Leasehold Reform (Ground Rent) Bill [HL]

(Limited Text - Ministerial Extracts only)

Committee stage
Monday 14th June 2021 Grand Committee

[Lord Lennie (Lab) [V]]

My Lords, Amendments 14 and 15 refer to the penalties contained in the Bill, whereas Amendment 16, as we have heard, refers to the banning orders regime. I am pleased that the noble Baroness, Lady Grender, has introduced these, so that the Committee can consider whether these current penalties are appropriate and whether the banning orders should be extended.

First, on the issue of financial penalties, as we have heard, the amendments would increase the minimum financial penalty from £500 to £5,000, and increase the maximum penalty from £5,000 to £30,000. Given the sums of money which are involved in leasehold arrangements and the costs associated with ground rent, the current penalties seem lower than would be expected. If the Minister is not able to accept the noble Baroness’s amendment, I hope he will explain and justify how the Government arrived at those figures.

On the banning order regime, the noble Baroness brings forward the question of whether the provisions of the Housing and Planning Act should be strengthened. The amendment proposes the banning of landlords from collecting ground rents if they receive multiple penalties. On the same issue, I would be grateful if the Minister could explain whether consideration has been given to banning landlords from renting properties at all when they receive financial multiple penalties. Tenants must be protected from rogue landlords who break legislation over and over again. I hope that the Government will detail what steps they are taking to hold these repeat offenders to account.

[The Minister of State, Home Office and Ministry of Housing, Communities and Local Government (Lord Greenhalgh) (Con)]

My Lords, I also join the noble Baroness, Lady Grender, in recognising that today marks the fourth anniversary of the Grenfell Tower tragedy, which was the largest loss of life seen in a residential fire since the Second World War. My thoughts are with the survivors and the bereaved.

I thank noble Lords present and those participating virtually for all their time and effort in scrutinising the Bill so far. We have had very good discussions in this Committee and through our engagement meetings. I am grateful for the commitment from all noble Lords to improve the Bill and to reform leasehold more generally.

I have listened to the concerns raised by noble Lords that the penalties set out in the Bill are not high enough and that there should be more significant consequences for those who breach the provisions of the Bill multiple times. It is vital that the Bill contains enforcement measures that offer a strong deterrent to any freeholders and their managing agents who try to get around its provisions, and in so doing protects leaseholders. Amendments 14 and 15 in the name of the noble Baroness, Lady Grender, would raise the penalties that can be imposed per breach from a minimum of £500 and a maximum of £5,000 to a minimum of £5,000 and a maximum of £30,000 pounds —and my noble friend Lord Naseby would seek to quintuple it to a maximum of £25,000 pounds.

In response to the noble Lord, Lord Lennie, penalties in the Bill have been set with reference to the typical ground rent collected currently by landlords. I believe that the penalties have been set at an appropriate level to act as an effective deterrent without resulting in a disproportionate enforcement regime. I point out that £500 is a minimum only and that freeholders could easily be liable for multiple fines for the same building; a flat containing 40 leases could leave a freeholder exposed to a maximum fine of £200,000, which is a significant penalty. I ask noble Lords to also note that, through the Bill, we are introducing a minimum penalty amount. I believe this is the first time that this has happened in leasehold law—we have not seen this in other leasehold legislation. This will act as a strong deterrent to any landlord who considers breaching the provisions of the Bill. In addition, 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, including interest. As I said, the enforcement regime in the Bill is the first time that a penalty regime has been applied to ground rent. This landmark change will ensure a strong deterrent in the protection of leaseholders.

Amendment 16 from the noble Baroness, Lady Grender, and the noble Lord, Lord Stunell, seeks to allow a housing authority in England to apply a banning order under the Housing and Planning Act 2016 against landlords who receive three or more maximum penalties from an enforcement authority under the Bill. Banning orders under the Housing and Planning Act 2016 are intended for the most serious rogue private sector landlords and are not intended for leasehold housing. I note again that the penalties in the Bill apply per lease, so enforcement authorities can impose multiple penalties on freeholders who commit multiple breaches. Enforcement authorities and the tribunal can also order a refund of any prohibited rent.

