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Mr Adrian Bailey (in the Chair)
Order. Would the people leaving the hall please leave quietly? Another debate is about to begin. I call Stephen McPartland.
Stephen McPartland (Stevenage) (Con)
I beg to move,
That this House has considered Adriatic Land 5 Ltd, Stevenage.
It is a pleasure to serve under your chairmanship, Mr Bailey, and to be here today to debate the impact of companies such as Adriatic Land 5 Ltd with the Minister. I know she has a personal desire to try to resolve such issues for leaseholders up and down the country.
Companies such as Adriatic Land 5 Ltd hold freeholds and charge ground rents. Often, the rents double every 10 to 15 years and there are other conditions, and it is that situation that is preventing homeowners in Stevenage from remortgaging or selling their properties. I want to talk a little about leasehold, about Adriatic Land 5 Ltd, and to give a few examples from constituents.
There is a discrepancy at the moment about how many leaseholders there are in the country. The figure ranges from 2.5 million, or 4.5 million, to the Leasehold Knowledge Partnership suggesting 5 million to 6 million in England and Wales alone. Scotland and Northern Ireland have different conditions. Today, I am addressing the situation in England and Wales, and in Stevenage in particular.
Leasehold is a form of residential tenure that has been abolished in most countries around the world. The Commonhold and Leasehold Reform Act 2002 was passed with the best of intentions to give commonhold a big boost but, at the moment, that does not seem to have worked. My real focus and concern in this debate is leasehold and shared ownership. Often, first-time buyers have used Help to Buy to get on the ladder for the first time.
Adriatic Land 5 owns the freehold on a building in Stevenage called Six Hills House. Predominantly teachers, police officers, nurses and other public sector workers live there. They feel that they have been let down by their surveyors and the people that they purchased their properties from. They are first-time buyers who used Help to Buy; they now feel trapped by these conditions.
Who are Adriatic Land 5? We found it very difficult to find information about them, but we have had some help. We now understand that Adriatic Land is a residential freeholding company of various formulations, managed by the Long Harbour Ground Rent Fund. All Adriatic Land companies hide their ultimate beneficial ownership behind the directors of the Sanne Group, which has its headquarters in Guernsey. Long Harbour is a £1.4 billion fund and claims to have revenues of only £4 million on the ground rent fund, with a total of £340,000 in profits. Its sister company, Home Ground, told the Select Committee on Housing, Communities and Local Government in November 2018 that it collects £32 million per year in ground rent. Long Harbour claims to be investing in residential freehold primarily for pension funds, but there is no evidence of this, and there is a belief in the wider industry that predominantly hedge funds and speculators are behind it.
Buyers of leasehold properties can be seen as tenants on a very long-term rental, while the freeholder owns the land that the home is built on. The homebuyer of a leasehold property is required to pay ground rent to their freeholder, and the consent of the freeholder must be sought before any changes to the property are made, such as installing new windows or, if it is a house, a conservatory. The issue in my area is with flats. In flats, the ground rent often doubles every 10 years or so.
There is an accepted understanding that, as flats have communal spaces, there needs to be some kind of mechanism to collect money so that if the lifts break or there is a problem with the roof, everybody shares equally in the pain of putting that right financially. At the moment, companies such as Adriatic Land 5 do not seem to be providing any services, but are charging tenants in order to make a profit, and that is causing a great deal of disruption. In Six Hills House in Stevenage, it is preventing mortgage companies from offering mortgages. The homeowners in the flats are trapped, and that has caused huge concern among these decent public sector workers, who have tried to do the right thing and get on the housing ladder, and now seem to be trapped in the first home that they have bought.
There is a feeling in the wider media that these people should have known what they were getting themselves into; they should have read the contract; they were overexcited when they made the purchase. A first-time buyer considering a ground rent of £10 or £100, which will double in 10 or 15 years, does not expect to be there in 10 or 15 years; it is almost as if it does not apply. They do not expect to be there. Given that the mortgage company has extended a mortgage to that buyer, they do not imagine that as the terms get more onerous another mortgage company would refuse to remortgage or refuse to extend the terms to somebody else who then tries to buy it from them. The situation is causing a great deal of disruption.
