Noose loosens on leaseholders

Planned changes to the law on freeholding will put an end to the abuses conducted by some landlords, says Paul Gosling

THE Government is proposing new protection for leaseholders in the face of widespread abuses by freeholders. Last-minute government amendments to the recently published housing bill include measures to curb sharp practices by freeholders, which have particularly plagued buyers of flats in London.

One of the most common tricks is to buy freeholds attached to long leases cheaply and then demand excessive management or maintenance charges from leaseholders. If leaseholders cannot meet these bills, they face legal action for eviction. Proposals in the bill would enable leaseholders to ask a court to appoint an independent manager in such cases, and prevent freeholders from using non-payment of service charges as a grounds for obtaining forfeiture of the lease.

Many freeholders have used associates or associated companies to manage properties, and these managers have in turn employed other associates to do building and repair work at inflated prices. The leaseholders are then saddled with the charges. But under the new proposals, if a residents' committee exists and represents 60 per cent of leaseholders it would have the right to go to law to challenge the costs and necessity of building and renovation work and - except for emergency repairs - to delay them until the case is heard.

The Leasehold Reform, Housing and Urban Development Act of 1993 was intended to give leaseholders greater rights to buy the freeholds on their properties and to protect them against excessive management charges. But loopholes in this and the earlier Landlord and Tenants Act have prompted the proposed new legislation.

Leaseholders theoretically have the right of first refusal to buy their freehold when it is sold. In practice, many freeholders have simply defied their legal obligations by failing to notify leaseholders when the freehold is about to be sold. Current law makes this illegal but provides no penalty against violating freeholders. Legal redress for leaseholders to obtain their statutory rights has been expensive, because legal aid is not available.

Similar problems afflict many long-standing tenants, whose legal right to buy properties being sold is often ignored by landlords. The new housing bill proposes to make it a criminal offence to fail to give leaseholders and qualifying tenants the right of first refusal. Although the proposed level of the fine, up to pounds 2,500, might appear to be on the low side, the Government is convinced that the risk of a criminal conviction will deter many freeholders and landlords.

Some have found more cunning ways to avoid the spirit of the law by using exemptions from the obligation to give leaseholders and tenants the right of first refusal when freeholds and properties are sold. A perfectly legal device - used by Taylor Woodrow among others - involves the owner transferring freeholds and properties to associate companies. Shares in this second company are then sold to another business.

The Government proposes to end this exemption, but it appears the loophole will stay open where freeholders and landlords have dormant associate companies that are more than two years old.

Even if the proposed measures become law, another problem is likely to continue. In the past, leaseholders have often found themselves unable to achieve the majority needed to exercise their right to buy. In some instances, this has been because freeholders bribe or buy out enough leaseholders to prevent the necessary majority being obtained. This practice will continue to be fully legal.

The Council for Mortgage Lenders welcomes the Government's proposals but is concerned that they do not go far enough.

The CML would have liked to see the immediate introduction of leaseholders' right to manage their properties, rather than just their right to challenge freeholders' mismanagement.

The CML has for a long time championed the abolition of the concepts of freeholding and leaseholding, and replacing them with the principle of "commonholding", under which flat owners would own their own freehold but would have statutory rights and obligations relating to other properties in the same block.

Ron Armstrong, deputy director-general of the CML, said: "Tinkering with the system is wrong. We need a new system like that of other European countries, which is custom-designed for flat ownership."

The CML says the Government has indicated it will introduce a bill that proposes that commonholds replace freeholds and leaseholds in its 1996/97 legislative programme. But that may face disruption if a general election is called.

Freeholders and leaseholders

If you own the freehold of your property, you own that property in perpetuity, or until you sell. But leaseholders only own a property for a certain time, sometimes 999 years but usually 99 years. As the length of the remaining lease falls away, particularly when it gets to 20 or 30 years or so, it hits the value of a property. But leases can be renewed by negotiation with the freeholder. There are about 1 million leaseholders in Britain, mostly in the inner cities, particularly in London. The Duke of Westminster and Eton College are among the major freeholders.