Leasehold and Freehold Reform Bill

Earl of Lytton Excerpts

Committee stage
Wednesday 1st May 2024 Lords Chamber

Moved by

[The Earl of Lytton]

93B: After Schedule 12, insert the following new Schedule—
“SCHEDULEBUILDING SAFETY REMEDIATION SCHEMEDuty to establish the scheme
1 (1) The Secretary of State must establish, or make arrangements for the establishment of, a Building Safety Remediation Scheme (“the BSRS”).(2) The purpose of the BSRS must be to ensure that residential blocks of flats with building safety risks are made safe, mortgageable and insurable at no cost to leaseholders or landlords. (3) For the purposes of this Schedule “building safety remediation principle” is the principle that—(a) so far as reasonably practicable, remediation costs for relevant buildings with building safety risks arising from defective construction or additional building work should be met by the developer, the principal contractor or both, and(b) where that is not reasonably practicable, or where building safety risks do not arise from defective construction or additional building work, costs should be met by the building industry.Scope of the scheme
2 The BSRS must be framed so as to apply to relevant buildings which—(a) were constructed, or subject to additional building work, on or after 1 June 1992, and(b) present building safety risks.Operation of the scheme
3 (1) The BSRS must provide for persons (including freeholders and leaseholders) to apply—(a) for a building to be recognised as a relevant building, and(b) for a relevant building to be recognised as eligible for grants in respect of the cost of remediation works.(2) The BSRS must provide—(a) for the appointment of persons (“BSRS adjudicators”) with appropriate expertise to determine, on behalf of the Secretary of State, applications under sub-paragraph (1)(a) and (b), and(b) for BSRS adjudicators to be required to exercise operational independence in making determinations under the scheme.(3) For the purposes of sub-paragraph (2), the BSRS may provide for appointments to be made by the Secretary of State or by one or more persons designated for that purpose by the Secretary of State under the scheme.(4) The BSRS must provide that determinations of BSRS adjudicators in respect of building eligibility for the scheme under paragraph 4 are final (but nothing in this sub-paragraph prevents the exercise by the High Court of its judicial review jurisdiction).Scheme supplementary regulations
4 (1) The Secretary of State must make regulations (“scheme supplementary regulations”) in respect of the BSRS.(2) Scheme supplementary regulations, in particular—(a) may make provision for determining what is to be, or not to be, treated as a relevant building for the purposes of the scheme;(b) may make provision for determining the date on which buildings were constructed or subject to additional building work;(c) may make provision for determining who is entitled to make an application under the scheme in respect of a relevant building;(d) may specify criteria to be applied by BSRS adjudicators in determining whether a relevant building presents building safety risks as a result of defective construction (and the criteria may, in particular, make provision wholly or partly by reference to building regulations or other enactments in force at the time of construction or by reference to specified classes of document);(e) may make provision permitting or requiring BSRS adjudicators to conduct tests, and requiring owners and occupiers of relevant buildings to cooperate with BSRS adjudicators in conducting tests; (f) may make provision permitting BSRS adjudicators to require local authorities or other specified classes of person to provide information or documents, and requiring persons to comply with any requirements imposed;(g) may make provision about the timing of applications and determinations;(h) may make provision about evidence to be adduced in support of an application;(i) may require or permit BSRS adjudicators to operate a rebuttable presumption of defective construction where specified classes of fact have been proved (for which purpose the regulations may make provision similar to, or applying with or without modification, any enactment);(j) may make provision about the making, processing and determination of applications under the scheme;(k) may make provision about the giving of notice to developers and others;(l) may make provision about the payment of awards;(m) may make provision about monitoring expenditure on remediation works;(n) may set a threshold for the estimated or quoted cost of remediation works below which an application for recognition cannot be made;(o) may make provision for determining, having regard in particular to the need for proportionality, the nature and extent of remediation costs which may be funded by the scheme (for which purpose “remediation costs” means any class of expenditure related to building safety risks, including, in particular, repair costs, the costs of interim mitigation or safety measures and reimbursement of or compensation for increases in insurance premiums);(p) may make provision for account to be taken of grants provided in respect of remediation works by any other scheme established