who have publicly spoken out in support of home-owning leaseholders.

Campaign against retirement leasehold exploitation / Leasehold Knowledge Partnership was relegated to observer status only – and that grudgingly at the last minute – perhaps in punishment for having organized, with Sir Peter Bottomley, the meeting with Mr Prisk at Westminster in December which brought about the round-table in the first place.

Amour propre aside, it was very good that leasehold is being considered as a problem by the housing minister and he is seeking solutions.

The civil servants of the Depatment of Communities and Local Government slotted in their former colleague Michelle Banks, the chief executive of ARMA, to speak first on the subject of ARMA-Q.

This is the new ethically enhanced code of practice, for which there is a regulator – Keith Hill, a former Labour housing minister – to rule on breaches of ARMA terms of membership.

There was a suggestion that Ministers might consider giving the ARMA code statutory backing, as is the case with the RICS and ARHM codes.

It is probably sensible to wait and see how it works. Banks has emphasized that the new ARMA regulator is not a substitute for the far more congenial – because they are anonymous – grievance procedures of the Housing Ombudsman.

An additional issue, that was not raised at the meeting, is how the membership will respond, as managing agents are expected to pay for ARMA-Q in addition to their existing ARMA subscriptions. Understandably, this has caused rumblings of discontent.

Baroness Gardner urged the statutory regulation of managing agents – which is supported across the sector – but ministers were evasive on the subject.

There was unanimity that s152, 154 and 156 of the Commonhold and Leasehold Reform Act 2002 needed to be implemented. This would be a stronger legal protection of leaseholder funds held in trust by managing agents.

It would prevent cases such as the Anchor Housing Association sitting on £10 million of leaseholder funds and keeping the interest over 10 years, which has been reported in the Mail on Sunday and never denied.

There was a discussion about Philips v Francis, with all present agreed that this important case concerning Section 20 consultation needs swift action. The ministers promised action, but no timetable was given.

Regarding the Leasehold Valuation Tribunals there was – again – pointless discussion about mediation.

The kind of disputes reported on Campaign against retirement leasehold exploitation / Leasehold Knowledge Partnership websites are beyond being reconciled by mediation.

When pensioners in Plymouth are prepared to take a case to the Land Tribunal, knowing that their freeholder estimates his legal costs at £30,000, the chances of a mediated settlement are nil.

Mediation is backed by all those who favour secrecy and lack of transparency. Janet Entwistle, of Peverel, is an advocate, and given the stinging criticisms of her company at LVTs it is not hard to understand why.

There was a long discussion about LVTs, but failed to address how lawyers have worked a way around them functioning as low cost justice by adding legal costs as an “administrative charge” on individual leaseholders.

It is this practice that was used against Dennis Jackson, of Plantation Wharf, Battersea, who had his £800,000 flat forfeited on January 30.

Julian Tomlinson MP, had a very specific issue about right to manage and a development in his area that had taken 17 years to handover because a bollard hadn’t been put in place, therefore thwarting the leaseholders from exercising their RTM.

There was then a discussion about poor advice and agents helping leaseholders exercise their RTM simply to draw business to themselves and away from other agents.

The perils of leaseholders attempting to escape big freeholders and the larger managing agents is a familiar subject for Jeff Platt, of the Institute of Residential Property Management. He is the most eloquent advocate of the status quo in the sector.

Baroness Gardner intervened with a plea for Commonhold, which as an Australian she knows to be a fairer system than English leasehold.

Finally, the Association of Retirement Housing Managers’ code was discussed, and there was talk of bringing it and the ARMA code could be brought together.

Campaign against retirement leasehold exploitation / Leasehold Knowledge Partnership has asked whether the ARMA regulator could be “lent” to ARHM in disputes, but this was indignantly dismissed by ARMA. The regulator is only going to be involved in blatant or systemic breaches of ARMA rules, and is not an alternative complaints procedure.

The Office of Fair Trading provided a review of its report on exit fees, stating that such fees were often difficult to pursue under unfair contract terms legislation. Sir Peter Bottomley suggested retrospective legislation, but there was no enthusiasm from ministers.

The DCLG will summarise action points for Mr Prisk and then there will be another meeting.

