Leasehold and Freehold Reform Bill (Sixth sitting)

Barry Gardiner Excerpts

Committee stage
Tuesday 23rd January 2024 Public Bill Committees

[Richard Fuller]

It is a good to see you in the Chair, Dame Caroline. We are blessed on this Committee to have three people who have been Housing Ministers, the great experience and expertise of the hon. Member for Brent North, and the good graces of the shadow Minister, the hon. Member for Greenwich and Woolwich. I was recently speaking about the Bill to my right hon. Friend the Member for Ashford (Damian Green), who pointed out that there were discussions about some of the measures in the Bill when he was the adviser to Sir John Major in No. 10 in the 1990s.

I have none of the expertise or experience of any of the people I have just mentioned, so it is with humility that I rise to make some observations. My first observation, which is not specific to the Bill, is that whenever there is a clear consensus between Government and Opposition, problems usually arise subsequently. We have just spoken about 29 pages of schedules and two pages of clauses —31 pages of a 130-page Bill—and I heard one or two sentences from the shadow Minister. [Interruption.] Oh, the shadow Minister is coming back in later; good. I am encouraged. I was called to speak straight after my hon. Friend the Member for Redditch, rather than us bouncing between Government and Opposition Members, so I was worried. My first concern was that we were going through a very large proportion of the Bill very quickly. Grouping so much of the Bill together is a choice. It is perfectly within the ambit of the Opposition to say, in the Programming Sub-Committee, “We will do clause 9 stand part, then clauses 10 and clause 11, and then schedule 2 separately,” but in the planning done by the Government and Opposition Whips, we decided to put all the provisions together, so that we brush past them very quickly, hoping that no one will notice. I notice a twinkle in the eye of the hon. Member for Brent North.

[Barry Gardiner (Brent North) (Lab)]

Does the hon. Gentleman suspect that the reason why my hon. Friend the Member for Greenwich and Woolwich allowed such a grouping is that we hope that after the next general election, Parliament will be presented with a new Bill that does away with this nonsense altogether?

[Richard Fuller]

Well, maybe. I am not a mind reader, either of the mind of the shadow spokesperson or the mind of the great British public. They will make their decision at the next election and, I hope, return a Conservative Government for a fifth consecutive term, but that is not the import of my points today.

My first point was that the public should beware when they see such circumstances, not because anything is necessarily wrong, but because it is a leading indication that consensus is overwhelming scrutiny.

--- Later in debate ---

[Richard Fuller]

The former Minister makes an excellent point. She knows much more about this than I do and therefore I am very wary about falling into the trap of answering her question directly. What I will say is that, for the purposes of my speech today, what I think is not important. What is important is this: what will the courts find, and how have we ensured that the Bill is robust in those circumstances? I will say, without answering my hon. Friend’s question, that people sometimes sign contracts for things that they do not use or that have no value, but there is an argument that they signed a contract and it had these line items in it. People may sign a contract that gives them access to a swimming pool or gym and they may not use it. I do not mean to be pejorative, because these are very important issues. I am just saying that the principle is that, whether ground rent is real or not, it is still subject to the fact that it was part of a contract that was signed, and that will have weight in any legal challenge to the Bill.

[Barry Gardiner]

rose—

[Richard Fuller]

I do not know whether the hon. Member for Brent North wants to intervene and give me some more knowledge.

[Barry Gardiner]

The hon. Member’s colleague, the hon. Member for Redditch, made a pertinent intervention in relation to ground rent, but I wanted to try to address what philosophical issues he is having with marriage value. Marriage value is an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values. That is why the cup and saucer and the vase analogies are apposite. He seems to me to be seeking to say, “Well, if this exists, if people are actually paying this, it’s real; it’s not a fiction.” Let me set out my understanding of what the Government are trying to do and, indeed, what Parliament has tried to do on many occasions, going back to 1967, after we passed the legislation to right what had happened in the Custins v. Hearts of Oak case, where marriage value had been introduced against the will of Parliament. The point is this. If someone is the leaseholder, the person who owns that lease to the home, it is much more important to them than to anybody else in the world that they get the freehold together with it. That is the other vase; that is the saucer that goes with the cup. To them, that is important and it has a value that it does not have for the rest of the world. That is why they are constrained, and that is the constraint that Parliament has repeatedly tried to free people from, because they are not simply a willing seller in a free market with a willing buyer in a free market. This person, as the leaseholder, is a buyer under special measures.