My real concern is that these are shared-ownership properties, but the tenants seem to be responsible for 100% of the freehold, even though they will often only own 10%, 15% or 25% of the actual property. That does not seem fair. All the barriers to moving forward in their lives seem to be loaded on the people who are 75% tenants and 25% homeowners. It does not seem fair.
Ground rents of as little as £1 a year used to be charged by many freeholders across the country. In the early years of this century, developers began inserting clauses where ground rent was set at £200 to £400 a year, with the charge doubling every 10 years or so. The Government have taken action on that; they have launched consultations and the previous Secretary of State announced that ground rents would be reduced on new home builds to zero or a £10 peppercorn rent. The current Secretary of State met a variety of leaseholder and retirement holder groups in late January. He also said that he thought a peppercorn rate was zero, so it could not double every 10 or 15 years and could not be a barrier to moving on in property.
The Government are trying to take action on the current situation—they are trying to stop it going forward—but there are real problems with retrospective action for people who are currently in these leases. The Minister and I have had some correspondence in the past on this issue, and I know she is keen to resolve it. The hope was that developers would put pressure on the people who owned the freehold, then the freeholders would come to an agreement with the tenants, and as a result they would be able to move forward.
I will give some examples from the case of Six Hills House in Stevenage. One of my constituents said:
“I live in a fairly new department block of flats in Stevenage that were built in 2016 called Six Hills House. I moved in in November 2016 and bought a 45% share as a shared ownership help to buy scheme. This year it came to light that the lease has a clause in it that states the ground rent (which currently stands at £300 per year) will double every 15 years with a break at 90 years. Whilst this wasn’t a problem for lenders in 2016 when the flats went on sale, it has since become illegal for leaseholds to include this type of clause and has therefore made the flats unsellable to anyone other than cash buyers. I have recently put mine up for sale and whilst I found a buyer within a week, no banks would lend on the mortgage and so the estate agents have advised that I cancel all other viewings and limit to cash buyers only.”
This is two years after the individual bought their property. The constituent continues:
“I feel this option is extremely limited as the shared ownership proposition is meant for first time buyers who wouldn’t necessarily have the money to buy this share outright leaving a building of around 150 flats unsellable.
I have spoken with metropolitan housing who are the landlords for the rented part of the building who have said that they are trying to negotiate this clause with land charter who own the building however they have not heard anything back from them and they couldn’t give a timescale that this would be sorted.
This now means that the people who have put their flats up for sale including myself have paid out for private valuation fees…to get the flats to sale we are left out of pocket with flats on the market that we are unable to sell. Plus I have now come out of a fixed mortgage rate thinking I was going to sell after 2 years which was the original plan and am now paying a higher interest each month without having the option to fix in again in case it does sell.”
She goes on to say that she wanted to get in contact and explains some of the other reasons why. I stepped in and asked Land Charter what had happened. It confirmed:
“Metropolitan Housing Association purchased all the apartments from us, and then sold them on to their clients. The freehold was sold soon thereafter to Adriatic Land 5 Ltd…Although we have sympathy we have not control over the matters raised by her.”
We are still not aware of whether it was Metropolitan Housing or the developer, Land Charter, that sold the freehold. I have spoken to Metropolitan Housing, which responded in December 2018:
“Thank you for your communication received…We can confirm that Metropolitan Thames Valley Housing are not the Freehold owner of this site. We have a head lease which requires us to pay Ground Rent to the Freeholder and we have created under leases for our residents which require them also to pay ground rent as per the head lease.
When the lease was originally entered into, it was common for ground rent clauses doubling every 15 years to be included. Whilst this is not illegal it is now not considered to be good practice and the Government are currently consulting on restricting ground rent on new leases. We do not believe they will be regulating existing leases which have already been entered into.
The ground rent payable at present is a reasonable amount, however when a resident attempts to sell their property, the mortgage company of the proposed purchaser declines to lend as the lease contains potentially onerous ground rent terms for the future. In effect, this means that the properties can only be sold to cash buyers.”