The meeting was also attended by perennial leasehold representative Bob Smytherman, of the Federation of Private Residents Associations, which represents 500 RAs – a fraction of the country’s leaseholders, but is the only constituted and accountable organization to do so. Smytherman, a member of the LKP board, presented the following paper:

 

Issues that FPRA would like to raise with the All-Party group for the Private Rented Sector Tuesday 12^th February 2 01

The FPRA is a non-profit organisation and is the sole national body representing the interests of long leaseholders and private tenants, normally in flats but occasionally in other forms of accommodation; this is done through the membership of Residents’ Associations, Resident Management Companies and similar groupings. Its membership is in excess of 500 such groups and it is therefore hoped that the following representations to you will be given the full consideration which the needs of probably between 2 to 3 million flat dwellers, including some particularly vulnerable groups, such as those in the retirement sector, deserve. For convenience, the term “leaseholder” is used throughout this letter to describe the group represented by the FPRA.

 Please note that the items set out below are not in any order of priority or importance.

1/ Improving Legislation for Leaseholders

There is a glaring need to consolidate all the Landlord & Tenant legislation, particularly the Acts since the Housing Finance Act 1972.  Since that time, there has been a succession of statutes constantly altering clauses in earlier Acts making interpretation of leasehold law excessively difficult, even for members of the legal profession, never mind the average leaseholder or tenant.

A consolidation act that brings together all the previous legislation is a relatively inexpensive, non-controversial way of improving the clarity and operation of the sector.  We feel the Government’s Leasehold Advisory Service could possibly help with the ‘nuts and bolts’ of bringing together the legislation.

2/ Simplifying Legislation for Leaseholders

In addition to the need to consolidate, many of processes and systems created therein require simplification to make them more workable, e.g. major works consultation under Section 20 of the Landlord & Tenant Act 1985.  As mentioned below,

There may indeed be an urgent need to address this due to the recent Chancery Division decision in Phillips and Goddard v Francis [2012].

3/ Criteria Applied in the Law of Enfranchisement

A review should be undertaken as to whether a single development of several blocks paying one service charge should be able to opt to be treated as one unit.

Leasehold houses within a development of leasehold flats should be able to enfranchise under the Leasehold Reform Housing and Urban Development Act 1993 or under the Leasehold Reform Act 1967 or have a choice.

4/ Inappropriate Design of Legislation

Most landlord and tenant legislation has been designed to deal with potentially conflicting interests of leaseholders and freeholders; however one of the successes of the legislation over the last two decades has been to enable leaseholders to enfranchise and thus own their own freehold but this change is not fully reflected in legislation.

It has created an unfair situation where invariably unpaid directors of resident management companies are subject to the same requirements as commercial landlords; it is suggested that such companies should not be required to undertake such detailed  and burdensome duties where not appropriate.

5/ The Commonhold & Leasehold Reform Act 2002

Unfortunately the Commonhold provisions in the Act were poorly drafted and, as a result, Parliament’s intention to create an entirely new form of tenure has  almost completely failed.  Remedies would include making it compulsory in all new developments, a right to convert from leasehold in existing blocks by a majority decision.

• Other flaws in the Commonhold provision include:
• (a)   The failure of Commonhold to provide for shared ownership leases (any larger development will tend to include a social housing element as a result of Government’s planning policies).
• (b)   The lack of clear provisions on how a mortgagees interest is secured when a Commonhold in wound up, leading to the unwillingness of most major lenders to lend on Commonhold units.
• (c)   The failure to provide some of the same protection as is available in leasehold developments in that in Commonhold developers are able to award long term “sweetheart” contracts prior to the Commonhold association taking control of the development.

• 
  6.   The £250 limit for Qualifying Works (The Service Charges (Consultation)(England) Regulations 2003)

 

The £250.00 limit for consultations was set some 14/15 years ago and due to inflation alone, needs to be revisited.

This is becoming a very expensive burden, particularly to Resident Management Companies rather than their protection it was intended to be.

It is within the Minister’s power to adjust this limit.

There may be an argument that the limit should be different for blocks which have an independent freeholder from blocks that are lessee owned.

There may indeed be an urgent need to address this due to the recent Chancery Division decision in Phillips and Goddard v Francis [2012].

 7. Disability

The admirable disability legislation has failed to address the situation in blocks of flats particularly conflicting requirements of people sharing the same entrance.

