Leasehold Reform (Ground Rent) Bill [HL]
(Limited Text - Ministerial Extracts only)
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The Minister of State, Home Office and Ministry of Housing, Communities and Local Government (Lord Greenhalgh) (Con)
My Lords, first, I declare my residential and commercial property interests as set out in the register.
This Bill will lead to fairer, more transparent home ownership for thousands of future leaseholders. It represents part of the most significant changes to property law in a generation and should be welcomed by all across this House. The Bill is intentionally narrow in scope and exists to put an end to ground rent payments for new residential properties with long leases—those in excess of 21 years.
The Bill’s measures have been informed by consultation with the public and the leasehold sector. We consulted on proposals to reduce future ground rent in October 2018; that consultation received more than 1,200 replies, which have informed the Bill and its implementation approach. I extend my thanks to all those who have made invaluable contributions to the process of bringing this Bill forward, as well as to those who engaged with me ahead of today. We can all agree that this has ensured that the Bill will be even more effective in delivering on its promise to ensure that, for the first time, ground rent in residential long leases will have no financial element. I look forward to further engagement with noble Lords across the House in the coming weeks.
The Bill is only the first part of a two-part legislative programme to reform the leasehold system. Further leasehold reform will follow later in this Parliament and will redress a range of issues facing leaseholders. Taken together, this programme of reform delivers on our manifesto commitment to improve the leasehold system for generations to come.
I am pleased that the Bill is now before the House. It is an integral part of Government’s broader reform to create a housing marking that works for everyone. This includes improving leasehold as a system of home ownership. There are an estimated 4.5 million leasehold dwellings in England and 235,000 leasehold properties in Wales. In England, that represents almost one in five of the total housing stock. Leasehold has always been a common form of ownership for flats: more than two-thirds of leasehold dwellings are flats and the rest are houses, which equates to 3.1 million leasehold flats and 1.4 million leasehold houses in England.
We know that leaseholders face a range of problems, such as a lack of transparency in an often opaque system and high charges when buying or extending a lease. We have been consistently clear on our ambition to take forward a comprehensive programme of reform to end these unfair practices in the leasehold market. We are committed to helping existing and future homeowners by banning the sale of new leasehold houses, giving freehold homeowners the same rights as leaseholders to challenge unfair charges and closing loopholes to prevent unfair evictions.
On 7 January, the Secretary of State announced a package of leasehold reforms covering enfranchisement valuation and 990-year leases. This is the first part of our response to the Law Commission’s reports on leasehold and commonhold. We will respond to the Law Commission’s remaining recommendations in due course. In addition, we know that commonhold does not work as well as it could. That is why we have established the Commonhold Council—a partnership of industry, homeowners and government—to prepare the market and consumers for the new, widespread take-up of commonhold; the first meeting of that council took place last week. Our reforms will ensure that leasehold is a fairer and more transparent system for homeowners.
I am aware of the concern that many noble Lords will have for existing leaseholders. The package announced in January by the Secretary of State will result in substantial savings for existing leaseholders, particularly those with fewer than 80 years left on their lease. For existing leaseholders, we will increase the length of lease extensions to 990 years, which is a significant improvement on the current length of 90 years for flats and 50 years for houses. Existing leaseholders can currently pay a premium up front in exchange for extinguishing or buying out the ground rent and extending their lease.
We will also abolish marriage value, cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. A new online calculator will make it simpler for leaseholders to find out how much it will cost them to enfranchise.
We know that some leaseholders have faced serious problems with high and increasing ground rents, which is why we asked the Competition and Markets Authority to conduct an investigation into potential mis-selling and unfair terms in the leasehold sector, including the problem of onerous ground rent. The CMA carried out a detailed investigation into these practices. Its report, published in February last year, estimated that doubling ground rent has affected more than 18,000 lease-holders. In March this year, the CMA informed developers that they may be in breach of the law. This is a very serious issue indeed, and the Government strongly welcome the CMA’s efforts to bring justice to home owners affected by unfair practices.
On the specific issue of ground rent for future leaseholders, historically, leases would require a ground rent payment of no or little financial value. This payment was often used to form the contract between the leaseholder and freeholder, and what might be known as a “peppercorn ground rent”, but the leaseholder received no tangible service in return for this limited ground rent payment.
