Leasehold Reform (Ground Rent) Bill [HL]

Baroness Grender Excerpts

Committee stage
Monday 14th June 2021 Grand Committee

Moved by

[Baroness Grender]

14: Clause 9, page 7, line 9, leave out “£500” and insert “£5,000”
Member’s explanatory statement
This amendment would raise the minimum financial penalty under the Bill from £500 to £5,000.

[Baroness Grender (LD)]

My Lords, this group of amendments is an attempt to ensure that enforcement bodies have sufficient financial long-term sustainability. It also ensures that there are appropriate deterrents in the Bill to incentivise freehold landlords to understand just how serious a breach will be and the impact it will have on their current portfolio of properties. The additional aim is to create an incentive for local authorities to pursue financial penalties.

Today, of course, is the fourth anniversary of the Grenfell Tower fire where 72 people lost their lives, and I am sure that we are all thinking of those bereaved families, survivors and residents as they remember their loved ones. That tragedy underlines just how important it is that homes are safe and secure, and one of the first lines of defence is the enforcement authorities.

In addition to moving Amendment 14, I will speak to Amendment 15. While we appreciate that the Minister stressed at Second Reading that the fines would be for each individual lease, the danger remains that an enforcement authority will receive only £5,000. Indeed, Clause 9(3) states:

“Where the same landlord has committed more than one breach of section 3(1) in relation to the same lease, only one financial penalty may be imposed on the landlord in respect of all of those breaches committed in the period”.


Several noble Lords at Second Reading raised the issue of enforcement and resources to enforce. Local authorities’ trading standards departments have experienced staff cuts of at least 50% since 2010. It is not unusual for skilled and experienced—and therefore more expensive—staff to have been replaced with less skilled and lower-salaried staff. Sometimes trading standards has been contracted out to third parties completely. Local authority trading standards departments need greater sustainable long-term resource and that means generating greater levels of income.

Therefore, there should be a wider range for the fines and a higher start point for the penalty. The amount should be consistent with the Tenant Fees Act 2019 where landlords breach Sections 1 and 2 of the Act on more than one occasion. If you are a leaseholder, you are not a home owner, and therefore the levels of potential fines should surely be similar to those for rogue landlords in the Tenant Fees Act. The Bill relies on local weights and measures authorities—namely, trading standards departments—to oversee this new law. The Government will already be well aware of the sluggish approach to fining and banning rogue landlords under the Tenant Fees Act 2019. When originally launched, the Government predicted that there were 10,500 rogue landlords; so far, only 43 have been registered. Speak to many local authorities and they will report that an operation of this nature requires early up-front investment, but other priorities such as social care with chronic records of poor funding will inevitably come first. As Liam Spender, a trustee of the Leaseholder Knowledge Partnership, points out:

“It is likely most local authorities will decline to get involved, as they do in most private sector housing disputes now, on the grounds that leaseholders have civil claims they can use to recover any prohibited ground rent.”


Waiting for the next local government settlement is a short-term solution and, frankly, unlikely to solve this problem given other competing demands on local authorities. Now the Government are adding another task with too limited financial reward: as the fines currently stand in the Bill, the incentive to take the necessary action to fine a freeholder will not be worth the effort.

Amendments 14 and 15 would raise the minimum financial penalty from £500 to £5,000 and the maximum financial penalty from £5,000 to £30,000. The potential of greater fines would give local authorities an opportunity to invest in this operation, charge rogue landlords and freeholders and therefore sustain a longer-term, fully budgeted operation. If the Government are opposed to this increase, perhaps the Minister could share what level of financial penalty would make it worth while for a local authority to pursue a freeholder. If the argument is that this will have an impact if it is a penalty on a developer across several leases, what level of fine do the Government anticipate?

On Amendment 16, in my name and that of my noble friend Lord Stunell, the arguments are similar. It contains a new clause that would be inserted after Clause 12 that would extend the banning order regime under the Housing and Planning Act 2016, with an exception for rent recovery orders. It would ban landlords who received three or more penalties in any six-year period from collecting some or all of the monetary ground rents arising under pre-commencement leases. That should be a clear signal to persistent offenders that, under Clause 9 of the Bill, if the maximum penalty has been charged three or more times against the same landlord or a person acting on their behalf, there will be restrictions and penalties.

