Leasehold and Freehold Reform Bill

Debate between Earl of Lytton and Lord Foster of Bath

Committee stage
Monday 29th April 2024 Lords Chamber

[The Earl of Lytton (CB)]

My Lords, I move Amendment 82C and will speak to Amendments 82D to 82M standing in my name. These draw on good practice in the management of multiunit developments in Australia, Europe and North America and seek to replicate best practice here. They are also designed to address some of the concerns raised in earlier debates, particularly in the context of the proposed change to the threshold for enfranchisement in mixed-use developments from 25% to 50%. I suggest that similar amendments to a future commonhold Bill would go some way to meeting concerns that have been expressed about the risks associated with a wholesale move to that tenure.

The amendments provide for the appointment of a building trustee. It is proposed that this should apply in the largest and most complex developments. Building trustees might also be appointed at the request of a recognised tenants association or by the courts. The building trustee will be an independent and impartial figure whose primary role of auditing performance would ensure that interest rights, responsibilities and performance of the landlord were properly balanced with those of leaseholders and, more importantly, that the building is properly maintained and the service charge provides value for money. I noted in our earlier discussions the Minister’s comments to me about value for money, but it is the benchmark used by the National Audit Office for local authority finance, I believe—I eyeball noble Lords who have experience in that line of business.

Amendment 82C sets out the buildings this would apply to, and Amendment 82D outlines the trustee duties—I will rattle through the amendments at some speed. Amendment 82E is about the appointment process of the building trustee. Amendment 82F sets out the trustee entitlement to documents and information.

There is, of course, the question of who pays for the building trustee. It would be unreasonable—particularly during a cost of living crisis—to burden leaseholders, especially as many of the buildings covered by Amendment 82C are already facing increased service charges owing to the new safety requirements under the Building Safety Act. Instead, Amendment 82G provides that the costs of building trustees would be covered by a levy on providers of commercial and residential mortgages and block landlords, excluding enfranchised building and tenant right-to-manage companies.

Amendment 82H sets out what would be the baseline value-for-money benchmark. This is necessary because there is a risk of inevitable bias in the management under the auspices of a party to the leasehold arrangements. This might be perfectly reasonable in terms of the person instructing the management, but still fall well short of the optimal.

One of the Bill’s key aims is to make it cheaper and easier for leaseholders to enfranchise. I welcome that. My amendments are designed to augment these plans by providing a light-touch oversight to ensure effective, efficient and economic management of a building. This backstop would require reassurance to lenders, leaseholders and other stakeholders that a freeholder-managed or resident-managed building will be properly looked after.

The reassurance offered by the building trustee is needed, as there is strong evidence that, monetising policies by a few freeholders apart, leaseholders themselves are often reluctant, unable or lack the skills to take on the responsibility and liabilities for the management of increasingly complex buildings, or to direct the professional managers adequately. Indeed, some complaints reaching my mailbox are about residents’ own management companies, and the Government’s own research found that leaseholders were concerned about issues of working with neighbours, lack of time and reluctance to take on additional responsibilities beyond those necessary as a home owner.

That touches on a point raised by the noble Lord, Lord Moylan, in a previous group, because although most leaseholders will appoint a managing agent to undertake the day-to-day running of a building, they themselves remain responsible for key decisions and setting priorities, such as service charge levels, authorising maintenance schedules and dealing with arrears. It can be difficult to get collective agreement on these issues, with resultant detriment to the management of the building fabric. According to data from the Scottish House Condition Survey, half of all housing is in what it describes as “critical disrepair”, and almost half demands “urgent attention”. The situation is most acute in tenements, so I appreciate that this probably relates to older buildings, but paying for common repairs or maintenance was the most frequent cause of disputes in these buildings.

By taking a whole-life view of the building, the building trustee can seek to avoid that Scottish experience by providing an independent assessment of maintenance needs and condition, and ensuring sufficient provision is put aside to maintain the building properly. Amendments 82I and 82J would require landlords to provide a 10-year plan of anticipated expenditure on capital works and building maintenance, and to establish a sinking fund to avoid leaseholders facing large, unanticipated bills. The plan and the fund would be subject to an independent audit and assessment by the building trustee to ensure that necessary works, and only necessary works, were planned for and adequately funded.

In an open letter to lenders on taking commonhold as a security, dated 21 July 2020, the Law Commission recognised that

“the value of a lender’s security is inherently linked to the management and maintenance of the building in which a flat is located. A failure to keep the building in repair, to insure it properly, or to keep sound finances all have significant potential to jeopardise the value of a lender’s security”.