Since the early 2000s, we have seen an increasing number of properties sold with leases that require significant financial ground rent payments from leaseholders. We have seen little consistency in when and how much ground rent is charged—and, still, no tangible service in return. Thousands of leaseholders bought homes for which the ground rent started at hundreds of pounds a year. These payments were subject to increases, some doubling more frequently than every 20 years. Unfair practices relating to ground rent have damaged the reputation of the leasehold system, but, fundamentally, we know that ground rents are frequently not transparent and have caused substantial difficulties for some leaseholders. With this Bill, we are legislating for the first time so that new residential long leases have no financial demand for ground rent. In new leases, ground rent will be set in law at a genuine “peppercorn rent” level. This means that nothing more than an actual peppercorn can be sought from leaseholders, if indeed any ground rent is sought at all.
Let me be clear: this Bill is not an attack on freeholders. They play a clear, central role in the property market. However, by ensuring that ground rent in new residential long leases does not impose a financial burden, we are removing an opaque charge faced by home owners and making home ownership more transparent and fairer for future generations. We are ensuring that the costs associated with home ownership are clear and easily understood, and that high charges with no tangible service in return can never happen again. Institutional investors will be able to benefit from their existing investments, but in future they will find alternative investment elsewhere. I fully expect investors to adjust their business models to account for this change. Crucially, the benefit to future home owners will be significant.
I turn to the key provisions of the Bill, which apply to future long leases exceeding 21 years of dwellings in England and Wales. The Bill will mean that if any rent is demanded as part of a new residential long lease, it cannot be for more than one literal peppercorn per year. As is the case now, there will be no obligation on a freeholder to charge or collect a peppercorn, and following this Bill we do not envisage that in practice freeholders will ask their leaseholders to pay a peppercorn in rent.
It is not our intention to put barriers in the way of freeholders collecting payments needed to maintain the building and provide tangible services to leaseholders, but it is unacceptable if freeholders attempt to find loopholes and ways around this legislation. We have tussled with the notion of closely defining the meaning of “ground rent”, and of a “rent”, and concluded that a fixed definition could lead to workarounds by those who wish to avoid the legislation. That is why the Bill includes a wide definition of “rent”: to deter attempts by freeholders to charge what is effectively a ground rent by another name.
For the same reason, the Bill also bans freeholders from charging an administration fee for the collection of a peppercorn rent from long residential leaseholders. Leaseholders will have the right to apply to the first-tier property tribunal if a prohibited rent or administrative charge is paid.
There are some exemptions in the Bill. It does not apply to leases used only for a business purpose. As my noble friend Lord Young of Cookham has previously pointed out, the Bill includes a slightly different definition of a business lease from the one used for business tenancies in the Landlord and Tenant Act 1954. We have carefully considered how to define business use for this Bill. As a result, we have crafted a new definition to ensure that residential leaseholders are protected, and commercial landlords can still collect rent from their tenants. For mixed-use properties, the residential use must significantly contribute to the business purposes of the lease for the exemption to apply.
Statutory lease extensions for flats are unaffected by the Bill because they are already restricted to a peppercorn rent. Statutory lease extensions for houses—for which no premium is currently paid—are exempt and can continue to include a ground rent higher than a peppercorn, but we intend to reform this later in this Parliament. Leaseholders extending through the voluntary process are also exempt and will be able to choose to continue to pay ground rent for the remaining period of the existing lease instead of paying a large up-front sum. However, the peppercorn limit will apply to the new, extended lease.
Clause 2 provides for applicable community housing leases also to be exempt. This allows a community land trust or a co-operative society to collect rent to provide services for their community. Community housing schemes that promote the supply of new housing to meet local need and where residents contribute towards the cost of shared community services are very different from ground rent for long residential leases where no clear service is provided in return.
The Bill also makes special provision for home reversion equity release plans and homes bought using a rent-to-buy arrangement. It is important that such specialist financial products can continue, maximising choice for home owners over how they finance their property purchase. This exemption ensures that such specialist financial products that rely on rent can continue, giving home owners choice over how they finance their property purchase. Clause 2 is clear that to benefit from this exemption, home reversion plan products must be regulated by the FCA.