by enactment or by a public authority;(q) may make provision for financial assistance provided by any other scheme established by enactment or by a public authority to be repaid out of grants under the remediation scheme;(r) may permit or require the amalgamation of multiple applications in respect of one relevant building, or of applications on behalf of the residents of one or more relevant buildings;(s) may permit or require representative applications on behalf of the residents of one or more relevant buildings;(t) may make provision about the qualifications, appointment, remuneration and conduct of BSRS adjudicators, and the regulations may, in particular—(i) provide for adjudicators to be remunerated from BSRS funds;(ii) provide for indemnities in respect of decisions taken by adjudicators (for which purpose the regulations may apply an enactment (with or without modification));(u) must include provision requiring the maintenance and publication of records of applications and determinations under the BSRS;(v) must confer a right to appeal to the First-tier Tribunal in respect of determinations as to whether a building safety risk arose from defective construction or additional building work.Scheme funding regulations
5 (1) The Secretary of State must make regulations about the funding of the BSRS and of grants made under it (“scheme funding regulations”).and of grants made under it (“scheme funding regulations”). (2) Scheme funding regulations must aim to apply the building safety remediation principle so far as practicable.(3) For that purpose, scheme funding regulations must aim to ensure that a grant awarded under the BSRS is funded—(a) so far as possible where building safety risks arise from defective construction or additional building work, by the developer or principal contractor of the building in respect of which the grant is awarded, and(b) failing that (whether by reason of the dissolution of a developer or principal contractor, insolvency or otherwise), or where building safety risks do not arise from defective construction or additional building work, by money paid into a fund maintained through a levy on the building industry in general, or specified parts of the building industry.(4) For the purposes of achieving the objective in sub-paragraph (3)(a)—(a) the reference to the developer of a building includes a reference to any person who arranged for its construction or additional building work and for the sale of units in the building;(b) the reference to the principal contractor is a reference to the person who was responsible to the developer for the construction of a building or undertaking additional building work;(c) scheme funding regulations must permit a BSRS adjudicator to provide for an award under the scheme to be paid by one or more persons specified by the adjudicator (and awards may, in particular, provide for joint and several liability);(d) scheme funding regulations must confer a right to appeal to the First-tier Tribunal;(e) scheme funding regulations may include provision permitting a BSRS adjudicator to permit or require an award for payment by a specified person to be satisfied wholly or partly by a person connected to that person (within the meaning of the regulations, for which purpose the regulations may apply, with or without modification, section 121 of the Building Safety Act 2022 and any enactment relating to joint ventures);(f) scheme funding regulations may include provision about enforcement of liability to satisfy awards, which may, in particular—(i) provide for collection of awards as a statutory debt,(ii) include provision for interest or penalties,(iii) provide for liability to make payments pending appeal or review, and(iv) create criminal offences in connection with evasion.(5) For the purposes of achieving the objective in sub-paragraph (3)(b), scheme funding regulations—(a) must establish one or more levies to be paid by specified businesses or classes of business;(b) must make provision for determining liability to pay the levy;(c) may confer functions on BSRS adjudicators or other specified persons (which may include the Secretary of State) in respect of determination of liability to pay the levy;(d) must confer on a person determined to be liable to pay the levy the right to appeal to the First-tier Tribunal;(e) may provide for different amounts of levy to be paid by different classes of person;(f) may provide for the levy to be paid by way of one-off payments, periodic payments or both; (g) may include provision about enforcement of liability to pay the levy (which may, in particular, provide for collection of the levy as a statutory debt, include provision for interest or penalties and create criminal offences in connection with evasion);(h) must include provision about the administration of the levy by the Secretary of State, including provision as to the maintenance and publication of estimates, accounts and other records;(i) may include supplemental provision about the levy.