Leasehold Reform (Ground Rent) Bill [Lords]

Eddie Hughes Excerpts

2nd reading
Monday 29th November 2021 Commons Chamber

[The Parliamentary Under-Secretary of State for Levelling Up, Housing and Communities (Eddie Hughes)]

I beg to move, That the Bill be now read a Second time.

As hon. Members may know, I have long championed a root and branch comprehensive reform of our leasehold system. It has been a long journey to get here from my private Member’s Bill—Ground Rents (Leasehold Properties) Bill—to try to overhaul the regulations on ground rents. It is particularly gratifying to be standing here today as the Minister responsible for this hugely important legislation.

The Bill will make home ownership fairer and more transparent for future generations of leaseholders. We will do this by reducing the ground rent on new residential long leases where a premium is paid to a peppercorn. I am sure that this change, which will benefit thousands of future leaseholders, will be welcomed right across the House.

[Sir Desmond Swayne (New Forest West) (Con)]

I lobbied for an exemption for the retirement living industry, which was granted and then withdrawn in January this year. Why was that?

[Eddie Hughes]

I appreciate my right hon. Friend’s strong lobbying on this matter. I think the Government decided that it was appropriate to treat all leaseholders the same and therefore we made that change, although we did allow an extension in the introduction of that to April 2023.

[Chris Bryant (Rhondda) (Lab)]

The bit I do not understand is why we have leasehold at all. It is just preposterous nonsense, is it not? It is a feudal relic. Would it not make far more sense to have some kind of commonhold situation for flats, which is what they have in nearly every other country in the world and, I think I am right in saying, also in Scotland? Does that not make far more sense? We can then just get rid of leasehold completely.

[Eddie Hughes]

I thank the hon. Gentleman for his intervention. I wonder why, in the brief periods when Labour has been in control, it has not done so itself. I guess English law is pretty complex, so it would not be so straightforward to simply withdraw it on the basis that he suggests. Perhaps when Labour is in power again at some point in the distant future, it will be able to return to this matter.

[Catherine West (Hornsey and Wood Green) (Lab)]

The Minister is being generous in giving way. He may not wish to be as radical as my hon. Friend the Member for Rhondda (Chris Bryant) is suggesting, but does he share my concern at some of the greedier developers, which are insisting on a year-by-year, annual increase? For example, ground rents are going up and up in New River Village in Hornsey. I have to name the Berkeley Group, because it really should know better. It has done very well, including throughout coronavirus, given all the leg-ups that it has had from the Government through various coronavirus packages, and it really should not be demanding multiples every year from my poor old leaseholders.

[Eddie Hughes]

I largely agree with the hon. Lady, not least because the ten-minute rule Bill to which I referred, which I brought to the House when I was a Back Bencher, completely endorsed her points. It is unfortunate that some people include such egregious terms in ground rents.

[Mark Tami (Alyn and Deeside) (Lab)]

Does the Minister agree that this issue is about not only ground rents, but the admin fees that are often associated with any minor changes that the owner of the property wants to make? A lot of these properties are also linked with extra charges for management fees for the land and other things. The levels of charges placed on leaseholders are becoming totally unacceptable.

[Eddie Hughes]

I do not want to jump forward several pages in my speech, but the right hon. Gentleman is predicting—or at least pointing to—the fact that we have identified this problem and have ensured that when we reduce ground rents to a peppercorn, people will not be able to cheat by introducing associated management fees and other charges. If he is looking for further changes, the second part of our seminal legislation, when it comes in due course, will no doubt satisfy his needs.

The starting point for this legislation has to be our shared recognition that for many people, to be a leaseholder is also to be a homeowner, and we are clear that homes that have been bought should be theirs to live in and enjoy, not be treated as cash cows for third-party investors. This Government are on the side of homeowners, which is why in our manifesto we committed to introduce this important legislation.

