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This article first appeared in Estates Gazette on 20th April 2019.  Republished with kind permission. 

Could an industry-led code of practice secure the future of the current residential leasehold system?

Last month, a group of freeholders, managing agents and developers signed a public pledge signalling their intent to bring about positive change in the residential leasehold sector. Backed by the government and overseen by the Ministry of Housing, Communities & Local Government (MHCLG), this commitment to raise industry standards could turn out to be a watershed moment. Will it secure the future of the current leasehold system as we know it?

The need for change

Part of the significance of this pledge is the tacit acknowledgement it signals of the problems that have shaken parts of the leasehold sector in recent times – and the public and political reaction that has followed. Undoubtedly the most prominent and well­-publicised issue has been onerous ground rents (for instance, those that double every 10 or 15 years). While only impacting a small fraction of the UK’s four million leaseholders, this has been a scandal that the media has quite rightly shone a bright light on. The practice of many developers in selling houses on a leasehold basis has also come under the spotlight. It is chiefly these issues that led to the government’s ongoing, extensive programme of consultation on reforming leasehold and “reinvigorating” commonhold.

Consumer protection is to lie at the heart of any change the government implements, and is thus a useful yardstick against which we should measure both any reform the government decides to implement and any industry-led proposals for regulation.

Flawed proposals for reform

From a consumer protection perspective, any proposals to prevent the grant of onerous leases and to severely limit the sale of houses on a leasehold basis are welcome. But some of the recommendations feel short-sighted. Among these is the MHCLG proposal for all ground rents on new leases to be reduced to £10 a year.

As I have previously commented (“A treatise in defence of ground rents”, EG, 26 May 2018: www.egi.co.uk/legal/a-treatise-in-defence-of­ ground -rents/), ground rent can serve a useful purpose in the modern market – principally through securing investment by professional institutional freeholders. These organisations can (and often do) play a crucial stewardship role when it comes to blocks of flats. Forcing them out will only open the door to less scrupulous parties – a point acknowledged in last month’s Communities Select Committee’s report.

The report also suggested the leasehold system might be abolished altogether in favour of a commonhold structure, where residents manage their own developments. This is no solution. The government will face appreciable difficulties in getting industry behind commonhold. Also, Law Commission proposals to make it easier to convert from leasehold to commonhold are fraught with so many difficulties that any growth in commonhold use is likely to be slow and led by new developments.

Commonhold may seem utopian in principle but, given the diverse nature and interests of property owners within blocks of flats, in most cases would cause as many problems as it solves. It will suffer the same problems as other resident-managed schemes – and the same problems recruiting the right sort of directors with the long-term interests of a development in mind. With regards to making commonhold “compulsory”, government and campaigners should be careful what they wish for: it is one thing introducing regulation and capping ground rents at a sensible level; it is another to force everyone into communally managed developments. That is not a way to secure enhanced consumer protection.

Let the industry lead the way

A more sensible and efficient route to reform is through industry-led regulation, where all relevant stakeholders are pulling in the same direction. The pledge is a stepping stone towards this goal.

Among the commitments in the pledge are the elimination of onerous ground rents, the abolition of new leasehold houses and measures to ensure that leaseholders understand exactly what they are buying. Crucially, participants also commit to developing and making mandatory a code of practice that enforces the highest possible standards across the industry.

A version of this code has already been developed, albeit it needs perfecting. Under section 87 of the Leasehold Reform Housing and Urban Development Act 1993, the secretary of state can put the code on a statutory footing, granting it the teeth it needs to help rebuff arguments against self­-regulation. The code in its current form covers areas from building safety and complaints procedures to unfair leases and property management.

Earlier this month, industry stakeholders convened to discuss this. The consensus was clear: it has great potential, but for it to work, it is essential that more sign up. It needs to engage all key stakeholders in the debate – not just professional institutional freeholders and developers, but also conveyancers, managing agents, resident management companies, and right to manage companies (in larger blocks). Leaseholder representatives need to give their views too.

Too often, reforms to the property sector are piecemeal. There is an opportunity now to promote holistic reform, and much quicker than could be achieved through long­-winded statute-led reform. This is the only way to achieve a prompt consumer-focused outcome that gets to the heart of the problems.

Cynics will argue that the code is an empty gesture, as many of its obligations already exist. However, this is a demonstration of intent by the industry to bring in self­-regulation, far quicker than the government could legislate for. If the government gets behind the code, once fully developed, this could be a fast and effective solution (albeit not a complete one) to a number of priorities around leasehold, all coming back to the all-important theme of consumer protection. We can only hope that both industry and government embrace the opportunity this represents.

By Simon Allison

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