[The Chair]

Order. May I interrupt you and point out very gently that this is quite a lengthy intervention, Mr Gardiner?

[Barry Gardiner]

I am happy to be guided by you, Dame Caroline. I think I have made the point and I hope that the hon. Member for North East Bedfordshire will be able to take it on board, because it does go to what I think he would recognise from a free market point of view as the essence of why this is important.

[Richard Fuller]

Dame Caroline, you were not in Committee when I made a point of order on the hon. Member for Brent North, perhaps inadvisably, but this time I thought his intervention was very helpful, so I would like to commend him. That point is very helpful to my understanding, and I appreciate his building my understanding further. We will have to see.

My purpose in making these points is to look at the possibilities of legal challenge. I am not a lawyer so I am probably one of the first to do that anyway, but the principles behind schedule 2 relate to existing contracts and make a political decision to redistribute value to full or some extent. In Committee, however, we are doing this where we do not have complete financial information about the extent to which we open ourselves to the charge that our decision will have unintended consequences. We are putting a lot of faith in the Government to get that right.

We are dealing with different situations: where, in a relationship between a freeholder and a leaseholder, freeholders are providing poor service or have been price gouging; or where other freeholders have entered into contracts, done all the right things under that contract and behaved in a very excellent way, but we are now retrospectively going to change all their contracts. I want to put on the record some of my concerns about doing so. I understand that the intention of the House as a whole is to move forward, but I am interested in whether the Minister has any comment on that—he does not need to—or has something interesting to add.

--- Later in debate ---

[Matthew Pennycook]

I thank the Minister for his explanation of the Government amendments and for his initial response to my amendments and the amendment tabled by my hon. Friend the Member for Brent North.

We welcome the new costs regime provided for by these provisions. The Minister is absolutely right that, as things stand, there is no balance of power: the playing field is tilted very much in favour of landlords rather than leaseholders. That needs to be addressed. Under the current law, leaseholders are required to pay for certain non-litigation costs incurred by their landlord when responding to an enfranchisement or lease extension claim. That obviously does not reflect normal practice in residential conveyancing, where each party bears their own costs.

The argument for imposing non-litigation costs has always been that in enfranchisement or lease extension claims, a landlord is being forced to sell his or her asset, and that that justifies a departure from the costs arrangements that operate in open market sales of residential property, where any valuations and final price will reflect the fact that each party must pay their own costs. However, when it comes to lease extensions or freehold purchases, a landlord is obviously not simply being compensated for the value of the asset they are being compelled to sell. They are instead securing, through the payable premium, a share of the profit to be made from selling to the leaseholders in question. In addition, as things stand, through capitalised ground rents they are extracting funds from leaseholders over long periods—often decades—prior to securing that profit share for no explicit services in return, a point that the hon. Member for Redditch made.

The valuations of lease extensions and freehold acquisitions under the existing statutory regime rely on prices agreed via an open market transaction, but those valuations do not account for the fact that leaseholders are expected to pay their landlord’s non-litigation costs. A landlord in an enfranchisement or extension transaction therefore receives both a price for the asset being sold, which reflects the market rate without non-litigation costs factored in, and their reasonably incurred non-litigation costs on top.

As the Law Commission’s 2020 final report on enfranchisement puts it, the effect of the law and current market practice is that

“the landlord is over-compensated for the non-litigation costs that he or she has to incur in order to transfer the interest to the leaseholder.”

In addition to the fact that landlords are over-compensated for non-litigation costs, many of those who are better resourced use the fact that such costs are borne by leaseholders as leverage in negotiations on the price of the lease extension or freehold acquisition, confident that the expense of challenging those costs in tribunal will dissuade many leaseholders from doing so.