Hon. Members will be well aware of the problems that many leaseholders have faced in recent years, including, as pointed out by Opposition Members, spiralling ground rents and onerous conditions that have turned the dream of home ownership into a nightmare for some leaseholders. This Bill is the first of our seminal two-part legislation to reform and improve the leasehold system. Further legislation will follow later in this Parliament to continue to address the historic imbalances in the leasehold system.

[Andy Carter (Warrington South) (Con)]

I pay tribute to the Minister for the work that he has done so far. He may know that constituents on Steinbeck Grange in Warrington South have been calling for changes for almost 10 years. Will he give an update on the current Competition and Markets Authority investigation, which is vital to people living in Warrington?

[Eddie Hughes]

The work of the CMA has been pivotal so far in already changing the behaviour of a number of significant developers. I have spoken to it recently; further work is ongoing and I hope that it will have further successes in the future. My hon. Friend is completely right to raise that point.

Both this Bill and the wider leasehold reform programme have been informed by consultation. I thank those present here today, including the Opposition Front Benchers, who have taken the time to discuss the issue. I look forward to further discussions over the coming weeks and months.

The Bill has a specific focus: the ground rent in future long residential leases. Some existing leaseholders face substantial difficulties, including costly enfranchisement, a lack of transparency and burdensome lease terms. Escalating ground rents in particular can reach unaffordable levels and make some properties difficult to sell. That is not right, which is why we have asked the Competition and Markets Authority to conduct a thorough investigation into potential mis-selling and unfair terms in the leasehold sector.

[Mark Tami]

I have met many people who were told by the company that sold them their property that they would be able to buy the lease, only to find out, when they inquire to buy it, that it has been sold on to some financial institution. Does the Minister accept that point?

[Eddie Hughes]

Once again the right hon. Gentleman points out an egregious and unfortunate practice that hopefully we will be finding ways to address in future.

[Sir Desmond Swayne]

That prompts the question of what proposals the Minister may have to enable leaseholders to enforce the purchase of freeholds from such companies. Does he have plans for that?

[Eddie Hughes]

As my right hon. Friend will know, unfortunately I am not the Secretary of State, much as I would like to be. [Interruption] Not yet, anyway. It is best to leave the fine detail of the formation of future legislation to the Secretary of State to decide. However, I look forward to discussing the matter further with my right hon. Friend as we progress.

[Christian Matheson (City of Chester) (Lab)]

I have listened to my right hon. Friend the Member for Alyn and Deeside (Mark Tami) and others. The Minister is waiting for the Competition and Markets Authority report, but is he prepared to say, even before that report has concluded, that on the basis of all the evidence we are hearing from right across the House, what we are seeing is nothing more than a financial scam from a bunch of greedy speculators?

[Eddie Hughes]

I am not sure I can go so far as to agree, but, as a number of hon. Members on both sides of the House have pointed out, it is an unfortunate practice that we will be seeking to address in future legislation.

[Catherine West]

The Minister is being very generous with his time; he remembers well what it is like to be on the Back Benches. Does he agree that many of the points under discussion will be good for future generations, but it is all a bit “jam tomorrow” if we cannot help our constituents today?

[Eddie Hughes]

I would say that we are doing a very important thing with today’s legislation, which effectively draws a line in the sand to prevent future onerous ground rent clauses. Once we have done so, we will then have the opportunity to work, hopefully quickly, to deal with the existing ground rent problem.

[Kevin Hollinrake (Thirsk and Malton) (Con)]

I have been known to swim against the tide once or twice with regard to this particular debate. I draw the House’s attention to my entry in the Register of Members’ Financial Interests. I am a leaseholder, not a freeholder, in this context. Nevertheless, it is not right to think that effectively scrapping leasehold and moving to commonhold is a panacea. For evidence of that, hon. Members should look at the system in Scotland, which moved to a commonhold system. Some 80% of buildings require maintenance and there is a £2 billion unfunded maintenance backlog. We should step forward very carefully. Leasehold does need reform, but I am very concerned that if we effectively scrap it altogether, we will create ourselves a new problem.

