Leasehold and Freehold Reform Bill (Sixth sitting)

Eddie Hughes Excerpts

Committee stage
Tuesday 23rd January 2024 Public Bill Committees

[Richard Fuller]

Somebody had to mention the vase.

[Eddie Hughes (Walsall North) (Con)]

Or the cup and saucer?

[Richard Fuller]

I am just so glad it was not me. The Minister and shadow Minister are far more experienced than I am on this matter, so I am drawing on a much more limited data set than they are. But, to date, I have not heard loud and clear that there is no such thing as marriage value. I have heard that there are questions about how it is calculated and that we do not think it should apply, which is a political point of view. If the shadow Minister is trying to say that there is something else he wants, between the issues of calculation and of making a political decision to transfer it, that is interesting to me. I do not think that he has been trying to make that point, and I certainly do not think we have heard that evidenced.

It is a crucial point. The idea that we are expunging values that relate to something real, which is under contract, is a material point in trying to make this legislation bulletproof or, as the Minister rightly says, to ensure that, in a hotly contested area, the Government get it right. In circumstances where there are real values —although perhaps massively overemphasised—where performance has been exemplary or to contract, where there has been no question of the performance required under contract, and, finally, where there has not been price gouging, or this automatic doubling every two years, and the rents have remained the same, what is the reason to apply legislation retrospectively?

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[Eddie Hughes]

It is a pleasure to serve under your chairmanship, Dame Caroline. I was triggered to speak by some of the references to limiting ground rents to 0.1% of the property value, and am feeling nostalgic about my ten-minute rule Bill from June 2019, the Ground Rents (Leasehold Properties) Bill. That is an issue that I have been interested in and concerned about since I got to Parliament.

In my ten-minute rule Bill, I suggested that we limit ground rents to 0.1% of the property value, or £250, depending on which was the higher. In the evidence session, we heard that in some parts of the country, ground rents can very quickly become onerous for existing or prospective mortgage lenders. I want to ensure, however, that we do not let certain elements of our discussion of the clauses of the Bill pass by without celebrating the great things that are going on in it.

To some people, this might be a dry exchange, with some technical data about calculations—as a civil engineer, I love a bit of differential calculus, but it might not be to everyone’s liking—but some great stuff is going on in the Bill. We should be enthusiastic about that and celebrating it, because it will genuinely make a difference to the lives of people who are listening. It has also made a great difference to my life, because I feel as if I am seeing my ten-minute rule Bill slowly come back to life in this Committee.

[Lee Rowley]

It is as if we have all the emotions in an all-encompassing and unexpectedly interesting post-lunch debate. Let me try to summarise as quickly as I can. I am grateful for everyone’s contributions.

Turning to the substantive points made by my hon. Friend the Member for North East Bedfordshire, I, like him, start from the principle that if there is consensus, we should look at things in more detail without casting any aspersions on our colleagues on the other side of the aisle. I think there is consensus not because I have suddenly converted to social democracy or socialism—that is absolutely not the case—but because even from different angles we can see that there is a challenge. I will try to argue this a little from Conservative principles for a moment.

I recognise the absolutely reasonable points made by my hon. Friend about the additional information that is needed, which we have talked about on multiple occasions, and I recognise that there are always inherent dangers and unintended consequences in any change, which is why things need to be thought through in the manner in which he indicated. In the limited time I have had experience of this matter, however, I have been convinced that the proposal is proportionate, and that is why I am in Committee today on behalf of the Government.

My hon. Friend rightly made the point about how property rights and contract law are the absolute bedrock of our functioning as a society. In particular as Conservatives—to speak just for those on this side of the aisle for a moment—we seek not to move them around, change them, or amend them on a regular basis, because certainty and clarity are at the heart of a functioning and robust democracy. As Conservatives and from the centre-right, however, we also have a deep aversion to rent-seeking and middlemen, and we have a deep and avowed, if imperfect, commitment to free and more perfect markets.

There is a challenge with all manner of things, whether that is marriage value or the percentage used in ground rent. If we were dealing with a market in widgets, with very low barriers to entry, a plethora of supply, and the ability for people to come in and out on a regular basis, I would potentially draw a different conclusion, but the reality is that the housing market is severely constrained by a number of factors, and it has been for many decades. It is not a perfect market. Therefore, it is proportionate to regulate in the ways we are talking about.

On the point about rent-seeking and middlemen, we must be cautious about legislating via anecdote, which we should not do. We must absolutely do the kind of deep analysis that hon. Members suggested a moment ago that we should. I am led to believe that a lot of what we are seeing with ground rent and other aspects included in the Bill would not have been visible 20, 30 or 40 years ago, because it would not have happened. Effectively, a market has been created—at least in part if not wholly—because, for want of a better phrase and without being pejorative, loopholes have been exploited. That has enabled middlemen to take profit out and distort the market, making it less perfect and meaning we have ended up in the place where we are today.

I absolutely share the caution expressed by my hon. Friend the Member for North East Bedfordshire about making sure the elements are right. We may differ in the end about whether or not the changes are proportionate, but I know we share the ultimate objective that the market should be made perfect. The clauses take us in that direction. It is an absolute requirement from a Conservative perspective to smash middlemen and rent-seekers and make sure that they do not take money from people for no reason. For those reasons, I commend the clauses to the Committee.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clauses 10 and 11 ordered to stand part of the Bill.