8.   Regulation of managing agents

There has been substantial discussion about regulating managing agents and also the lesser protection of ombudsman schemes and whilst we approve of actions being taken by certain trade bodies for their members, such as that proposed by ARMA, because membership of a trade body is voluntary, by its nature the less reputable agents would just not join. It is therefore essential that where a block has an independent managing agent (and is not a self-managed block run by volunteers), that some form of control has to be exercised. This control is particularly important where the independent freeholder runs the “managing agent service” directly or indirectly.

Compulsory qualification of all managing agents through organisations such as The Royal Institute of Chartered Surveyors (RICS) and The Institute of Residential Property Management (IRPM) would be a benefit.

Perhaps the Leasehold Advisory Service role could be expanded to take on this role.

9.   Energy Efficiency

Most legislation drafted to encourage energy efficiency, including the award of grants, effectively excludes flat owners because no account is taken of the need for collective action with the landlord’s co-operation and where the lease may preclude expenditure on work which in effect amounts to an “improvement”.

10. Excessive Insurance Commissions on Blocks of Flats

Leaseholders of flats are usually required to pay for insurance of the structure of the building through the freeholder.  Many freeholders see this as a profit-making opportunity and the whole insurance market for blocks of flats is, as a result, distorted by the payment of excessively high commissions and quasi- commissions in various guises to brokers, intermediaries and others, often amounting to 30%, 40%, 50% or even higher percentages; thus, the premium charged to the leaseholder is substantially higher than it should be.  Legislation requires that service charges, including insurance, must be reasonable and , if not, is referrable to the Leasehold Valuation Tribunal; however, unlike other charges, such as maintenance, cleaning, etc. in the case of insurance, the protection afforded by the law is ineffective, by reason of the distortion referred to above when the definition of “reasonable” is considered.

The FPRA’s proposal is that similar regulation should be introduced as in the Life and Pension market so that unfair commissions are banned.  The earning capacity of legitimate brokers and others would not be affected as transparent fees at a reasonable level could still be charge.

At present, it is claimed by some professionals that commissions are already transparent and this may well be the case with those paid to members of the RICS or ARMA but it is not necessarily so when paid direct to freeholders or associated undertakings.  Furthermore, even with professionals, disclosure is on request only and not automatic; the majority of leaseholders would not even know of the abuse or the right to challenge it.

Linda Woodall, Head of Investment Intermediaries, at the FSA says in respect of many policies that: “The payment of commission encouraged the sale of the highest commission paying financial products even though they might not be in the best interests of consumers.  Woodall says we have seen links between high levels of commission and mis-selling.  In the past some advisers might have been tempted to recommend something that is not in the client’s interest because of the commission.  By moving away from commission we remove that temptation.”

The FSA however says it has no power over freeholders and managing agents as they are unregulated. We think this is incorrect and should be changed.

The whole leasehold sector is being distorted by insurance commissions, where the whole business logic to buy freeholds by investors and the prices paid is distorted because they can earn high commissions at the expense of leaseholders.

No other service charge items such as plumbers or decorators bills would be acceptable to have ‘kick backs’ (bribes which are of course illegal under the Bribery Act) so why is insurance.  The fact that if you ask if a ‘bribe/commission’ is being paid you have the right to be informed but only those paid to certain agents is irrelevant to the principle.

Worryingly we are now seeing ‘commissions’ now being offered by utility providers so again the leaseholder will pay more than is necessary so that the freeholder or his agents can earn more.

11. Safety of Leaseholders funds held by managing agents/freeholders/others

Leaseholders are usually obliged to pay advance payments and contribute to sinking/reserve funds.  It seems that the sums held by unregulated and unprotected third parties may well exceed £1-2 billion and perhaps may be even higher.

It is believed there is no other area in the UK where funds are held by a third party and such third party is not regulated and can in practice be some person or organisation without any qualification who sets up in the property managing business, irrespective of experience or even of a criminal background but nevertheless is able to take and hold “deposits”. This situation has on occasion resulted in leaseholders being defrauded or otherwise losing funds. Bizarrely, there is a whole statutory scheme of protection for rental deposits but none for leaseholders who are obliged to advance much greater sums.  There is, it is true, legislation requiring deposits to be held “on trust” but this is difficult to enforce in practice.

It is, in the view of the FPRA absolutely essential that some system is devised so that such funds are protected by the Financial Insurance Services Compensation Scheme or similar.