We recognise how significant the failure is of this part of the Housing and Planning Act 2016. On 9 January 2018 the then MHCLG Minister, Jake Berry MP, said the Government’s estimate was that

“about 600 banning orders per year will be made”.—[Official Report, Commons, Fifth Delegated Legislation Committee , 9/1/18; col. 12.]

In April, the Housing Minister, Christopher Pincher MP, confirmed that just seven landlords had so far been issued with a banning order. As the National Residential Landlords Association says of this failure:

“The Government needs to work with local authorities to understand the true extent of the pressures faced by environmental health departments responsible for enforcing many regulations”


affecting this sector.

“Too often, government has introduced initiatives to crackdown on”,


for instance,

“criminal landlords without properly understanding whether councils have the resources and staff to properly enforce them. In short, regulations and laws to protect tenants”—

and to protect leaseholders from bad practice—

“mean nothing without them being properly enforced.”

When we look at the level of these fines, we must remember that this industry is vast. The MHCLG’s own estimate is that, of the 4.5 million leasehold properties in the UK, approximately 2.5 million are owner-occupied. All these people are likely to be paying some level of ground rent. The companies behind the freehold interests receiving these ground rents are huge undertakings. They are more than a match for any local authority seeking a £5,000 fine. For example, Proxima GR, a key company in the Vincent Tchenguiz freehold portfolio, reports in its most recent accounts that it expects to receive £2.4 billion in ground rent between 2019 and 2080. It is believed to control a portfolio consisting of freehold interests over hundreds of thousands of leasehold properties. The same accounts report cash income of £24 million in the same year. A fine of £500 or £5,000 for multiple breaches is no disincentive to any organisation of that scale. Information on other ground rent investors is hard to come by but, from the limited information available, there are many other substantial operators out there. For example, in 2016, leasehold properties worth £64.8 billion were sold. Of these, new-build properties were worth £13.7 billion, leasehold house numbers doubled, and developers made £300 million to £500 million a year from ground rent sales. Looked at from that perspective, £5,000 seems a very small sum to put as a maximum. Has the Minister considered an industry-funded redress scheme to support enforcement?

To conclude, there should be greater detail in the Bill about how to resource penalties and sanctions to sustain longer-term planning and funding. These are large industries with significant levels of income and profit: they need to be aware that their days of exploiting leaseholders are over and failure to recognise that will cost them dearly. I beg to move.

[Lord Naseby (Con)]

My Lords, I am delighted to support the noble Baroness on Amendments 14 and 15. I was just reflecting on how important this issue is: hundreds of thousands, maybe millions, of families are affected. The problem probably goes back over half a century. It is to the great credit of my noble friend on the Front Bench that the Bill is before the Committee now, and I say to him “Well done.” In 1968—I see my noble friend Lord Young sitting opposite me—I had the privilege of being elected, somewhat against the odds, as the potential leader of the London Borough of Islington. We won 57 out of 60 seats; we did a deal with the other three, because they were a local community group. I was then elected to be leader and chairman of the housing committee. Sitting here this afternoon, I still remember working really closely with the officers of that authority, from the town clerk down. It was not entirely to do with leaseholds, but it was to do with property and rogue landlords. Two in particular come to mind: a local one called De Lusignan and the one whom we all remember, Rachman. Those rogues and their successors have not gone away—the noble Baroness is absolutely right; they may well have multiplied for all I know. They were a huge problem even in those days.

There is another element, which I can talk about, though some noble Lords might have more difficulty. I have lived and worked in Pakistan, India and Sri Lanka. I have the greatest respect for those countries. I would go as far as to say that I love them dearly; I know them extremely well. As far as I can see, there is a rogue element, particularly in the poorer parts of our country, which exploits vulnerable migrants. That is wrong, and we know that it is wrong, but some local authorities appear to be slow, resistant, unwilling or too conscious of the social situation. In my view, as someone who has taken a deep interest in housing all my political life, that rogue element has to be addressed—it does not matter who they are.