That is Metropolitan Housing Association, which owns most of the shared ownership, confirming that the people trapped in those 150 flats cannot sell their properties unless they do so to cash buyers, because of the nature of the lease. In fairness, Metropolitan is trying to fix the issue. It says:
“We first became aware of this issue a few months ago and we wrote to the Freeholder asking them to vary the Ground Rent clauses in the lease in light of the wider publicity around onerous Ground Rent terms and the effect it was having on sales. The lease can only be varied if the Freeholder consents. The Freeholder refused to allow any variation in the lease stating that they purchased the Freehold in good faith based on the potential income from Ground Rent.”
It goes on to explain why Metropolitan Thames Valley Housing, as a social housing provider, cannot step in and resolve the issue financially.
I have had correspondence with the Minister on this issue, and other constituents have contacted me. People in this block of 150 flats are increasingly frustrated. I received an update from a constituent on the solution that has come forward from Metropolitan. The constituent states:
“They’ve given the option for us to extend the head lease. However, this will come at a cost and we will also be required to pay all our legal fees, including Metropolitan’s and the freeholder’s legal costs etc.”
She attached the letter for my reference, which I could read out, but I will just hand it to the Minister instead. It is easily working out to be around £10,000, which is half the deposit that the constituents saved up to get on the ladder in the first place and enter into the part-buy and rent scheme. She says:
“If I decided to go down this route and spend £10,000 to get out of this lease, allowing me to sell, I’d then be left with half the deposit I did have, unable to buy somewhere new or benefit from any other first-time buyer schemes again.”
As I say, Metropolitan has come up with a means by which it will vary the head lease and do what it can to try to extend that forward over the 90 years, so that the current tenants have to pay only a small, peppercorn rate. Unfortunately it will cost the tenants over £10,000, because although they own only part of these properties, they are responsible for 100% of the freehold fees. As a result, they have to pay both the shared ownership and freeholder fees, which come to over £10,000.
Essentially, no one really thinks this is fair. Everybody in the building is very upset about the escalating price, which is now between £10,000 and £15,000. My constituents feel frustrated and trapped, as can be imagined. From their point of view, they are missing out on any other first-time buyers schemes, because they are not currently first-time buyers, so they will never be able to benefit from any other schemes again—they have already used Help to Buy.
The tenants feel that the surveyors and the people working with them are part of a very large property industry and are involved in this field on a day-to-day basis, just as Members are. We can all use our own jargon about delegated legislation and statutory instruments—it is very easy for us, but it is not easy for someone out there to understand what any of that means. It is the same with those people who are very excited to be buying their first property. As the mortgage companies were happy to lend to them on their leases, most of the tenants felt that they would only be in those properties for five to 10 years maximum, and that they would be leaving before the ground rent began to double. It seems that within a two-year timeframe, 150 people—predominantly public sector workers—have now been trapped in a scheme in Stevenage, which is not fair. It is really frustrating my constituents and me.
The Government’s policy is to lean on developers and social housing providers to try to vary the leases, but those 150 flat owners are trapped because the freeholder—Adriatic Land 5 Ltd, which is registered in Guernsey—will not play ball. The simplest solution would be for Adriatic Land 5 Ltd to change the details on the deed, so that the ground rent clause is changed to something more appropriate. That would resolve all the issues with the mortgage companies and social housing providers. My question to the Minister is: how do we bring forward somebody who owns a freehold in a property, such as Six Hills House in Stevenage, but will not play ball? How do we encourage Adriatic Land 5 Ltd, which is registered in Guernsey, to help ensure that these 150 flat owners can move forward with their lives and sell their properties if they choose to do so?
The Parliamentary Under-Secretary of State for Housing, Communities and Local Government (Mrs Heather Wheeler)
It is a pleasure to serve under your chairmanship, Mr Bailey. I thank the hon. Member for Croydon Central (Sarah Jones) for being here; I did not realise this was a walk-on part—that does not need to go in Hansard. I congratulate my hon. Friend the Member for Stevenage (Stephen McPartland) on securing this important debate on issues concerning leaseholders, and particularly the problem in Stevenage.