(6) In making regulations under sub-paragraph (5), and in particular in assessing the proportionality and other fairness of any levy imposed by regulations under sub-paragraph (5), the Secretary of State must—(a) have regard to any other levy or similar imposition that appears to have a similar purpose as a levy under the scheme funding regulations, and(b) must consult persons appearing to him or her to represent the interests of persons affected by other relevant levies and impositions.(7) Scheme funding regulations may include provision about—(a) application of awards, levies and grants, including provision for holding (or return) of surplus funds;(b) the nature and extent of obligations imposed by awards (which may, in particular, provide for payments in money or services or money’s worth);(c) processes and procedures to be applied in determining applications for grants and questions of liability to awards (which may, in particular, include provision for determination wholly, partly, absolutely or contingently by arbitration, mediation or any other kind of process or procedure the Secretary of State thinks appropriate);(d) terms and conditions of awards, levies and grants;(e) appraisals, appeals and enforcement.Apportionment
6 (1) Scheme funding regulations may make provision about apportionment of liability for defective construction.(2) In particular, scheme funding regulations may provide that where a person is required to pay an award under the BSRS, that person may bring proceedings to recover a contribution from one or more persons who share responsibility for the defects in respect of which the award is made.(3) Provision made by virtue of this paragraph may—(a) confer jurisdiction on the First-tier Tribunal or on any other specified court or tribunal;(b) apply (with or without modifications) any enactment about third- party liability.Interim payments
7 (1) The Secretary of State may make interim grants to persons whom the Secretary of State believes are likely to be entitled to benefit from the remediation scheme.(2) Interim grants may be made on such terms and conditions (including as to repayment) as the Secretary of State may specify.(3) Scheme supplementary regulations—(a) may include provision for account to be taken of interim grants under this paragraph, and(b) may include other provision about interim grants under this paragraph (including provision about applications for grants, eligibility for grants and determination of applications for grants). Interpretation
8 For the purposes of this Schedule— “building safety risk” has the meaning given in section 120(5) of the Building Safety Act 2022;“building industry” has the meaning given in section 127(7) of the Building Safety Act 2022;“construction” includes any kind of building work (whether part of the original construction of a building or not) including works of improvement, repair and extension;“class” includes description;“defective construction or other building work” means construction or additional building work that—(a) contravened building regulations or other enactments in force at the time of the construction or additional building work, or(b) satisfies any other criteria specified in the BSRS or in scheme supplementary regulations;“BSRS funding regulations” has the meaning given by paragraph 5;“BSRS scheme” has the meaning given by paragraph 1;“BSRS adjudicator” has the meaning given by paragraph 3;“grant” includes loans and any other form of financial assistance (for which purpose a reference to payment includes a reference to the provision of assistance);“building safety remediation principle” has the meaning given by paragraph 1;“landlord” means means the landlord under the lease or any superior landlord.“remediation costs” has the meaning given by paragraph 4;“relevant building” means a self-contained building, or self-contained part of a building that contains at least two dwellings;“scheme supplementary regulations” has the meaning given by paragraph 4.Consultation
9 Before making the scheme, the scheme supplementary regulations and the scheme funding regulations, the Secretary of State must consult—(a) persons appearing to represent the interests of freeholders, leaseholders or occupiers of blocks of flats with building safety risks;(b) persons appearing to represent the interests of the construction industry and related industries, and(c) such other persons as the Secretary of State thinks appropriate.Regulations
10 (1) Scheme supplementary regulations and scheme funding regulations—(a) may make provision that applies generally or only for specified purposes,(b) may make different provision for different purposes,(c) may confer functions (including discretionary functions) on specified persons or classes of person, and may provide for the Secretary of State to appoint persons to exercise functions under the regulations or the remediation scheme (whether or not on behalf of the Secretary of State), and(d) may include supplemental, consequential or transitional provision.(2) Scheme funding regulations may not be made unless a draft has been laid before, and approved by resolution of, each House of Parliament.(3) Scheme supplementary regulations are subject to annulment in pursuance of a resolution of either House of Parliament.” Member's explanatory statement
This new Schedule would implement a building safety remediation scheme to ensure that buildings with building safety risks are put right without costs to leaseholders.