The noble Baroness, Lady Grender, asked what incentives there are for local authorities to carry out enforcement penalties set at this level. They retain proceeds and, as I have pointed out, multiple breaches incur multiple penalties. There is also a point of principle here: that local authorities should not consider the potential financial windfall when deciding to take enforcement action; they should seek to set fines relating to the breach, and therefore they should be proportionate.

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[Lord Stunell (LD) [V]]

My Lords, this has been a very interesting debate. Everybody has spoken with a sense of understanding and concern, remembering that today is four years since the Grenfell tragedy. It should be a matter of particular regret in the kind of debate that we are having that, four years on, so few of the deep issues that have been revealed subsequent to that fire have yet been fully dealt with or accounted for. It is a matter of regret to me that the building safety Bill is still somewhat on the distant horizon, and that we have not yet solved at all the question of who will pay for the costs of this tragedy, since it affects households right across the country.

Noble Lords would expect me to focus particularly on Amendment 20 in the rest of my remarks. Before I do, I will comment briefly on Amendment 19 from the noble Lords, Lord Kennedy and Lord Lennie, which calls for a review. I will skip the number of days and focus on the four issues that they have said need urgent reform and which every speaker in this debate and anybody who has considered the issue would agree on: lease forfeiture, transfer fees, redress schemes and enfranchisement. The Bill does not deal with those four issues. It is time that the Government face up to that and present to Parliament—preferably in the form of legislation, but if not a published report—precisely what their view is on those issues.

The move of the noble Lord, Lord Berkeley, to clarify where Crown exemptions come into play for leaseholders raises an issue that he has brought to your Lordships on a number of occasions. I would be very interested indeed to hear whether the Minister is brave enough to accept his challenge to write to the Duchy of Cornwall and get it to answer the noble Lord’s letter. Your Lordships certainly deserve to hear from the Duchy precisely how it intends to proceed. If the legislation needs change and reform to take account of that, we need to hear the Minister say that he is ready to do that and to make sure that Crown exemptions are used with appropriate discretion and not in any way at all to put residential leaseholders of Crown land in a more disadvantageous place than those holding leases where the freeholder is a private body.

On Amendment 20, my noble friend Lady Pinnock set out, as she has done many times before to your Lordships, the grievous burdens placed on leaseholders across the country as a consequence of the remediation made necessary following property inspections post Grenfell. Before I go on, I remind noble Lords that I served as a Minister in the Department for Communities and Local Government, as it then was, with responsibilities for building regulations between 2010 and 2012.

The Grenfell inquiry has been hearing evidence of failures at many levels: building owners, building managers, designers, materials suppliers, on-site contractors, inspection teams and enforcement bodies. No one has escaped damning evidence of their failures. What there has not been is any evidence at all of failure by residents or leaseholders. On the contrary, it was the residents of Grenfell Tower who repeatedly warned of the dangers that other people chose to ignore. That led to the terrible tragedy, the deaths and the unmeasurable impact on so many lives of families in and around Grenfell Tower who survived that night.

It also led to the discovery that this was not an isolated case of many unfortunate things coming together in a sequence of horrible coincidences to make a one-off dangerous, combustible building. We now know that more than 400 other residential blocks have been found to have similar dangerous cladding, and the enforced inspection of those blocks has brought to light many other fire safety defects, costing billions of pounds in total. Many of those blocks are occupied by blameless leaseholders who find that they now live in a dangerous and unsaleable home and are being presented with enormous bills for remediation under the terms of their leases.

The Minister will say that this is not the place to insert a proper compensation scheme—nor does Amendment 20 do that—but he needs literally to take stock. That is what Amendment 20 tabled by my noble friend Lady Pinnock does. It asks for a taking stock of the impact of this Bill on leaseholders who live in those defective properties.