The same is, of course, true for leasehold buildings. That is why I believe that professional landlords and lenders should cover the cost. It is the banks and the building societies whose capital is at risk. The building trustee should provide a cost-effective way of reassuring them that the flats they have lent on are being properly managed, and of maintaining the value of the security. The same is true of commercial lenders on mixed-use developments. I envisage that the Secretary of State would outsource the appointing of building trustees to an external body, as provided for in Amendment 82E.

Two significant further powers would be conferred on the building trustee through Amendments 82H and 82K. Amendment 82H would allow the building trustee to apply to the tribunal on behalf of leaseholders to seek refunds of expenditure that does not provide value for money. Amendment 82K would allow the building trustee to adjudicate in disputes between landlord and leaseholder, and between leaseholders. One of the main areas where I see this provision being used is service charge arrears. It is particularly important in leaseholder-managed blocks that do not have the wider financial resources of the major landlord groups that service charges are paid promptly. Failure to do so prevents a building being managed properly, and in extreme cases places all residents at unnecessary risk. If essential safety works could not be undertaken or building insurance obtained, that would create real problems.

Evidence from other parts of the world suggests that condominium statutes do not have sharp enough teeth to recoup outstanding contributions efficiently and effectively. In England and Wales, we currently fall between two extremes. I have sympathy with those noble Lords who argued in a previous debate that forfeiture, with the exorbitant windfall that it can offer landlords, is inherently unreasonable. Equally, I recognise the point the Minister made in previous discussions that civil debt recovery proceedings can be lengthy. The building trustee’s power to adjudicate offers a faster and less formal route of dispute resolution than the court, and supports the building’s cash flow.

Amendment 82L would provide for the building trustee to take over the management of a building if its landlord becomes insolvent. Historically, this has happened to very few landlords. However, the Committee will recall that I have previously raised concerns that not all landlord groups have the funds needed to meet the building safety remediation liabilities and could therefore become insolvent. The financial position of these groups may get significantly worse, depending on the Government’s decision on ground rents. Some of the country’s largest landlord groups—I refer to E&J Estates, which is landlord to around 40,000 homes, Long Harbour, which is landlord to around 193,000 homes, and Regis Group, which is landlord to around 30,000 homes—have significant borrowings that are due to be repaid from ground rent income over the next 40 to 60 years.

To the best of my knowledge, the Government’s final position is still unknown but, based on press comments on the Secretary of State’s own preference, it is reasonable to assume that the finances of landlord groups dependent on ground rent income to repay their borrowings will come under further, if not fatal, stress. This is not just my view; it is also that of the Government, whose own impact assessment states that

“there may be potential insolvencies/forfeiture and associated costs where the freeholder defaults on contractual obligations as a result of the cap”.

However, it does not seem that there has been further assessment of just exactly what this would mean in practice.

The collapse of a major landlord group would be without precedent and could cause tens of thousands of leaseholders in hundreds of buildings to be in serious trouble. In blocks subject to intermediate leases, it is likely that contracts covering everyday management and maintenance would be at risk because there would be no landlord to provide instructions. Conveyancing and lending transactions, which are already under stress, would be paused as there would be no one to process essential documents such as notices, deeds of covenant, landlord certificates and leaseholder deeds of certificate. The ability of the building trustee to assume the management of a building in such circumstances, and prevention of possible management contract termination, is an essential backstop that prevents leaseholders being left in limbo for months while they try to set up an alternative arrangement for managing their buildings and/or await the outcome of the administration or liquidation.

Finally, Amendment 82M would simply ensure that the building trustee has relevant qualifications for the task.

I hope your Lordships will see the merit in these arrangements, and that the Minister will be able to agree that measures such as this are a necessary complement to the Bill’s intentions. While I commend these amendments to the Committee, I simply say that I am not set on this particular structure, but the principle needs further examination to provide the point that I have constantly been on about—namely, consumer protection. On that basis, I beg to move.

[Lord Foster of Bath (LD)]

My Lords, I will speak to Amendment 95A. The Long Title of the Bill is very clear. It includes the phrase

“in connection with the remediation of building defects”.

Much of the debate has been on the management and funding of remediation and maintenance, but the early identification of defects is clearly really important in order to avoid some of the problems that can occur, as, tragically, we have seen, for instance, in the Grenfell Tower fire.

That fire was caused by a faulty electrical appliance, but there is also a large number of fires caused by faulty electrical installations. Indeed, the charity Electrical Safety First has calculated that there are around nine such fires every single day in England and Wales. On average, they cost about £32,500, but they have in many cases ruined lives, and on a few occasions have meant, tragically, that people have lost their lives. Quite clearly, it makes a great deal of sense to identify faults at the earliest possible opportunity.