[The Earl of Lytton (CB)]

My Lords, in moving Amendment 93B I will also speak to linked Amendment 107 and Amendments 105C to 105G standing in my name. These amendments offer a range of proposals to enhance the protection of leaseholders from the costs of remedying fire protection or other structural defects.

I make no apology for returning, once again, to this matter of basic consumer protection for leaseholders and for going over some old ground. My mailbox tells me that the issues are far from resolved. Too many leaseholders remain seriously encumbered by the defects in the original construction of flats that they occupy or own. The plain truth is that the Building Safety Act—I shall refer to it as the BSA—is not delivering the protection that leaseholders ought to expect as a basic right, and this Bill serves to undermine it further in certain material respects.

There is cross-party consensus that the BSA needs amendment. I pay tribute to colleagues who, with me, continue to press the Government to make changes. I support the other amendments in this group for reasons that will become apparent. The BSA is convoluted. It complicates, excludes, creates uncertainty and risk, and delays remediation. It leaves some leaseholders—and their lenders—with permanently impaired assets. Where before there was one market, the BSA creates three tiers of flat ownership, with such complex rules that conveyancers frequently decline instructions and, increasingly, insurers are unwilling to offer professional indemnity cover to practitioners.

The Government have placed substantial remediation obligations on landlords. The courts should be the last resort, yet the BSA and the Bill force landlords to take legal action as a first resort on initial unfunded remediation and, thereafter, to recover the costs of defects that they did not cause from the developers. Where the developer no longer exists, they must fund it themselves. There is no automatic developer liability to meet any of the costs in the 85% of buildings not covered by the developer contract. There is no legal obligation on any contracting developer to cover non-life-critical fire defects and structural defects. Landlords are the backstop if public funding for cladding costs happens to prove insufficient. Construction inflation, moreover, has risen by a quarter since the announcement of the building safety fund in March 2020, so my first question is: what assurance exists that all eligible claims on the building safety fund and the cladding safety scheme will be met even if they exceed those historic cost budgets?

More broadly, this model seems to be based on little more than political bias and destined to fail, and fail in a way that will ultimately harm leaseholders and the leasehold market. I have questioned previously whether the major landlord groups can afford to fulfil their remediation obligations as demanded. I was therefore surprised to learn that under the Bill, and despite relying on landlords to fund non-cladding remediation works or related legal action, the Government proposed to eliminate or reduce the ground rent income. I was further surprised to learn from the noble Baroness, Lady Swinburne, in a letter last week, that the Government have no estimates of the risk of freeholder insolvency.

The main asset of many landlord groups is ground rent income, as we have heard before in discussions on the Bill. It is used to repay the long-term bonds or loans over many decades. If the income is removed, some will likely declare insolvency: the Government acknowledge this risk in their own impact assessment. I mention this again because it is critical to the remediation obligation. So that leaseholders are not left completely exposed if their landlords are insolvent, I trust that the Minister will regard as an essential lifeline my amendments, which are the only ones providing for alternative remediation funding sources. I would like to know what contingency plans the Government have in place apart from this, should buildings with remediation obligations escheat to the Crown, an eventuality the Minister alluded to on Monday.

Valuers are already marking down portfolio valuations because of material uncertainty. Permanent impairment of leaseholder and lender assets is also risked under the Government’s model. Basel III pillar 1 standards come into force next year. Lenders will have to revalue a loan if an

“event occurs resulting in a permanent reduction of the property value”.

Leaseholders will also be hit by these provisions; specifically the unprotected and partially protected—that is, the capped liability leaseholders—and those leaseholds covered by the developer contract. The contract allows combustible materials, now banned, to remain on buildings so long as they do not cause that “life-critical fire safety risk”. I put that in quotes: it is a non-statutory definition and my Question for Written Answer on this still awaits a response. But leaving these in place gives rise to a B1 category of building risk rather than the fully remediated A1 classification. At the same time, these flaws are evident to the market, which values an asset not according to life safety but according to the risk of material loss. The result is permanently higher insurance premiums. Ministers may wag the finger at the FCA in relation to its insurer members but, in truth, the market has spoken on the BSA and on building and professional indemnity cover risks, and no amount of political manipulation is going to alter that.