Time after time your Lordships have pressed the Government to come forward with a proper scheme of compensation for leaseholders all over the country who have been unwittingly caught up in the Grenfell scandal. Every time your Lordships have pressed Ministers—this Minister in particular—we are told, “Not here and not now”. Meanwhile, as my noble friend Lady Pinnock spelt out, leaseholders are being sent five-figure bills with 28 days to settle or face the forfeiture of their lease. They cannot raise finance on their now-worthless properties, and the Government still have not issued the vital information on how they can even access the loan scheme the Government announced months ago.

Will the Minister tell your Lordships today when those missing loan scheme criteria will be published and what the distribution system of those loans will be? Please can he assure us that it will not be administered via an outsourcing company such as that in Virginia, USA, which earlier this year was the nemesis of the green homes grant fiasco? Let this piece of work be started soon, carried out efficiently and delivered to the benefit of leaseholders as quickly as possible.

Secondly, will he urgently bring forward a proper compensation scheme and lift the threat of forfeiture and bankruptcy from innocent leaseholders trapped in these blocks? Will he, as an earnest of good intent, accept my noble friend Lady Pinnock’s amendment today so as, at the very least, to commit to take stock of the impact that a ground rent ban could have on those affected leaseholders and tenants?

[Lord Greenhalgh (Con)]

My Lords, I turn to Amendments 19 and 20 from the noble Lords, Lord Kennedy and Lord Lennie, and the noble Baronesses, Lady Pinnock and Lady Grender.

Under Amendment 19 the Government would be required to carry out a financial assessment of the Bill within 30 days of Clause 3 coming into force. The Government would also be required to consider whether further legislation would be necessary to address any financial consequences related to the Bill

“for tenants in long leases of dwellings, including but not limited to in relation to … lease forfeiture … transfer fees … redress schemes”

and

“enfranchisement.”

The effect of Amendment 20 would be to require the Secretary of State to complete a financial assessment of the impact of the Bill on leaseholders, specifically with regards to building remediation costs.

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[Lord Lennie (Lab) [V]]

My Lords, we also strongly support Amendment 21. It rightly asks whether the Government can improve the definition of “rent”. Unfortunately—we heard much of this from the noble Baroness, Lady Grender—there is a litany of housing legislation that is in desperate need of modernisation. I hope the Minister will use today’s debate to explain what further legislation is planned to bring the provisions up to date.

On the specific issue raised by the noble Lord, Lord Young of Cookham, can the Minister confirm what engagement the Government have had with NGOs and representatives of tenants on the issue thus far? Can he confirm whether the Government have any plans, as suggested by the noble Baroness, Lady Grender, to update the definitions available in the Leasehold Reform Act 1967 and the Landlord and Tenant Act 1985?

[Lord Greenhalgh (Con)]

My Lords, this amendment from my noble friend Lord Young seeks to capture within the definition of rent other charges, such as fixed service charges, if they are reserved as rent in leases. It also seeks to exclude from the definition of rent variable charges or insurance if they are reserved or form part of the rent. The comments on a proposal regarding the definition of rent received from my noble friend Lord Young and other noble Lords continue to be carefully considered. I am very grateful to all those who have given it such close examination and look forward to hearing the further deliberations from the Law Society.

This is an important point to discuss today, as the treatment of what is meant by a ground rent and a rent lies at the heart of what the Government wish to convey through the Bill. It sets the tone for leasehold reform legislation to follow. On the specific meaning of rent, I am not unsympathetic to my noble friend Lord Young’s intention in his amendment. Since the very outset, this Government have been alert to defining what is meant by a ground rent in such a way as to discourage avoidance activity by sectors of the property market which make a habit of such activity. I believe we are all agreed that preventing such activity is of the utmost importance.

To give noble Lords some more of the context behind our reasoning for this definition, we started from a similar position to many of the Committee when approaching this issue by seeking to define closely what is meant by a ground rent. It is a logical approach; tightly drawn definitions are often meat and drink to a strong legislating body such as this House. However, I ask your Lordships to reflect on the seeming ease with which some parts of the leasehold sector have found ways around generation after generation of leasehold legislation, drafted with the greatest care and scrutinised in both this House and the other place, as my noble friend Lord Young knows well.