[Eddie Hughes]

I thank my hon. Friend, who is incredibly knowledgeable in this area. I remember discussing my ten-minute rule Bill with him at the time. I completely assure him that we will proceed with caution and seek advice from experts both across the House and outside the House. I look forward to discussing this with him again in the future. I also take this opportunity to thank the former Secretary of State, my right hon. Friend the Member for Newark (Robert Jenrick)—I am delighted to see him in his place—for all the work that he put in in driving forward this agenda. Back in January, he announced measures to make buying a freehold or extending a lease cheaper and easier for many leaseholders.

I now turn to the specifics of the Bill. Ground rent is usually paid annually by leaseholders to their freeholder or landlord, but, crucially, no tangible service is provided in return. The industry is also familiar with the term, “peppercorn rent”, to describe a token or nominal rent used as a payment in forming a contract, which typically is not actually collected in practice. Historically, ground rents were generally very low. The past two decades have seen a surge in properties sold with significant and escalating ground rent. At its worst, this practice can lead to properties becoming unsellable. These unfair practices have caused real misery for those affected and, in turn, have undermined the reputation of the leasehold system. Regardless of whether the ground rent is a nominal peppercorn or thousands of pounds, the fundamental issue is that no meaningful service is provided in return. We want to end this for new leases, and that is why we are legislating so that new residential long leases will have no financial demand for ground rent. Instead, nothing more than an actual peppercorn can be collected from the leaseholder.

[Theresa Villiers (Chipping Barnet) (Con)]

Will the Minister acknowledge that the situation is slightly different in relation to retirement housing, where the practice has been for ground rents to more or less fund the shared spaces, and ground rents have been part of making retirement housing viable? Will he take care to ensure that the Bill does not have unintended consequences for retirement housing?

[Eddie Hughes]

The reason why we extended the timeframe for the introduction of this legislation for those properties is to allow people time to adjust their business models, so that they can cope with the change in legislation. To avert the risk of possible future shortages of peppercorns, and to ensure that our meals continue to be well seasoned, I should clarify that we do not expect any landlord to require the actual payment of a physical peppercorn each year. In reality, the new genuine peppercorn rent for future leaseholders means that they will not pay the rent.

The specifics of the Bill apply to residential long leases in England and Wales of over 21 years for which a premium is paid. The inclusion of the requirement for a premium clarifies that normal and legitimate practices relating to rack rents can continue. For leases regulated under the Bill, the rent demanded will not be any more than literally one peppercorn a year.

Following much careful deliberation, we have arrived at a broad and flexible definition of “rent”, using the real-world meaning, and therefore including anything in the conventional nature of rent. The Government are clear that landlords should retain the ability to collect legitimate charges. The definition will ensure that landlords can still collect legitimate charges where the market reserves them as rent, such as charges for services, including building maintenance. The broad definition will deter freeholders or landlords from trying to circumvent the new system by disguising ground rent as a different charge. It will also enable appropriate tribunals to make sound judgments on whether a leaseholder has in fact been charged a prohibited rent.

We plan to leave no loopholes for unscrupulous individuals, so we are also banning the charging of an admin fee for collecting peppercorn rent. Where a prohibited rent or administrative charge is paid, leaseholders will have the right to apply to the first-tier tribunal in England or the leasehold valuation tribunal in Wales. Provided that the tribunal deems the payment inappropriate, the relevant authority can then order the amount to be repaid. In the case of prohibited rent, that must be within 28 days and potentially also with interest.

There are a limited number of exceptions from the provisions of the Bill. The first is leases used purely for a business purpose. The intention behind the Bill has never been to reduce business leases to a peppercorn rent, so through careful consideration, we have excepted business leases that include the use of a dwelling in any way that protects the interest of residential leaseholders and commercial landlords. For mixed-use properties, such as a flat above a shop, the exception will apply only if the residential use significantly contributes to the business purpose of the lease.