There is one group that faces a very bleak outcome, unless the Government change course, and that is in enfranchised leaseholders. Theirs are, in the terms of the BSA, “not relevant buildings”, a point that the noble Lord, Lord Young, makes in his amendments. The limit of any new protection afforded to resident management companies is the cost of obtaining a remediation contribution order, so can the Minister explain how enfranchised leaseholders will deal with non-cladding defects or effectively force the original developer to make a contribution, especially if it happens not to exist any longer?

Better policy is clearly needed. Simply, the BSA should be amended to protect all leaseholders, regardless of circumstances, in buildings of all heights. A separate, dedicated funding stream is needed so that leaseholders are not left in limbo, particularly when their landlord becomes insolvent.

The Committee will be familiar with Amendments 93B and 107 from the debates on the levelling-up Bill and the then Building Safety Bill, so I will try not to labour the point too much. Amendment 107 requires the Government to establish a building safety remediation scheme and Amendment 93B proposes a new schedule setting out the scheme’s key features. The scheme would serve to protect all leaseholders, without exclusion, from building safety remediation and interim safety costs. As drafted, it is fully funded.

Joint and several liability for remediating building safety defects is placed on the developer and principal contractor where a building did not comply with regulations at the time of construction. If neither can pay, or if the regulations have moved on and a building is retrospectively deemed unsafe, remediation funding comes from a levy across the wider building and materials industry. That approach has been extensively scrutinised by a range of legal and other professionals. In particular, I thank David Sawtell KC, of 39 Essex Chambers, for making himself available when I recently met with the Minister, whom I thank for facilitating the meeting.

I have added a second option for good measure. Amendments 105C to 105G amend certain arrangements already in the BSA. The developer contract limits developer responsibility to undefined “life-critical fire safety defects”. That means that all other defects are excluded. Amendment 105C closes that loophole by requiring developers to remedy all defects defined in the BSA. That brings all fire and structural defects within the scope of the developer contract—and, therefore, the responsible actors scheme—and puts that in line with primary legislation. It ends the arrangement whereby Parliament set in legislation one definition of defects requiring remediation while the Secretary of State entered into some side agreement with the industry for something rather different. At present, the government scheme requires developers only to remediate their own buildings. The Secretary of State has not given effect to Section 126(4)(b) of the BSA on the costs of remediating other buildings. Amendment 105D would put that right by amending the responsible actors scheme regulations.

Amendments 105E and 105F set out to end the three- tier system of leaseholder exclusions from remediation cost protection. Amendment 105E removes the exclusions according to building height and type of lease set out in the BSA. Amendment 105F removes the conditions and exclusions around remediation cost protection in Schedule 8 to the BSA.

The risk of major landlord insolvency is real. Amendment 105G reinstates and expands the original BSA provisions on insolvent landlords. It obliges insolvency practitioners and Law of Property Act receivers to commence or continue remediation work. Remediation costs are to be considered part of their expenses and therefore paid ahead of other creditors. It also reinstates their power to apply for a remediation contribution order, which the Government seek to remove through the Bill. But—this is a very big “but”—insolvency practitioners need secure funding if that is to work.

In closing, I draw attention to the great gulf between the Government’s self-praise about what they are doing—although, to a great degree, there is a lot of good in the Bill—and the reality. That reality is measured in the anguish and distress of hundreds of thousands of leaseholders who bought properties in good faith and now cannot sell them, get mortgages or move on with their lives. It is measured in the 15,000 people evacuated from their homes, as reported three days ago in the Sunday Times and referred to by the noble Baroness, Lady Thornhill, on Monday. It is measured in the 37% defect rate found in developer-contract buildings; in the glacial progress of remediation revealed in the Government’s most recent progress statistics; and in the FCA’s frank warning that insurers price risk not according to the loss of life, as the Government may wish, but according to the stronger test of total loss of asset. It is measured by the fact that this debate continues to play out seven years after the Grenfell fire.