The noble Baroness is right about the figures that are in the Bill. In today’s world, £500 is absolutely no deterrent to anybody: you only have to see what is happening out there in the market. She is right that £5,000 is the beginning of a reasonable deterrent. Personally, I would do a multiplier by five, because £25,000 somehow—perhaps it is the advertising man in me—sings out as even stronger than £30,000. I do not know why that is, but I thought about this when I was working on it over the weekend. I agree with the noble Baroness that £5,000 is the beginning of a proper deterrent, and I think that £25,000 should be the maximum.

Of course, it is for my noble friend on the Front Bench to decide what Her Majesty’s Government believe is appropriate, but all I say to him is that this area needs dealing with, and here is an opportunity to do it. I again congratulate my noble friend and his colleagues on bringing this Bill forward. Let us make a really good job of it.

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Amendment 16 proposed by the noble Baroness, Lady Grender, and the noble Lord, Lord Stunell, would have the detrimental effect, which I am sure was not intended, of making it impossible to make rent repayment orders against anyone subject to a banning order for receiving any monetary ground rent. For these reasons, I ask the noble Baroness to withdraw her amendment.

[Baroness Grender (LD)]

I thank the Minister for his response. I am very interested in his response about redress schemes—that is something that we could possibly explore at Report. Just to put things in perspective, the Government have recently published a draft online safety Bill which would enable a new online regulator to fine companies up to £18 million or 10% of their annual global turnover, whichever is higher. We are looking at those kinds of equivalents here.

The point about local authorities contemplating a possible windfall is the very opposite of the current scenario, where a local authority will look at a potential freeholder and ask whether, if it goes down the route of attempting to fine for breach of lease, three days’ work alone by somebody with no legal skills will use up the £500 that it would get from the fine. While I appreciate that, as I said in my opening remarks, fines would be across all leases, there is a problem when, if there are multiple breaches for one lease, that is not recognised in the legislation as drafted.

The most important issue is that we need to understand that the penalties and punishments will actually work. We know that there are significant challenges for local authorities to enforce the current systems and that these new systems will seriously struggle and be seriously challenged.

I thank all noble Lords who have expressed their support for these arguments and amendments. Obviously, we will want to revisit this. We will look at the Official Report and see what can be done to continue to pursue this issue, which is all-important because, without enforcement, the Bill is simply not going to work. I beg leave to withdraw the amendment.

Amendment 14 withdrawn.

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[Lord Young of Cookham (Con)]

My Lords, one of the themes in our debate on Second Reading was the need for a clear definition of what exactly a ground rent is. In addition to those who have taken part in Committee, I recall the contribution of my noble friend Lord Hammond of Runnymede, who drew on his experience in this area to outline some issues about definition. The helpful briefing that we have all had from the Law Society has as its first priority the need to amend the definition of rent in the Bill. It says:

“The main issue with the Bill at present is the failure to distinguish between different types of rent. Although the Government’s clear intention is to tackle ground rents alone, the Bill does not make this focus clear.”


During the proceedings this afternoon, I have had a further email from Mr Hugo Forshaw of the Law Society saying that he is supportive of the spirit of my amendment; he has offered support for a tweaked amendment on Report because, apparently, mine is not absolutely perfect, in his view.

Amendment 21 deals with this important issue. We need an effective and clear definition if the legislation is to work in practice. There is no current clear definition. Clause 22(2) says:

“‘rent’ includes anything in the nature of rent, whatever it is called”.

If I may say so, that is reminiscent of the controversy about self-identification and the context of gender identification—that if you say something is the case, then it is. The Government’s current approach will, I fear, result in litigation to determine the scope of what counts as ground rent. While such litigation is ongoing, leaseholders will have to continue to pay ground rents in all but name to avoid forfeiture. It is therefore essential that there is a workable definition from the day this legislation is commenced, without leaseholders needing to engage in litigation with landlords to establish that definition.

I listened to my noble friend the Minister’s point at Second Reading that the drafting of “rent” had been left deliberately wide so as to avoid providing a target for landlords to work around, but I am not sure this is wise. The drafters of our tax legislation face similar challenges, for example, yet manage to achieve a greater degree of precision than has been achieved here. There is value in ensuring that future leaseholders and their advisers can determine with certainty what is and what is not ground rent. That way, they can at least seek amendments to a proposed lease to avoid ever agreeing to pay a disguised ground rent. This broad definition risks capturing sums often reserved in the lease as rent, and therefore called rent, which may be perfectly legitimate service charges or insurance contributions. As my noble friend Lord Hammond said at Second Reading, they risk capturing market rents granted under a long lease, which is not the Government’s intention.