The Government believe strongly in the benefits of home ownership. It is right that we should do everything we can to support people from all backgrounds to realise their ambition to own their own home. We believe that shared ownership has a vital role to play in offering a route into home ownership to those who would otherwise struggle to buy a home. By purchasing a share of a property, aspiring home owners can overcome the income and deposit barriers that may stand in their way. Under the shared ownership model, landlords can collect rent on their share of the property and this Bill will allow them to continue to do so. Once the leaseholder has purchased 100% of the property, the rent will be limited to a peppercorn. The Bill does not amend any other aspect of shared ownership.
It is only right that older residents also benefit from the Bill and are no longer burdened by a financial demand for ground rent. That is why it will also apply to retirement properties. I acknowledge that the Government had originally announced that the retirement housing sector would not be covered by the legislation. In recognition of that, the Bill will not affect retirement properties until after 1 April 2023, giving the retirement sector additional time to transition.
The Bill proposes a number of enforcement measures that offer a strong deterrent to any freeholders and their managing agents who try to get around its provisions and in doing so it protects leaseholders. Enforcement will be the duty of local trading standards authorities. Trading standards do a good job of enforcing current regulations and have an excellent understanding of their local areas. District councils in England will also have the power to enforce this Bill if they choose to do so. Enforcement authorities will be able to retain the proceeds of any penalties they impose to meet the costs of their work relating to residential leasehold property.
In terms of sanctions, freeholders who charge a non-peppercorn ground rent on regulated leases will face financial penalties of between £500 and £5,000. The penalty applies per lease, so freeholders of multiple properties could receive higher penalties if they breach the legislation multiple times. In addition to any financial penalties, enforcement authorities and the tribunal can order the freeholder or their agent to refund any prohibited rent within 28 days. Leaseholders who have paid prohibited rent or administrative charges can also apply to the First-tier Tribunal for recovery of the rent or to determine if the charge is payable. Enforcement authorities may also help a leaseholder apply to the tribunal. This help can include conducting proceedings or giving advice. I believe that this enforcement and penalty regime has been set at an appropriate level to act as an effective deterrent.
These measures will deliver an important and meaningful improvement to the leasehold system for future generations of home owners. We recognise that the system as it stands is not working for all leaseholders, which is why we are committed to an ambitious programme of reform. The Bill is an important first step, and with noble Lords’ support we will see it made into law with speed. By banning ground rent for future residential long leases, while delivering on our commitment and making the leasehold system fairer and more transparent, the Bill will make a real difference to thousands of future leaseholders across England and Wales. I commend it to the House and beg to move.
Lord Greenhalgh (Con)
My Lords, I am grateful to all noble Lords for their very valuable contributions and for setting my expectations for the depth of scrutiny in Committee. It has been extremely helpful to hear all noble Lords’ views.
I pay tribute to my noble friends Lord Blencathra and Lord Young, who in many ways set out the historical context for this modest first step in the Government’s programme of leasehold reform. It has taken nearly 1,000 years to establish landlord and tenant law. We started with the Domesday Book of 1089 and then gravitated to the Middle Ages and the feudal system, when the words “freehold” and “leasehold” were formally established. I am surprised that my noble friend Lord Blencathra did not mention copyhold, the form of tenure whereby a serf received a copy of the manorial roll as an indication of where they should live—so they had absolutely no rights at all. That was true serfdom.
In his speech, my noble friend Lord Young showed the relatively recent steps that we have taken. In the year of my birth—1967—nearly 54 years ago, the first Act was passed, and we saw the legislation that he brought in in 1993 and, obviously, the Commonhold and Leasehold Reform Act 2002. That is a little over half a century to reform, so I argue that reform of a system that has taken over 1,000 years to establish is not—and can never be seen as—a quick fix. Certainly, I prefer the description of the noble Baroness, Lady Grender, of this as a small but significant step, as opposed to the metaphor used by my noble friend Lord Blencathra, which I will not repeat.