After very extensive consideration, we have concluded that we would need to take a different approach to the definition of rent for the leasehold sector. We therefore purposely defined rent widely to prevent landlords avoiding the restrictions in the Bill by including spurious periodic changes under any other name. As stated at Second Reading, the Bill intentionally uses a wide definition so that it includes anything in the nature of rent, whatever it is called. For example, we are mindful of not wanting to allow for a new garden rent or parking space rent replacing ground rent after the Bill is passed. That is why the meaning of rent in the Bill is drafted in such broad terms.

Any change faced by leaseholders that looks and sounds like a rent, whatever it is called, will therefore be open to challenge through trading standards and the First-tier Tribunal. Freeholders, landlords and even managing agents acting on behalf of a landlord will be able to refund this rental charge, whatever it is called, and may face a penalty fine. This imposes a potential liability on managing agents and ensures that they will scrutinise future contracts with great care.

We agree that it is not necessary for a lease to reserve charges, such as service charges and insurance, as rent. Under the Bill’s definition of rent, landlords will need to consider whether to itemise other charges separately in the lease. I point out that fixed service charges are a valid way for freeholders to charge for services where leaseholders and freeholders enter into a lease agreement. We are aware of criticism of the misuse of fixed service charges on occasion; these charges are generally in payment for a tangible service and differ from ground rent. Under the Bill, landlords will need to consider whether to itemise these in the lease agreement, and to be clear what the charge is and what a leaseholder receives in return.

I thank my noble friend Lord Young for raising the points made previously by my noble friend Lord Hammond of Runnymede. He raised two specific points, one on the definition of a ground rent for long leases over 21 years where a rack market rent is charged. I welcomed my noble friend Lord Hammond’s thoughts on this and am happy to undertake today that my officials and I will continue to engage with him and others as we look further into this matter. My noble friend Lord Hammond also raised a point on intermediate leases where there is a head lease or multiple properties. I point out that there are a number of potential options to address the complexities in this scenario. Once again, I am grateful to him for raising this issue and will continue to explore the matter further before Report.

Above all, I welcome the efforts of my noble friend Lord Young to achieve our shared objective of a clear definition of rent. However, I fear that my noble friend’s amendment would add complexity and provide opportunities for landlords to find workarounds to a Bill otherwise closed off by the simple definition it currently contains. I am interested to see what the Law Society comes up with and to see the revised drafting.

In response to the noble Lord, Lord Lennie, we have engaged with a number of NGOs and stakeholders in preparation for the Bill and I am happy to provide details of that in writing. While I appreciate the intention behind my noble friend’s amendment and I am happy to continue discussions with him, I ask him to withdraw his amendment.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to all those who have taken part, as this is a modest Back-Bench amendment which has generated three Front-Bench responses. The noble Baroness, Lady Grender, reminded us that there is a lot of money riding on the definition of ground rent; there are huge financial instruments at stake. We do not want a shaky foundation for that market.

I listened to the Minister’s reply. I will say only that he has so far failed to convince the Law Society or the lawyers I referred to, who do not believe that the broad definition adopted by his department is the right way to proceed. I am not sure that I was reassured by the Minister saying that, if there was any doubt, tenants could go to tribunals. The whole point of the amendment is to try to avoid doubt and grey areas and reduce the need for litigation.

At the beginning of his response, my noble friend said that his department continues to carefully consider the issue of the definition and that he was not unsympathetic to what I was trying to do. I am grateful for those responses. On the basis that discussions will continue between the noble Lord, Lord Hammond, and the department, the Law Society and the department, and indeed, those solicitors who have expressed serious doubts about the current definition, I am happy to withdraw the amendment.