Schedule 2

Determining and sharing the market value

Amendment made: 59, in schedule 2, page 90, line 28, at end insert—

“Business tenancies

10A (1) This paragraph applies only to—

(a) the transfer of a freehold house under the LRA 1967, or

(b) the grant of an extended lease of a house under the LRA 1967.

(2) The standard valuation method is not compulsory for the property comprised in the current lease if that lease is a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies (see section 1(1ZC) of the LRA 1967).”—(Lee Rowley.)

This amendment would prevent the standard valuation method in Schedule 2 from being compulsory if the current lease is a business tenancy (which benefit from the rights of enfranchisement and extension under the LRA 1967 in the circumstances set out in section 1(1ZC) of the LRA 1967).

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[Lee Rowley]

New clause 7 is a key amendment to close a loophole that landlords could potentially use to recoup process costs from tenants via variable service charges. These are costs to which they are not entitled under the new cost regime. The new clause is supported by a number of consequential amendments.

The new clause will support the new cost regime introduced in the Bill, which, as the Committee will be aware, seeks to prevent landlords from recovering process costs from leaseholders making enfranchisement or right-to-manage claims in the appropriate tribunal. In its current form, the Bill takes active steps to prevent a potential loophole by ensuring that variable service charges cannot be used by landlords as a mechanism to charge leaseholders for their litigation or process costs in connection with any of the aforementioned claims made by leaseholders.

[Eddie Hughes]

Can the Minister clarify whether the prescribed format would include the application of charges for insurance?

[Lee Rowley]

I hope to clarify that issue for my hon. Friend in the next few minutes. If I am unable to do so, I will write to him.

New clause 7 seeks to go a step further in blocking the loophole by ensuring that landlords are unable to recoup costs through variable service charges issued to other tenants who are not actively participating in the claim. To be certain that the new clause is effective, we are clarifying that these costs are not defined as relevant costs that a landlord is allowed to include in service charges. We are also giving the appropriate tribunal a new power to order landlords to repay leaseholders in cases in which they have wrongly been charged for such costs.

Although we recognise that it is unlikely that landlords will seek to circumvent the intent of the Bill, it is important that our efforts to remove barriers to leaseholders bringing applications to enfranchise or to exercise the right to manage are not undermined, and that we ensure that the cost regime is watertight and fairer for leaseholders. I reiterate that new clause 7 will have the effect of preventing landlords from using service charges to obtain from leaseholders costs to which they are not entitled. This will be supported by a power for the tribunal to order landlords to repay leaseholders to whom they have incorrectly passed on such costs. I commend the new clause to the Committee.

I turn to the Government’s position on the amendments tabled to clauses 12 and 13. Amendments 4 and 5 would remove proposed new section 19C of the Leasehold Reform Act 1967 and proposed new section 89C of the Leasehold Reform, Housing and Urban Development Act 1993, which together would establish an exception to the new general rule that each side will bear its own costs in tribunal proceedings for enfranchisement and lease extension claims for flats and houses respectively. The exception exists to entitle landlords to receive a portion of their process costs from leaseholders in low-value claims—those for which the premium to be paid to the landlord by the leaseholder is less than the process costs.

I should note that I share the worthwhile desire of the hon. Member for Greenwich and Woolwich to make it cheaper for leaseholders to enfranchise or extend their leases. For too long, the balance of power has been weighted too much in favour of landlords. We have introduced changes to the cost regime because we believe that they will make it fairer, and because we wish to remove the risk and uncertainty facing leaseholders bringing such claims. While restoring balance, however, it is important that the new regime is fair for both sides when there are claims of this nature. Rightly, leaseholders have a statutory ability to enfranchise or extend when they like. In low-value claims, it is not fair for landlords to be required to incur a net financial loss at any time that leaseholders wish to exercise their rights. In claims that are not low-value, the landlord will receive sufficient compensation and will be able to use this to cover the costs incurred; in low-value claims, that is not possible, as the premium is less than the process costs.

Part of the reason why leaseholders have been liable to pay their landlord’s reasonable process costs is to ensure that landlords are protected from unfairly burdensome costs. They could face these costs at any time. In many cases, landlords have no choice but to pay out, given their duty to honour the statutory rights of leaseholders to enfranchise or extend their lease. The low-value claim cost provisions create protection. They mean that leaseholders will be liable for some of their freeholders’ costs, but their exposure to cost will not be excessive. Although it is right that the cost regime changes, we must continue to ensure that there are protections in place both for leaseholders and for landlords. I ask the hon. Member for Greenwich and Woolwich kindly not to press his amendments.

We have been clear that we want to make it cheaper and easier for leaseholders to extend their lease or buy their freehold; that is the whole point of this Bill. Clause 12 will make it cheaper for owners of leasehold houses to exercise their enfranchisement rights. It introduces a new cost regime with a general rule that, in future, both landlords and leaseholders will bear their own process costs during an enfranchisement claim. Process costs could include costs for services such as valuation, conveyancing and other legal costs. This could save a leaseholder thousands of pounds. Leaseholders will no longer be deterred from bringing a claim because of the process costs demanded by their landlord, and a leaseholder will no longer face unknown costs from their landlord, making it much simpler to buy their freehold or extend their lease.