Charge of the daylight robbery brigade

ON 25 February this year, provisions in the Commonhold & Leasehold Reform Act 2002, order 2004, come into force that will have a significant effect on housing associations.

Properties held by housing associations on a long – more than 21-year term – leasehold basis will be affected. Many freeholders employ companies to collect ground rent and carry out other administrative functions. These companies exploited the law as it was, to the detriment of many housing associations. The new provisions are designed to minimise that exploitation.

Housing associations that are the freeholder (and therefore a collector of ground rent) under a long leasehold title must also ensure that they comply with the new regulations. Shared-ownership leases, where the tenant’s total share is 100%,come into this category, along with right-to-buy and right-to-acquire leases.

A big problem for housing associations that purchase properties (especially in the northern parts of the country), is that the insurance arrangements often need to be approved. Ground rent collectors are often slow to give approval. This can have the serious consequence of preventing contractors from starting work on newly purchased sites in areas that housing associations are trying to regenerate.

But section 164 of the 2002 act will change all this. Subject to some easily satisfied conditions, the long leaseholder will no longer be required to arrange property insurance with a company nominated or approved by the freeholder (often, in practice, their ground rent collector). The leaseholder need only give notice to the ground rent collector.

This section only applies in the case of long leases of houses, not of flats, but its practical effect will be to prevent ground rent collectors holding purchasers to ransom by demanding that they use insurance companies nominated by the ground rent collector – not necessarily the most competitive option. The practice of only approving housing associations’ block insurance policies after they have been charged extortionate “costs” for processing the approval will also be foiled.

Frequently the terms of a long lease require that a notice of change of owner be served on the freeholder. Usually this will not be accepted by the freeholder unless a substantial notice fee is paid. In most cases, there is no provision in the lease for payment of the extortionate fee demanded by ground rent collectors. If there is a requirement for payment it is usually for a nominal amount. But the freeholder may often refuse to accept payment of rent until the notice fee itself has been paid. It is a common tactic for the ground rent collector to threaten forfeiture for non-payment of rent in order to extort the notice fee payment.

Sections 166 and 167 of the 2002 act should prevent freeholders using a right of forfeiture when rent has not been properly demanded or where insignificant amounts are outstanding. The freeholder must give the leaseholder a notice specifying how much is to be paid under the terms of the lease and when it must be paid.

The practice of only approving RSLs’ block insurance policies after they have been charged extortionate ‘costs’ for processing the approval will be foiled

If the freeholder is not accepting rent because an administration fee demanded for the notice has not been paid, it cannot now argue that the leaseholder is in breach of the lease for non-payment.

Similarly, section 167 decrees that a freeholder cannot exercise a right of re-entry or forfeiture for failure to pay rent and service or administration charges unless the unpaid amount exceeds £350 or has been left unpaid for more than three years.

If an administration charge is being demanded for non-payment of rent, it might be possible for the sum to exceed the £350 limit. But any administration charge must be deducted from the figure when assessing whether debts have topped the £350 mark.

As ground rents tend to be low, this should usually prevent a ground rent collector from being able to forfeit the lease.

Not the letter of the law

Long leaseholders often receive standard letters from ground rent collectors implying they will be in breach of the lease if any alterations have been made to properties. The breach can be waived, the letter then advises, if a significant fee is paid. But the ground rent collector may well not have looked carefully at the lease to check what its terms actually say. Under section 167 a freeholder may not serve a forfeiture notice, invoking the Law of Property Act 1925, unless a leasehold valuation tribunal has confirmed that the conditions required for service of the notice have been satisfied.

Finally, it should also be remembered that if a housing association is, in fact, in breach of any of the terms of its lease, the law has not changed and that the ground rent collectors will still try to charge an unreasonable amount to give retrospective consent.