Leading law firms have echoed the Law Society and my noble friend Lord Hammond in requesting a clear definition of ground rent, lest there be serious unintended consequences. For example, Herbert Smith Freehills says:

“As currently drafted, the form of the legislation does not differentiate between ground rent and any other kind of rent: in short, anything reserved as rent (eg service charge, insurance rent) would be cancelled and unenforceable. Similarly, there is no reference to the rent being of the nature of a ground rent, so if the lease exceeds 21 years, there would, as the Bill currently is drafted, be no way of granting a long residential lease without a premium and at a market rent. We expect these points are likely to be addressed as the Bill proceeds through Parliamentary readings.”


The definition I offer is based on that found in Section 4 of the Leasehold Reform Act 1967, which is also the definition recommended by the Law Society. But I have added to that definition words that relate to any fixed charge, or a charge which varies or may vary by reference to an amount of money, a fixed measure—for example, RPI inflation—or a period of time: for example, a charge which doubles every 10 years. The aim of this drafting is to include within the definition of ground rent any charge that does not vary in accordance with the cost of providing a service or an item. This is done using the well-known and well-understood definition of “relevant costs” in Section 18 of the Landlord and Tenant Act 1985, for which there is already much case law.

The wording of Amendment 21 is deliberately extended to include fixed service charges, for which currently leaseholders have no means of redress. At least one set of barristers’ chambers—Landmark Chambers—has already identified this as a potential weak point in the legislation, allowing ground rents to continue in a different guise. The aim of this drafting is to ensure that charges made in exchange for a tangible service, which may vary in accordance with the cost of a tangible service, are not within the definition of ground rent. That reflects the Government’s policy, as set out in the Explanatory Notes. This strikes a necessary balance between bona fide service charges reserved as rent and any attempt to circumvent the ban on monetary ground rents by adding fixed service charges or index-linked service charges, or escalating fixed service charges which function as ground rents but which are not given that label.

My noble friend may say that, as the Bill applies only to future leases, some of these uncertainties can be resolved by drafting new standard leases for future use. But if either this Bill is amended or a future Bill implements government policy to enable existing leaseholders to buy out their ground rents, this definition may well be used to cover existing leases, so the need for clarity is even greater.

Paradoxically, the existing definition may catch items that are not ground rents— the case mentioned by my noble friend Lord Hammond—but may not capture fixed service charges that should be caught. On that basis, I beg to move my amendment.

[Baroness Grender (LD)]

My Lords, the definition of rent is an area that requires detailed scrutiny when looking at loopholes during the passage of the Bill. As we heard from the noble Lord, Lord Young of Cookham, at present, as drafted in Clause 22(2),

“‘rent’ includes anything in the nature of rent, whatever it is called.”

This wide definition has set alarm bells ringing. We therefore strongly support this probing amendment by the noble Lord, Lord Young.

As I described in the debate on the first group of amendments today, this is a billion-pound industry which will not let its grip on the market go lightly. It relies heavily on borrowed money to acquire freeholds, all secured on the basis of future ground rents. With the potential of a “rent” unpaid and forfeiture as the pot at the end of the rainbow, we need to make sure that there is some very specific detail in the Bill as to what “rent” means.

The danger is clear, especially on forfeiture, as defining any service charge as “rent” means it must be paid to avoid that forfeiture before a leaseholder can even protest or start to take legal action against the amount charged. The Leasehold Knowledge Partnership has warned that “rent” or a contractual arrangement, as we heard from the noble Lord, Lord Young, could take the form of a fixed payment for arranging buildings insurance or for appointing and supervising the managing agent. Can the Minister say whether, for instance, it is possible to include in a future lease a payment of, say, £200 per year rising in line with CPI inflation as a payment for the landlord’s expenses in arranging buildings insurance if that exists as a fixed service charge rather than a prohibited ground rent caught by the new law? Does he accept or recognise that it would not be possible for leaseholders to challenge that payment as the law stands or is proposed in the Bill? What measures has the Minister’s department taken to ameliorate this all-important issue?