Community-led housing may have few other feasible funding schemes that they can use to continue to grow developments that benefit the community, rather than secure profits. To maintain this growth, we have excepted community-led housing schemes. Home finance plan leases are also excepted. That includes regulated home reversion plans, such as equity release and rent-to-buy agreements, where the consumer purchases the freehold at the end of the term. We will also allow shared ownership landlords to continue to collect a market rent on their share of the property. That practice is integral to the shared ownership model.

[Kevin Hollinrake]

The Minister is setting out a list of exemptions. Are complex developments included in that—for example, a tube station with a cinema or shopping centre attached, and a block of flats above it, all in effect part of the same development? Who will manage the complexity of that development? If I was a long leaseholder in that block of flats, I would not be keen to manage all the mechanical and electrical systems stuff in that development.

[Eddie Hughes]

I am not sure that I completely understand my hon. Friend’s point. The Bill will not change the management of that building’s operation; it will just prevent ground rent from being charged. If a leaseholder feels that they are being charged ground rent inappropriately, they will have a right of appeal, and the issue will be determined by the ways and means authority.

[Kevin Hollinrake]

I am sorry; I should clarify my point. The Minister is quite right that a management company could look after the whole entity, but things such as common areas and insurance of the whole building —among many other issues—affect the whole building, and they require somebody to have an overarching view of the entire development. I not sure how that is provided for. In fact, in 2019, when I was a member of the Housing, Communities and Local Government Committee, it looked into that and said there should be an exemption for complex developments on that basis. However, that does not appear in the Bill, despite having been referred to in debates in the Lords.

[Eddie Hughes]

As I said, the Government’s intention is to ensure that, for fairness, the provision applies in as many circumstances as possible. I am happy to pick that up with my hon. Friend for further discussion after the debate, to which I hope he will contribute.

Statutory lease extensions are the subject of existing legislation and so are not covered by the Bill. The peppercorn limit will apply to the extended portion of any lease extended through the voluntary process.

I should note that there is no longer an exception for the retirement sector. As I said to my right hon. Friend the Member for Chipping Barnet (Theresa Villiers), we believe that all new leaseholders should benefit from the reforms. The measures for retirement properties will apply no earlier than 1 April 2023. Hon. Members, some of whom are in the Chamber, have raised that as a concern in correspondence, and it has been debated at some length in the other place. We feel that the transition period strikes the right balance between the sector and consumers.

The Government recognise that these provisions require a robust and effective enforcement regime. Freeholders and landlords who abuse the system and deliberately seek to charge a non-peppercorn ground rent on leases in contravention of the Bill will be subject to steep fines of up to £30,000. After listening to and considering carefully the view expressed in the other place, we concluded that the level of fines should be higher. The new maximum fine of £30,000 is in line with other housing penalties, including those in the Tenant Fees Act 2019. Fines can be even steeper for more egregious abuses of the system. For example, if a freeholder breaks the law by charging unfair rents at multiple locations, such as in a block of flats, they will pay a penalty per lease. It does not stop there; penalties can be supplemented by the repayment of all prohibited rent collected. Enforcement will be the responsibility of local trading standards authorities, which already do an excellent job of enforcing similar housing regulations. District councils in England will also have the power to take enforcement action if they choose.

We recognise that enforcement will require additional resourcing. That is why authorities can retain any penalties imposed, and put them towards the costs incurred in enforcement of residential leasehold property rules. Taken together, the enforcement regime will act as an effective deterrent, while giving authorities the flexibility that they need to ensure that any enforcement action taken is proportionate.

The Government’s vision for a reformed and improved leasehold system is one anchored in fairness and transparency. For too long, too many leaseholders have been let down by institutional inertia and a ground rent system that has not worked in their interests. The system has been dogged by opaque rules and left many people in the dark. This legislation is targeted on exactly what it should target. By reducing future ground rents to a peppercorn, we will deliver a tangible and meaningful improvement to home ownership for future generations. We have engaged extensively to get to this point, and this process is by no means over. We are clear-eyed about the challenges ahead, and know that there is more to do, but today is a significant step towards fixing our broken leasehold system for good. I commend this Bill to the House.