Leasehold and Freehold Reform Bill

Lord Khan of Burnley Excerpts

2nd reading
Wednesday 27th March 2024 Lords Chamber

[Lord Khan of Burnley (Lab)]

My Lords, it is a pleasure to close this Second Reading debate on behalf of the Opposition, and I thank all noble Lords who have participated in it. The expertise, skills and knowledge on this subject in your Lordships’ House have been demonstrated in such an eloquent manner. I am sure that the Secretary of State, Mr Gove, will be delighted with the scrutiny his Bill is getting in this place.

I echo what so many others have said and add my own tribute to all the individuals and organisations which have campaigned for so long for reform in this area. It was interesting to hear the noble Baroness, Lady Thornhill, talk about her ancestral colleagues raising this issue in 1909, and my noble friend talking about leasehold being raised in the 19th century in this building. Without being subtle at all, I pay tribute to my Chief Whip, my noble friend Lord Kennedy, for his relentless and consistent efforts over a long period of time to educate our Benches, with his experience and expertise in the area.

As a number of noble Lords have pointed out, we have waited a long time for this Bill. It beggars belief that we are on to our fourth Prime Minister and we have had 10 Housing Ministers since the Government first proposed legislation on leasehold reform in 2017. We are pleased that the Bill will progress today. It will provide some limited relief to leaseholders. We welcome and support most measures in the Bill, including changes to the calculation of premiums payable for lease extensions or collective buying of the freehold, and the end of marriage value, as well as the introduction of 990-year extensions, ground rent reforms and freehold estate regulation.

The problem is that the leaseholders across the country expected so much more from the Government. We are clear that, in due course, as my noble friend has mentioned, Labour will have to finish the job and enact in full all the Law Commission’s recommendations on enfranchisement, the right to manage and commonhold. We are determined to do so.

I know the Minister is looking forward to responding to the many issues raised by noble Lords. We had a number of powerful contributions across the House. It is always refreshing to hear from the noble Lord, Lord Best, and, in relation to his property agents working group, it is a shame that his 2019 report has been largely ignored. The noble Lord is calling for a regulator, and has consistently done so, and the point was made that the industry has come out with this as one of its top requests.

The noble Lord, Lord Young of Cookham, and my noble friend Lady Andrews talked about uncertainty and lack of clarity. In her eloquent speech, my noble friend spoke about how the Bill deals with the problem but, although making some progress, it is a game of two halves; there is some good progress in certain areas, yet so much is missing, and I agree with that. She also shared personal stories and spoke passionately about the letters she received from leaseholders. I agree with my noble friend Lady Taylor of Stevenage, who said that this is a long way from what leaseholders want and have waited for. The Bill needs so much more substance added to it.

One of our key areas of concern is that there is so much material arriving throughout the passage of the Bill. As the noble Lord, Lord Stunell, mentioned, this is now becoming the norm and not an exception. How can that be effective for scrutiny, for noble Lords and Members in the other House to properly advise or amend?

I want to probe the Minister on some areas of concern which, at this stage, the Bill fails to cover. First, in 2021 the Law Commission provided the Government with updated recommendations on the archaic law of forfeiture, and yet, as many noble Lords mentioned, there is nothing in the Bill to end the unjust windfall gains exploited by freeholders. My noble friend Lady Twycross described freeholders’ behaviour as “mafia-like”, and the noble Lord, Lord Bailey of Paddington, said the way they operate is “gangster-like”.

The Secretary of State claimed that he wanted to

“squeeze every possible income stream that freeholders currently use”,—[Official Report, Commons, 11/12/23; col. 659.]

so why has this income stream been untouched? The Minister mentioned that she would be bringing the issue of forfeiture back to your Lordships’ House. This has happened too many times and it is another example of not being able to look at something from the outset. As mentioned by my noble friend Lord Kennedy, we will work with all noble Lords across the House to decide whether we can support what the Government bring back to end the forfeiture rule.

As previously mentioned by many noble Lords, Labour has committed to implementing in full the recommendations in the Law Commission’s three reports on leasehold. Why is it so difficult for the Government to do the same?

In 2021, the Government established the Commonhold Council to

“advise the government on the implementation of a reformed commonhold regime and bring forward solutions to prepare homeowners and the market”.

I understand that the council has not met for two years and, as has been discussed, there is no sign of commonhold in the Bill. Have the Government completely given up on this?

I re-emphasise that deferment rates used for calculating lease extension and freehold purchase premiums are missing from the Bill. These are crucial for determining the prices paid by leaseholders who want to buy out or extend their lease. Will the Minister bring forward more detail at the next stage of the Bill to set out the methodology for their calculation?

Almost every country in the world, apart from Britain, has either reformed or abolished this archaic, feudal model. I know the noble Lord, Lord Moylan, objects to “feudal”, but we are quoting the word that Secretary of State Michael Gove has been using. If the noble Lord looks at Hansard, the speech of the noble Lord, Lord Bailey, mentioned “feudal” more times than anybody else here.

There has long been cross-party consensus on the need to do something about this horrific situation, so why have the Government watered down their commitments to leaseholders of flats? This is a point that the noble Lords, Lord Stunell and Lord Young of Cookham, made about being on our own in not being able to deal with the situation.