The Opposition’s view is that freeholders should not receive compensation in respect of non-litigation costs. The fact that a landlord sells his or her asset and receives a share of the profit as a result is not sufficient justification for departing from an arrangement in which reasonable non-litigation costs are factored into the ultimate price. That is not least because the decision to enfranchise or extend a lease is often not discretionary; it is often a requirement brought about by the fact that a lease is due to expire, because the payable premium is rising as the lease shortens or as a result of the decision to move or re-mortgage.

We therefore fully support the intention behind clauses 12 and 13 to provide for a new regime based on the principle that leaseholders are not required to pay the freeholder’s non-litigation costs in those circumstances. We note the Law Society’s concern that landlords are being asked to bear their own non-litigation costs despite the fact that the proposed standard valuation method provided for by schedule 2, which the Committee has just considered, will lead to payable premiums below full open market value because it caps the capitalisation rate. However—this point touches on one of our previous debates—political decisions set the rules of the game for market competition. In our view, it is simply not the case that there is some kind of inherent market value for premiums that is entirely independent and autonomous of legislation in this area. Every sale of a flat and every lease extension process relating to a flat since 1993 has been undertaken against the backdrop of the 1993 Act, which reduced ground rents to a peppercorn.

The market value for premiums is shaped by the laws this House passes, and it is right in principle that, to achieve the Bill’s objectives of making it cheaper and easier for leaseholders in houses and flats to extend their lease or buy their freehold, leaseholders do not pay non-litigation costs in addition to the payment of a premium, as determined by the new method proposed in schedules 2 and 3. It is because we believe that leaseholders should not be liable for these costs as a result of an enfranchisement or lease extension claim on principle, irrespective of the method by which the premium is calculated, that we take issue with the fact that the clause as drafted does not protect all leaseholders from liability for costs incurred.

As the Minister has made clear, the clause entails only a selective extension of rights in this area, because it does not ensure—as the press release that accompanied the publication of the Bill claims it does—that all leaseholders will no longer have to pay their freeholder’s costs when making a claim. Instead, by means of proposed new section 19C, it makes exceptions to the general rule whereby the price payable for the freehold or extended lease is below an amount to be prescribed in regulations.

We understand the rationale for the proposed new section, namely that leaseholders should pay a freeholder’s non-litigation costs in such circumstances, so that low-value claims do not cost the freeholder money; the Minister has been very clear that the Government believe that that must happen to ensure that the process is fair for both sides. We also appreciate that there are risks in prohibiting a landlord from passing on non-litigation costs to leaseholders in instances in which they would be required to spend more in carrying out the transaction than they received for the asset. The Law Commission highlighted a number of those risks in its final report on enfranchisement, including the incentive created for landlords not to co-operate with a claim, or for them to transfer the low-value freehold into the name of a shell company, then liquidate the company and ensure that the lease becomes bona vacantia.

We are concerned, however, that exempting claims below a certain value will create a different set of practical problems. I hope I can get the Minister to engage with those problems, with a view to convincing him to reconsider. They include costly and time-consuming disputes in cases in which the price payable is close to the level of the non-litigation costs in question for low-value claims, and the potential for landlords to game the new system by arguing for a price payable below the threshold, in order to secure both it and associated non-litigation costs because of the burden of disputing the amount.

We appreciate that the Government have incorporated into the clause the Law Commission’s recommended remedy, namely that in low value claims for which the non-litigation costs are higher than the premium payable, the leaseholder would be required to pay the lower of the two values, one of which is to be prescribed by the Secretary of State. However, we believe that it does not entirely remove the potential for significant disputes to arise between leaseholders and freeholders, with leaseholders in a weak position to challenge them because of the cost and time required. We therefore worry that the prescribed sum, at whatever level it is ultimately set, will become the minimum sum payable to enfranchise. We are concerned that the difficulties of challenging a claim to the prescribed sum will deter some leaseholders from initiating the process of extending their lease or from acquiring their freehold altogether.