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The certainty of a date is, therefore, critical. That is why I was more than happy to put my name to the amendment, in the name of the noble Lord, Lord Blencathra, for it to come into effect as quickly as possible. It is funny that the noble Lord, Lord Young, and I took down exactly the same quote: we must make progress “as speedily as possible”. To do that, a clearly defined date is necessary, and not just for the leaseholders. The people in the marketplace neither trust nor believe that this is imminent and will happen. For that reason, I strongly support both amendments, particularly the one in the name of the noble Lord, Lord Blencathra.

[Lord Greenhalgh (Con)]

My Lords, these amendments seek to set a fixed date or timescale for the commencement of the provisions of the Bill. I sympathise with that and thank noble Lords for raising this issue. The Government also wish to bring an end to the unjustified charging of ground rents as soon as it is feasible. Clause 25 provides that the Bill’s substantive provisions will come into force on a day appointed by the Secretary of State by regulations. Noble Lords can rest assured that we do not intend to have an unnecessary delay in implementation.

Although I am grateful to my noble friend Lord Blencathra for his enthusiasm to see the Government’s legislation come into force, commencing all the Bill’s clauses immediately on Royal Assent is simply not workable. This would leave no time for the laying of regulations and other important matters relating to the implementation process. While most of the delegated powers in the Bill are intended for later use should the need arise—such as to close a loophole—some will be beneficial when the rest of the clauses are commenced and will need to be prepared prior to this. For example, regulations under Clause 2, specifying the form and content of notices to be exchanged by landlords and leaseholders in respect of a business lease, will aid transparency and understanding of the obligations of both parties under this legislation—an outcome which I am sure noble Lords would welcome. I am sure that noble Lords will want the Government to get such regulations right. I am also sure that the noble Lord will appreciate that, with the unpredictability of the parliamentary timetable, I cannot give a guarantee that the Act can come into force on the day it is passed.

Amendment 24, in the name of the noble Lords, Lord Kennedy and Lord Lennie, and the noble Baroness, Lady Grender, recognises that time is needed before the Act can come into force. Again, I appreciate the sentiment of wanting to see the Act brought into force as quickly as it can be. However, it is not appropriate at this point to set a hard deadline for commencement, as proposed in the amendment. The Government are mindful of the necessity of ensuring careful implementation of this new legislation and to allow for a planned transition to a leasehold sector without financial ground rents. As noble Lords would expect, we will work closely with the sector, enforcement bodies and others to ensure that the Bill is implemented as smoothly and speedily as possible. I again assure noble Lords that the Government are fully committed to bringing the Bill’s provisions into force without delay.

My eagle-eyed noble friend Lord Young has spotted that the Bill applies to England and Wales and that, as currently drafted, there could be different commencement dates. Conversations with the Welsh Government continue to ensure that we meet the needs of leaseholders in England and Wales and address any commencement concerns.

I state again that I have listened carefully to noble Lords’ concerns and will look at whether we can be more specific about commencement dates as we move to Report. I look forward to further discussions with noble Lords on this issue. Once again, the intention is to get the second stage of leasehold reform through in this Parliament, ideally in the third Session. However, I cannot make any hard and fast commitment to that, so I ask the noble Lord to withdraw his amendment.

[The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)]

I thought I had a request from the noble Baroness, Lady Grender, to speak after the Minister. Does she now not want to do so?

[Baroness Grender (LD)]

I will take the opportunity, since I have created so much confusion. I thank the Minister for saying that he will go back and see whether it is at least possible to specify some kind of commencement date. I would very much like to say to him that I think all sides of this House will happily work with him and his department and take recommendations if it is at all possible to specify a date in order to counter the market scepticism that I described to him. If it is at all possible to put a date by the end of this process, we would be very grateful for that move.

[Lord Greenhalgh (Con)]

Of course, as a Minister I would like to have stronger lines at this stage but it is important to recognise that we need to lay the regulations and ensure that the enforcement of this works, and there are communications challenges. However, taking that all into account, I am sure that we can reach a situation where we provide much greater clarity and we can be more specific around commencement dates. We can work towards that as the Bill moves through this House and on to the next stage.