To return to some of the points made, the noble Baronesses, Lady Andrews, Lady Pinnock, Lady Ritchie of Downpatrick and Lady Wheatcroft, and the noble Lords, Lord Berkeley, Lord Stunell and Lord Kennedy, all pushed for an indication of when wider leasehold reform would take place. Essentially, the Law Commission has made it very clear that bringing in the more detailed legislation will take at least a year, so, ideally, we hope to get this through quickly—notwithstanding the depth of scrutiny in Committee—so that we can bring the second step of the legislation in the next Session of Parliament. That is our objective; of course, events may take place that steer us away from that, but we certainly want to move at great speed to establish that very important second stage.
The Government are committed to reforming the leasehold system. It is complex, and it will take time to get the detail right because, as referenced by the noble Lord, Lord Best, commonhold has not taken root, even though it was introduced and established in 2002. We want to get it right this time: this is very much a first step in getting leasehold reform to work and in the widespread adoption of commonhold.
The noble Baroness, Lady Pinnock, the noble Lord, Lord Stunell, my noble friend Lord Blencathra and many others mentioned and asked about existing leaseholders, who are unhappy with ground rents that their lease requires them to pay. We understand these difficulties and have been working with industry to get existing leaseholds with onerous ground rent terms changed to a better deal. We are pleased that the Competition and Markets Authority is taking enforcement action in relation to two key issues: first, tackling certain instances of the mis-selling of leasehold property; and, secondly, addressing the problems faced by homeowners due to high and increasing ground rents.
It should also be noted that, where existing leaseholders have a complaint about a conveyancer, solicitor, property developer, estate agent, freeholder or management agent, there are existing routes to redress. We have worked with trading standards, which have published comprehensive information for leaseholders to access the right support.
In January 2021, we announced the introduction of a cap on ground rents in the enfranchisement valuation process. This will make it more affordable for leaseholders to purchase their freehold or extend their lease. As we set out in January, we will bring forward those further reforms in this Parliament.
This is not the Bill to address the costs of historical fire safety defects, as raised by the noble Baroness, Lady Pinnock. We will look at measures to strengthen redress and the building regime for high-risk buildings as part of the building safety Bill that will come before Parliament later this year.
Many noble Lords, including the noble Baronesses, Lady Andrews and Lady Grender, and my noble friends Lord Hammond, Lord Young and Lord Bourne, all raised the definition of ground rent. In drafting this legislation, we considered at length whether closely to define the meaning of “ground rent” or “rent”. We concluded that such a definition would likely do little more than offer a fixed target from which a nimble operator could diverge at ease. That is our principal concern. To avoid this, the Bill adopts a flexible definition of rent, which relies on its naturally understood meaning and includes anything in the nature of rent, whatever it is called. I understand that there are some concerns around this, but I can confirm that the Bill applies only to properties that can be considered long leasehold tenure with residential use. I am happy to meet noble Lords again to discuss the matter further. My noble friend Lord Hammond of Runnymede gave an interesting “person A to person B” example involving passing on a shorter lease of some 25 years where no premium was charged and then establishing a rent. He asked whether that would be covered. We recognise my noble friend’s concern and can be clear that it is not our intention to cover market rents and restrict those to a peppercorn. The Bill is forward-looking, so current investments are protected, and it applies only to leases of over 21 years. However, I would be happy to meet him and discuss these concerns further.
My noble friend Lord Hammond also mentioned the publication of regulations. There is no secondary legislation in relation to home finance plan leases. Clause 2(8)(b) is a reserve power which will be used only if abuse occurs and the Secretary of State needs to specify further conditions to deter such abuse. We have no plans to introduce conditions on the sector.
My noble friend Lord Young mentioned buying out existing ground rents. He will forgive me if I say that it was an issue also raised by my noble and learned friend Lord Mackay of Clashfern. Leaseholders of flats can already buy out their ground rents. Leaseholders of houses can do it by buying their freehold, which I appreciate can be prohibitively expensive. In January, we announced plans to reform the valuation process, which will cap how rent is treated and reduce the premium to be paid. The Law Commission has made specific recommendations in this area, mentioned by my noble friend, which we are currently considering.