This inequitable scattering of liability across innocent parties begs the question: why do the Government not make the wider construction industry, which designed, built, sold and banked the profits from these defective properties, the primary backstop for the damage done? We do not have an answer to that.

I have provided in these amendments two possible routes to effective protection of leaseholders, the most vulnerable group in this sorry tale of shame. I ask the Minister and noble Lords: if not by these proposals, how? When will the Government act to protect all innocent, home-owning consumers from market failure, and are they content to risk their reputation and legacy on simply making this a problem for the next Government? I beg to move.

--- Later in debate ---

With those clarifications, I hope that noble Lords will feel able not to press their amendments.

[The Earl of Lytton (CB)]

My Lords, I thank all noble Lords who have spoken in this debate. Needless to say, too many further questions arise out of all this, and there are too many points for me to be able to address anything other than the odd one—other than by making a very long speech and incurring the wrath of the Government Whip for the second time in the week.

I preface my further remarks by saying a word about Lord Stunell. His death is a great loss to all of us. He was forensically well-informed and always delivered his contributions with care, tact and supreme authority. I had the great honour of serving with him on the Built Environment Committee and, of course, I was with him throughout the Fire Safety Bill and the Building Safety Bill, as well as the levelling up Bill. He will leave a very great hole in our deliberations.

There is a fundamental common purpose between what the noble Lord, Lord Young, and I are trying to achieve. I simply say that I look forward to working with him to see whether we can find a common way forward—and indeed with other noble Lords, such as the noble Baronesses, Lady Thornhill and Lady Taylor, and the Minister, because there is a consensus that something needs to be done.

The right reverend Prelate and all the Bishops have been fantastic in their support on this—right the way through the passage of the now Building Safety Act and Levelling-up and Regeneration Act, and again on this Bill—in order to get justice for innocent leaseholders.

The noble Baroness, Lady Thornhill, referred to the wider liability and systemic failures. I get that, which is why I keep referring to the wider construction industry. There are lots of people involved there and they all have some responsibility.

The noble Lord, Lord Empey, referred to building control. This takes us back to the Building Act 1984 measures, which allowed for approved inspectors—as privatised entities—effectively to take over the role of local authority building control. The local authority then lost control of the process at that stage. The construction sector gamed the system. Indeed, I know at least one large body that had its own wholly owned subsidiary as its approved inspector. Where is the objectivity there?

The noble Lord, Lord Rooker, was absolutely right on the question of electrical safety, which is a subset of the fire safety issue.

The noble Baroness, Lady Taylor of Stevenage, has always been a fantastic supporter of what I am trying to do; I say to her and to all noble Lords that I am not set on the particular solution that I have put forward, but I am dead set on wanting something that protects consumers and protects leaseholders in their own home—this is the recurring theme. The chickens are going to come home to roost: the bottom line is that this will always end up with leaseholders by default picking up the pieces; they are the most vulnerable. The problems do not go away; whether you kick the political can down the road or whether you do not, it just leads to more grief.

I will not go through the comments of the Minister, but I thank her for them and will look at them with very great care. I am sorry that the argument still seems to be that, because this matter was raised in the passage of the then Building Safety Bill and levelling up Bill, it somehow should not be discussed any more. The point is that the problem has not gone away. The Minister may not want to listen to me—certainly not for much longer this afternoon—but she needs to listen carefully to what leaseholders are saying about their experiences. We in Parliament may start turning a tin ear to what is happening out there, but it is evident in the media and in emails to me and other noble Lords, and it cannot be ignored or avoided any longer. The mercury in this respect is going up the tube quite fast, and this will become more and more of an issue.

If my proposals are destined to slow down the process, all I can say is that, politically, I suspect that this is going to start speeding up very rapidly. The Government may say that they will take further action if the players do not perform, but this is another bit of finger-wagging. We know that something needs to be done and that it needs to be done now.

I end by saying that I will consult with other noble Lords about how we can take this forward. I certainly may return to this matter on Report. None of us wants to delay this Bill but, unamended, the agony for lease- holders will go on and on. On that note, I beg leave to withdraw Amendment 93B.

Amendment 93B withdrawn.