Taking a step back, we fail to see the logic in the Government’s position. On the one hand, they seem to be ignoring the Law Commission’s recommendations in relation to costs; they have chosen to provide for a general rule that leaseholders are not required to make a contribution to their landlord’s non-litigation costs, but have not chosen to adopt a valuation methodology that seeks to reflect open market value, which was the commission’s stated prerequisite for such a rule. On the other hand, they are following strictly the commission’s recommendations in respect of low-value claims.

Put simply, we believe that, by means of this Bill, we should take the political decision—it is an explicit political decision—to exempt all leaseholders from paying the costs incurred by landlords in processing enfranchisement or lease extension claims. Amendments 4 and 5 would omit proposed new section 19C of the 1967 Act and proposed new section 89C of the 1993 Act, thereby removing any exception to the general rule that leaseholders are not required to pay the freeholder’s non-litigation costs in such circumstances. Having argued my case on the basis of the practicalities, I live in hope that the Minister might reconsider.

[Barry Gardiner]

Can my hon. Friend clarify whether the proposals in his amendments 4 and 5 would cover my own amendment 128, which deals with the exactly parallel situation in which each side bears its own costs, but in relation to leasebacks?

--- Later in debate ---

Secondly, in the Minister’s view, are we addressing the egregious situations that we heard about in some of the evidence sessions in Committee? Groups of leaseholders have taken freeholders to court because of all sorts of spurious and seemingly tiny and insignificant things, and they have found that the freeholders have had the costs awarded to them and they are then seeking to recoup those costs through the service charges of the leaseholders. To me, that seems an absolute violation of justice. We believe in a fair market, but this cannot be one when leaseholders are operating in a dark room—they cannot see the prices, or the other buyers and sellers. It is not a free market in any shape or form. We are inching towards some degree of freedom, but I would welcome some reassurance from the Minister.

[Barry Gardiner]

Here was me thinking I was going to be helpful to the Minister with my amendment 128, that I was going with the grain of the Bill—its whole point. He was so eloquent, and said that it is absolutely right that each party should bear its own costs, and I was thinking, “Great, we’ve got one here. They’re going to support us”, and then he said that he could not accept the amendment. I urge the Minister to consider it again.

I am trying to take out that whole proposed new section 89D, because it is a new class of cost—this whole idea of a leaseback. These are new ways in which landlords will be able to increase the costs of enfranchisement, because they will engage a series of lawyers to review separately every single one of the contracts of the non-enfranchising leaseholders and, indeed, all the individual elements of the commercial premises that they are being forced to take the leaseback off. Those costs will be absolutely enormous, because they will do it on an individual basis. The hon. Member for Redditch spoke eloquently about her cynicism, and I am afraid that it is not cynicism: it is reality. It is an understanding of what is happening in the commercial world out there.

The Minister really needs to look at this again. I understand that he has a commitment not to accept the amendments put forward by my hon. Friend the Member for Greenwich and Woolwich, or, indeed, by me, but I urge him to think again and actually see what that might cost in practice—he can get his officials to look at that—for a large development where, we must remember, only 50% of the residential element may have enfranchised, meaning that 50% may not have; they will be leasebacks. The whole of the commercial element, which could be up to 50% of the development, will also be leasebacks, which will be individuated. The cost of an individual review by a landlord of every single one of those lease contracts will make it impossible for the 50% residential interest to enfranchise. It goes against the grain of the Bill. I urge the Minister to look at that again and come back at a later stage with his own amendments.

[Lee Rowley]

I will briefly address those points. I understand the broad point made by the hon. Member for Greenwich and Woolwich. If we need to look at specific areas in more detail, I would be happy to receive those from him outside the Committee. We think that the structure will work and is effective. On the point that my hon. Friend the Member for Redditch made a moment ago, officials have spent a significant amount of time trying to make the provisions as watertight as possible. Can I guarantee on absolutely everything that there is no possibility that we have missed something? No. That is why I am happy to take further information from any colleagues on the Committee, but we think that this is a valid prospectus on which to proceed.