Many noble Lords, including the noble Lord, Lord Stunell, and the noble Baronesses, Lady Bowles of Berkhamsted, Lady Andrews and Lady Grender, mentioned the important issue of resources for trading standards. We are very clear that funding for new burdens and new requirements will be taken into account in future local government settlements—I know that response was predicted by the noble Lord—but enforcement authorities will also be able to retain the proceeds of any penalty imposed by them. Penalties can be up to £5,000 per breach. If someone is doing this multiple times, they face that fine on multiple occasions. I am sure that we can explore in Committee whether we consider that to be enough, but that is currently what we have set, and it can be applied multiple times to an individual who perpetrates the breach on many occasions. We will publish guidance to local authorities and trading standards to help them enforce the Bill and work closely on implementation.
The noble Lord, Lord Best, an expert on retirement housing, asked whether the transition period was long enough. We believe that those who purchase retirement homes should benefit from the same reform as other future leaseholders. Including retirement properties in the Bill means that they are not exempt.
That does not change the way in which other types of charges such as event fees can be used in the retirement sector, but I am happy to discuss this further with the noble Lord, as he brings a wealth of experience, including in the regulation of property agents. I thank the noble Lord for the invaluable work that he led in that area, with the publication of the report on the regulation of property agents. We welcome the working group’s final report. The recommendations are with the Government for consideration, and we are committed to ensuring that those living in the leasehold sector are protected from abuse and poor service and to raising professionalism and standards among property agents.
The noble Baronesses, Lady Wheatcroft and Lady Ritchie of Downpatrick, raised unreasonable or egregious service charges. We believe very strongly that any fees and charges should be justifiable, transparent and communicated effectively and that there should be a clear route to challenge or redress if things go wrong. The law is clear that service charges must be reasonable and, when costs relate to work or services, the work or services must be of a reasonable standard. We will continue to be very vigilant on that matter and will consider any other measures that we need to take as part of our second step on the road to leasehold reform.
The noble Lords, Lord Stunell and Lord Kennedy, referred to other abuses. I point out that the Bill as drafted covers administrative fees so that we can stop freeholders who charge fees for the collection of a peppercorn ground rent, which would be frankly ludicrous, as it is a peppercorn that we do not even need to see levied. We will continue to look at fees such as those mentioned by the noble Lords, Lord Stunell and Lord Kennedy—transfer fees, permission fees and transfer charges. We welcome the report from the noble Lord, Lord Best, that looked at those issues, and we are considering his recommendations.
The noble Baroness, Lady Bowles of Berkhamsted, mentioned the estate charges scam. We intend to legislate to give freeholders on private mixed-tenure estates equivalent rights to leaseholders to challenge the reasonableness of estate rent charges, as well as the right to apply for the First-tier Tribunal to appoint a new manager to manage the provision of services covered by estate rent charges. It is important that there is a level playing field.
The noble Earl, Lord Lytton, asked why we should not bring about a statutory redefinition of “quiet enjoyment”. We have not looked at the statutory definition of quiet enjoyment as part of the legislation; the Bill does not affect rights to charge and receive ground rents for commercial premises in mixed-use development when the lease for the commercial premises is held on a separate lease from the residential part of the development.
The noble Lord, Lord Berkeley, wanted some clarification on the scope for new leaseholders’ conversion of houses into flats and retail into housing. I can provide the assurance that the Bill will apply to all new residential long leases, including in those instances exceeding 21 years. That includes those new leases created as a result of subdivision or conversion of properties. He also asked whether we had applied for consent from the Crown and, specifically, the Duchy of Cornwall. I can say that consent was sought and granted in writing from the Crown and the Duchy of Cornwall, and no changes were made.
The noble Baroness, Lady Ritchie of Downpatrick, wanted to know about the Government’s discussions with devolved Administrations, especially Northern Ireland. I point out that the legislation applies to England and Wales only. However, early discussions with Northern Ireland officials took place to help to inform the development of the policy.
I hope I have done my best to cover the principal points. This is necessarily tightly focused legislation which will improve the leasehold system for future home owners. The Government are therefore keen to get this Bill on the statute book as quickly as possible so that the new measures can take effect. I will be grateful for the support of noble Lords in achieving this.
This is only part of the start of an ambitious package of leasehold reform, with further legislation on a wider set of measures to follow later in this Parliament. As I have indicated, this will come in the next Session, I hope. This Bill is small, but it is vital and it is a step towards the better, fairer and more transparent leasehold system that the Government are committing to delivering. Therefore, I commend it to the House, and I beg to move.