The Bill says that no rent under a lease other than a peppercorn is permitted unless the lease is one of the types of lease excepted from the Bill. But in the Explanatory Notes we are told that the Act is intended to capture any payment under a lease that does not impose an obligation on the landlord to provide a service. LKP trustee Liam Spender put it this way:

“In modern leases, and modern case law, ‘rent’ often has a broader meaning. Many modern leases will define ‘rent’ as including both ground rent and service charges. Some modern leases also specify separate ‘insurance rents’ to cover the costs of buildings insurance arranged by the landlord. It is uncertain if the bill intends to force future leases to be redrafted so that these provisions are no longer described as part of the ‘rent’, or if the bill is not intended to capture these provisions because they are payments for tangible services.”


I look forward to the Minister clarifying some of those points.

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[Lord Young of Cookham (Con)]

My Lords, before I speak in strong support of Amendment 26, I raise an issue on commencement, which I think I raised at Second Reading—namely, whether it is possible to have different commencement dates in England and Wales. It is not entirely clear from Clause 25, as I read it, whether one could specify different dates and whether the possibility exists, for example, for the Welsh Assembly to come to the Minister and say, “We would very much like this Bill to be enacted in Wales way ahead of what you are minded to do in England.”

I turn to Amendment 26. During our first Sitting, my noble friend said:

“In order to move on to further legislative action on leasehold reform, we need to get this Bill through as speedily as possible.”—[Official Report, 9/6/21; col. GC 283.]


When he replied to Amendments 19 and 20 this afternoon he repeated that imperative for speed. This need for a swift passage has been behind the resistance to amendments even when, as we discovered last week, it was an amendment that delivered government policy.

As my noble friend Lord Blencathra said, the force of the Government’s argument is weakened if they will not give a firm date for implementation. All we know is that retirement homes will not be affected for another two years. It seems entirely reasonable for my noble friend Lord Blencathra to argue, as in Amendment 26, for a quid pro quo: swift passage in return for swift implementation.

The other leg of the Government’s argument has been, “Don’t worry if this Bill doesn’t do everything. Another one is right behind.” I expressed some scepticism about this last week; we are still waiting for stage 2 of Lords reform promised in 1997. I know my noble friend’s heart is in the right place but all he has been able to say is that stage 2 will be later in this Parliament, which is scheduled to last until December 2024. That legislation could then have a later enactment date, as this Bill does, so I think it fair to press the Government for clarity. Why not publish a draft Bill later in this Session and introduce it in the next one?

I end with a comment that adds weight to this need for clarity. This Bill was introduced in your Lordships’ House and has had a relatively easy ride, but the other place is full of MPs under pressure from leaseholders in their constituencies. Even the at times assertive language of my noble friend Lord Blencathra will pale in comparison with what Ministers will hear in the Commons, so I strongly urge my noble friend to develop what is known in the trade as a concession strategy on dates if the Government really do want to see the Bill proceed to the statute book without delay.

[Baroness Grender (LD)]

My Lords, I am really confused by the Government’s approach on this. It seems to be summarised as follows: “Give us this Bill as quickly as possible so that we can take as long as we can and as long as we like to implement it.” The problem is that there is a whole load of future leaseholders out there—and more importantly the marketplace, which believes that this lacks clarity.

Please do not take my word for it. I was reading a blog by Gary Murphy, an auctioneer on behalf of Allsop, which at the moment sells almost half of all London ground rents traded at auction. He notes the intention for this to change over a very long period of time, in the Landlord and Tenant Act 1987, the Leasehold Reform, Housing and Urban Development Act 1993 and the Commonhold and Leasehold Reform Act 2002. He goes on to say:

“Before freeholders panic, and new investors smell blood, we have to remember that reforms in this area have been on the cards since 2017. Recent announcements have amounted to little more than a press release. Whilst effective in courting headlines, they have changed nothing for the immediate future.”


The critical issue is that the marketplace, which needs to be convinced the most that this change is imminent and about to happen, is even less convinced than the noble Lords from whom the Committee has heard this afternoon. Until it is this market will continue, even if it is traded at slightly lower reserves.

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[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.