My hon. Friend made a point about my potential naivety, although that is not how she described it. I assure her that having dealt with freeholders from a building safety perspective now for 16 months, even though I have dealt with this sector for only a couple of months, I am under no illusions about the cynicism of part of that sector. Even when we go through legal processes—I know that colleagues in this room have had a great deal of this, particularly those who represent urban areas—and it is absolutely clear and staring us in the face that there are responsibilities and requirements to do things with regard to building safety, it is absolutely extraordinary that some freeholders continue to seek to get around their obligations and must be dragged kicking and screaming to them.

I listened to a rather erroneous and misleading discussion on the “Today” programme this morning where the BBC presenter said, “It is all terrible on building safety. An insufficient amount of progress has been made in terms of building safety a number of years on from the very sad events of Grenfell.” It is also the case that a substantial amount of work is going into dragging some of the freeholders to do the things that they are supposed to do in the first place and have the basic humanity to recognise that they need to provide buildings that are safe for people to live in.

I hope that I have assured the Committee that, if nothing else, I am absolutely cognisant of some of the challenges that were indicated by my hon. Friend the Member for Redditch. We hope that the elements that I articulated in my initial comments address some of the egregious situations. One of the reasons why we are tightening covenants is to ensure that there is not a workaround or way around some of the things that we have talked about.

I say to all three hon. Members, including the hon. Member for Brent North, that there is always a balance to be struck, but we are trying to make this as watertight as it can be. Although we cannot accept the amendment, if there is something that we genuinely think we have forgotten or missed, I will happily take further information, separately, and look at it again. We think this provision is okay, but I am always happy to take further information, if it would be helpful.

[Matthew Pennycook]

I thank the Minister for that response. Before turning to amendments 4 and 5, I have a brief note about the amendment tabled by my hon. Friend the Member for Brent North. It is a very strong idea, and there is a genuine deficiency in the law. If he is minded to press it to a vote, I would certainly support him. He may want to return to it at another date.

On amendments 4 and 5, perhaps I have misunderstood the Minister. We are not trying to make the argument that the Government have forgotten to include something in the Bill or that there is something missing; the point is that the exemption that they are providing for low-value claims will cause problems. I have taken on board what the Minister said about the Government’s position being that the exemption is essential to ensure that the new process is fair, but we are very concerned that the prescribed sum that the Secretary of State will bring forward will become the de facto minimum amount payable for those low-value claims. Because of the problems challenging that, I think that leaseholders will be deterred from taking this process forward. That is the best-case scenario.

The worst-case scenario—I fear that this is the more likely scenario, for the reasons outlined by my hon. Friend the Member for Brent North and the hon. Member for Redditch in relation to the behaviour of some freeholders —is that it will become a recipe for litigation and gaming of the low-value exemption in ways that will be detrimental to leaseholders. With that in mind, I am minded to press amendment 4 to a vote and, if that is successful, amendment 5 as well.

[Barry Gardiner]

There is a word in the clause that the Minister should pay very specific attention to. Line 29 of proposed new section 89D states that

“‘non-litigation costs’ means costs that are or could be incurred by a freeholder”—

I stress “could”. If the Minister is minded to look at this again, he should ask his officials to do some calculations about what the costs could be. I recognise the figures and have no wish to detain the Committee by pressing this to a vote. I am happy to support my hon. Friend in pressing amendment 4 to a vote, but if the Minister can give me an assurance that he will ask his officials to do that homework, I will not press the amendment.

[Lee Rowley]

We are certainly happy to write to the hon. Member to articulate the position in more detail and to seek to reassure him on some of the points that he has made.

Amendment 29 agreed to.

Amendment made: 30, in clause 12, page 15, line 14, at end insert—

“(za) the claim ceasing to have effect under regulations under section 4B (landlord certified as community housing provider);”—(Lee Rowley.)

This amendment is consequential on Amendment 57.

Amendment proposed: 4, Clause 12, page 16, leave out from line 19 to line 12 on page 17.—(Matthew Pennycook.)

This amendment would leave out the proposed new section 19C of the Leasehold Reform Act 1967, and so ensure that leaseholders are not liable to pay their landlord’s non-litigation costs in cases where a low value enfranchisement or extension claim is successful.

Question put, That the amendment be made.