Levelling-up and Regeneration Bill

Debate between Earl of Lytton and Lord Foster of Bath

Committee stage
Monday 20th March 2023 Lords Chamber

[The Earl of Lytton (CB)]

My Lords, I will get the guilt off my shoulders through your Lordships’ provision of the confessional: I declare an interest as co-owner of a second home in the West Country and of two short-term let properties in the same area. All, like the house I live in, which is in another part of the country, are legacies of estates that have been broken up and whittled down. Both areas have important family historical and indeed, in some cases, national historical associations.

Having declared that, I ought also to declare to the noble Lord, Lord Foster of Bath, who mentioned the Built Environment Committee, that I was, until the latter part of January, a member of that committee, and very privileged to have been so under the chairmanship of the noble Lord, Lord Moylan, who I am pleased to see in his place, and before him, the noble Baroness, Lady Neville-Rolfe. So I am familiar with the matters that were brought before us. However, I shall leave a lot of that to one side because there has been a bit of disaggregation in the groupings here. We have group 10 coming up, in which aspects of this will recur, and I find that quite difficult to deal with: I shall try to avoid getting up then and saying the same thing all over again and boring your Lordships.

While I have involvement with both normal assured shorthold tenancy properties and short-term buy to let, I certainly do not have anything to do with keeping property deliberately empty: that would be complete anathema to me, and I say so as somebody with professional training: I am a chartered surveyor and I know that all that happens with empty properties is that they deteriorate. They are much better occupied and lived in or used in some way.

I agree with the general premise that residential properties should not be deliberately kept empty for no good reason. I know that in some areas—the City of Westminster is one—there was a thought that foreign investors were buying up high-end residential accommodation and keeping it empty under the premise that perhaps it was less valuable if it had been previously occupied. It takes all sorts, but that is a particular situation. I support the noble Baroness, Lady Hayman of Ullock, in her Amendment 166 because there is a great deal of speculation about how many empty properties there are and where they are. They are not always in the places where people want or need housing and have to live and work. So, first and foremost, there is a distribution problem, along with a numbers problem. We need to sort that out, and there needs to be better data on that.

I would go further and suggest that the reasons why a property might be empty need to be understood before we set about making dramatic changes, either to the amount that is levied or to planning, although I take the point made by the noble Lord, Lord Foster, that something probably needs to be done in some of the areas that the noble Lord, Lord Shipley, referred to—the hotspots. They are not actually everywhere; they are not in every town and city; they are in defined places. Even those who particularly object to the idea of second homes and holiday homes altogether on principle recognise—and the data seems to show—that these are in quite specific areas. They are not necessarily in holiday locations at the seaside; they can be in the middle of cities and in parts of Greater London. We need to identify that.

We should not underestimate the inventiveness of those faced with a surcharge, any more than we should fail to consider the equity of a surcharge where there is a genuine reason the property is empty. The noble Baroness, Lady Hayman, referred to that and I use the example of the Ds: death, disrepair, dispute, debt, decarbonisation and, of course, redevelopment. Sorry, “redevelopment” is not a D, but noble Lords will get my drift.

Another aspect is that if there are to be additional charges, is that for the purpose of rectifying some particular, identifiable ill or mischief that is occurring, or is it just another tax? If it is just another tax and it is going into some jolly old pot, I am not particularly keen on that. There needs to be some degree of hypothecation. If there is a demonstrable case—for instance, that empty properties affect affordability in a locality or are adversely affecting incomers who might be economically active—the tax yield generated should perhaps be devoted to that or allied purposes and not put in some general pot. Presumably the case needs to be made.

I agree that ultimately, subject to some sort of national framework and means of analysis, the decision should be for the local community to put in place—and not necessarily be dictated from on high. The authorities, having made the case, must accept that the principle stood behind that is binding on them; otherwise, we risk a rather unedifying and opaque state of affairs, where the power is invoked for one reason but implemented for some entirely different objective altogether, and I would not be keen on that. We do not need a knee-jerk reaction to all that. There needs to be a consistent methodology for assessing the nature of empty second properties or short-term letting, and the detrimental effect these are having.

The noble Lord, Lord Foster, gave a graphic account of the issue, which I know from—

[Lord Foster of Bath (LD)]

Before the noble Earl moves on to another point I raised, could I ask, through him, for the Minister to perhaps confirm that even in the current legislation as proposed, it will be possible for councils to add a premium on the council tax for empty properties? It would be for the council to determine how that money is used; for example, my own local council has already a debate on this issue and proposed that the vast majority of additional money raised will go towards the building of more affordable homes in the area—to address the problem that is now being created because of the empty properties and short-term lets.