The Government has rejected a proposal from a Conservative peer to end the “extortion and corruption” of so-called “fleecehold” agreements.

A cross-party group of peers condemned the “fleecehold” system, whereby people who own freehold properties are locked into contracts to maintain the communal areas around them.

This means that, while freeholders own the land their home is on, they may have to pay large fees to a third party to maintain areas like gardens and private roads. It is thought that this system affects up to 1.5 million home owners.

Baroness Finn, a former chief of staff to Boris Johnson in Downing Street, told the Government: “We need to end this outrageous ‘fleecehold’ model, which has brought misery to the lives of so many.

“We need to protect them against extortion and corruption, which is essentially what the ‘fleecehold’ model is.

“There are numerous examples of abuse, from residents being charged terrorism insurance for a fence or charged for work that never happened.

“The problems of the ‘fleecehold’ model are all too apparent. We need to solve these problems for existing residents, which is why I welcome the current measures in the Bill, but we also need to prevent this model from being used in the future or we will be deliberately piling up problems for the new home buyers of tomorrow.”

Lady Finn told the House of Lords that when a developer hands over the running of parts of an estate to another company, the developer pays less in certain charges and the council “abdicates the responsibility” to maintain those assets.

She argued that the developer and council “split the profits, while the residents and new tenants get the bill”, adding that this is “not only collusion between the council and the developer, but an extremely inefficient way to run things”.

Her comments came as peers continued line-by-line scrutiny of the Leasehold and Freehold Reform Bill.

Lady Finn proposed an amendment to the Bill seeking to prohibit future “fleecehold” estates where freeholds are tied into expensive charges with no recourse, saying developments should only be private estates “where that is a deliberate, known choice on the part of the buyers”.

The amendment seeks to deliver the recommendation in the Competition and Markets Authority (CMA) report that the Government prepare common adoption standards and mandate local authorities to take over responsibility for these public amenities once the standards are met.

Lady Finn said: “I recognise and welcome the provisions in the Bill that currently provide additional redress for people trapped in ‘fleecehold’, but it is important to make sure that no more people become accidental ‘fleeceholders’.

“’Fleecehold’ has become prevalent, not because of any policy decision by an elected government, but rather as a way for developers and managing agents to make more money at the expense of unsuspecting home owners.”

However, housing minister Baroness Scott of Bybrook said: “These are very important issues that must be carefully considered, but they are not things the Bill can fully address.

“Legislation on planning considerations and liability for governing public amenities are covered elsewhere and are outside the scope of the Bill.

“The Government’s thinking on this issue will be set out in our response to the CMA report.”

Peers across the House criticised the “fleecehold” system and urged the Government to add protections to the Bill to guard against “extortionate” charges for freeholders on these estates.

Labour frontbencher Baroness Taylor of Stevenage said it is a “regime that fleeces home owners with unexpected and extortionate charges” and residents on these estates are “trapped in extortive relationships with unaccountable management companies”.

She pointed out that the Government has not taken any of the actions recommended by the CMA to “end the issue of ‘fleecehold’ one and for all” and said cross-party condemnation of the situation shows it is “untenable”.

She said the system is “simply providing another method of extorting money from hard-pressed home owners, effectively making them leaseholders of the public space on their estates”.

Other amendments proposed by peers include giving those who own a freehold on private or mixed-use estates the right to manage on par with leaseholders, measures to prevent developers building to a lower standard, and provisions allowing for refunds of charges where services are not delivered.

Lady Scott said the Government was concerned about certain “practical issues” in these areas, as well as potential “unintended consequences” of the amendments.

The comments in the House of Lords came after 46 Conservative MPs wrote to Levelling Up Secretary Michael Gove calling on the Government to stop the creation of “fleecehold” estates.