The Government are committed to improving consumer choice and fairness for the increasing number of leaseholders. That includes our work to make it easier and cheaper for leaseholders to enfranchise, the support we are providing for those with onerous ground rent terms, and our aim to make service charges more transparent for all. That work should act as a guard against the practices that form the subject of this debate, namely, where freeholds are sold on to a third-party investor without the leaseholder’s knowledge.
I am aware that many hon. Members have heard from their constituents on this matter, as have I and my Department, and the Housing, Communities and Local Government Committee also received evidence on it, so I recognise the importance of the debate. It is clear that we need to act to address the issues; I will use this time to set out the work that is under way to drive these unfair practices out of the leasehold sector.
The problem here is the excessive ground rent that leaseholders are being asked to pay. My hon. Friend the Member for Stevenage has rightly highlighted many issues that are faced particularly by those in shared ownership properties, but I know that the issue of onerous ground rents affects many other leaseholders. As he says, leases with onerous ground rent terms can make it difficult for the leaseholder to sell their property or re-mortgage. In this instance, as I understand it, the ground rent is £300 a year and doubles every 15 years. We have heard from the Housing Committee that many regard this as onerous, and it could also make the property hard to sell, exactly as he mentioned. People can therefore feel trapped in these arrangements.
It is the Government’s view that, in most cases, any lease with doubling ground rents will be significantly worse than an inflation-based arrangement. A rise in line with inflation maintains the value of the ground rent over time, whereas a doubling term every 10 or 15 years can significantly increase the value—too much—over time. The Secretary of State met freeholders last year and made that clear. There should be no reason why any clause that doubles ground rent every 10 or 15 years should be enforced. I welcome the proposals from some developers and freeholders to vary clauses so leaseholders pay less ground rent.
We have been clear that variations must have consumers’ best interests at heart. We will not look kindly on those who reduce the cost of ground rents with one hand and rip off leaseholders with the other, whether through permission fees or anything else. We need a proportionate response. I want industry to take the lead and make the changes voluntarily. It is not right that hon. Members should have to highlight the sort of issues that have been raised here today.
I want to see support extended to all leaseholders with onerous ground rents, including second-hand buyers, and for customers to be proactively contacted. We will continue to work with the industry on a way forward to help existing leaseholders with onerous leases. I want to stress that leaseholders should seek impartial legal advice about potentially onerous ground rents contained in their leases. Free advice is also available from the Government’s Leasehold Advisory Service—LEASE. Leaseholders and prospective leaseholders can get advice on all aspects of leasehold properties, including ground rents, service charges and the enfranchisement process, so I urge them to take advantage of that free service. We have recently appointed a new interim chair to that organisation, and I am confident that the standard of advice that leaseholders receive will be further strengthened. Furthermore, if the leaseholder’s solicitor or conveyancer did not point out the onerous terms at the point of purchase, the leaseholder can make a complaint against them, which can be escalated to the legal ombudsman. I suggest that my hon. Friend takes that point back to his constituents.
I have also heard from leaseholders who have seen a sharp increase in the level of their service charges, often with poor value for money. Many leaseholders are unclear about their service charges, how they were calculated, and whether they are paying too much. I believe very strongly that service charges should be transparent and communicated effectively, and that there should be a clear route to challenge or redress if things go wrong. With that in mind, the Government asked Lord Best’s working group to look at service charges and consider how they should be presented for both existing and prospective consumers. I have also asked the working group to look into fees and charges that go beyond service charges, and consider the circumstances under which they are justified and whether they should be capped or banned. That includes administration charges and permission fees. I am absolutely clear that we must see an end to leaseholders being charged excessive and unfair fees. I am following the working group’s progress with keen interest. I look forward to receiving Lord Best’s report in July, and I will be meeting him shortly.
I hope that my remarks demonstrate the Government’s strong commitment to supporting existing and future leaseholders. Although this debate has been on a specific practice in the leasehold sector, it is clearly a wide-ranging area that is in need of reform. The Government will introduce measures to deliver that reform. The work that is under way makes that commitment clear. Although successive Governments have left that work unfinished, we are just getting started. Nothing, including legislation, is off the table. In that spirit, I thank my hon. Friend for his speech and questions, and I look forward to pushing ahead with our programme of leasehold reform.
Question put and agreed to.