Just what do the Government stand for on the Bill? It is remarkable that, in a recent interview with the Sunday Times, the Secretary of State went so far as to declare, without qualification, that he intended to abolish the leasehold system in its entirety. There have been all these extravagant promises, yet we have a Bill before us which is missing in detail, and the Secretary of State’s ambition nowhere to be seen.

Leaseholders have been badly let down. Having waited so long, and had their expectations raised so high, they are understandably disappointed at the limited Bill that we are considering today. This unambitious piece of legislation makes it clear that proponents of caution and restraint have won out over those who want to lay claim to a legacy of bold reform in this area. The Government’s poverty of ambition has real implications for leaseholders being routinely gouged by freeholders under the present system.

The scaled-back leasehold reform Bill as the Government have introduced it is a far cry from what successive Ministers have led leaseholders across the country to believe would be enacted by this Government in this Parliament. Leaseholders deserve a clear answer about the real reason why they have got just a limited Bill. We on these Benches are determined to overhaul leasehold to their lasting benefit and reinvigorate commonhold to such an extent that it will become the default and render leasehold obsolete.

We look forward to working with noble Lords across the House, as well as the Minister opposite, to do whatever we can to strengthen the Bill throughout its passage in your Lordships’ House and on to the statute book. We on these Benches want to make the existing Bill the most robust piece of legislation that we can make it, by rectifying its remaining flaws. Like many noble Lords across the House, I look forward to the Minister’s response detailing how she will fill the gaps over the remaining stages of the Bill. However, I remind noble Lords that if they do a word index of what has been discussed today, some of the key phrases coming out of today’s debate are as follows: “missing detail”, “insufficient”, “limited”, “lacking ambition”, “significant shortcoming”, “not properly thought through”, and “glaring omission”. I look forward to hearing from the Minister.

Leasehold and Freehold Reform Bill

Lord Khan of Burnley Excerpts

Committee stage
Monday 22nd April 2024 Lords Chamber

Moved by

[Lord Khan of Burnley]

5: Schedule 1, page 135, line 19, leave out paragraph 5
Member's explanatory statement
This amendment, and other similar amendments in my name, probe each of the categories of “permitted leases”.

[Lord Khan of Burnley (Lab)]

My Lords, I will speak to these probing amendments in the name of my noble friend Lady Taylor of Stevenage. This group of amendments further relates to different parts of Schedule 1, which provides details of permitted lease categories where self-certification applies in relation to the Clause 1 ban on new leases of houses, which the Government added to the Bill on Report in the Commons. The purported ban on new leasehold houses does not actually ban all new leasehold houses—a point that my noble friend eloquently made during the opening group. It is imperative that, through the probing amendments in this group, we emphasise that this ban appears to be a weak ban.

Each of the amendments in this group refers to a different type of exemption or permitted lease: Amendment 5 relates to leases agreed before commencement; Amendment 6 refers to shared ownership leases; Amendment 9 relates to home finance plan leases; Amendment 10 refers to extended leases; Amendment 11 looks into agricultural leases—paragraph 9 of Schedule 1 details the permitted lease definition for agricultural leases as

“a lease where the house is comprised in … (a) an agricultural holding within the meaning of the Agricultural Holdings Act 1986 which is held under a tenancy to which that Act applies, or … (b) a farm business tenancy within the meaning of the Agricultural Tenancies Act”.

Without wishing to lengthen the debate on this issue, since many points were picked up by my noble friend, can I ask the Minister opposite to let the Committee know how many current leases fit these categories of permitted leases? Do the Government expect it to stay the same going forward, especially for shared ownership? How many permitted leases do the Minister and the Government envisage over the next 10 years, for example, to which these categories will apply?

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[Baroness Scott of Bybrook (Con)]

I am not aware of the timescale for that, but I will make some inquiries and come back to my noble friend.

[Lord Khan of Burnley (Lab)]

My Lords, I thank the Minister for her response to what was a very interesting debate. I always appreciate the breadth and depth of expert knowledge from the noble Lord, Lord Young of Cookham, in particular. He talked about the rights of shareholders and what they are entitled to, and it is important that he finished by talking about the response to the Select Committee report on shared ownership. I appreciate also the probing of the noble Baroness, Lady Pinnock, alongside myself, on the definition of agricultural leases but, for the time being, I beg leave to withdraw my amendment.

Amendment 5 withdrawn.

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[Lord Kennedy of Southwark (Lab Co-op)]

My Lords, I forgot to mention earlier how much I support the noble Lord, Lord Young of Cookham. I think the last draft Bill we had here was the Modern Slavery Act. There was a draft Bill and a Joint Committee of both Houses on it. The work of that committee ironed out all the wrinkles; we got a much better Act of Parliament, and it had a much easier passage through both Houses. The committee was able to look at the issues and deal with them, which was really important.

It would be lovely to hear the Minister say that we will have a draft Bill for commonhold. Again, that would really help us. We could have a Joint Committee of both Houses that could take evidence and work through all the problems. Then, when we got the proper Bill, we would get it much more smoothly and easily through this House and the other House.

I suspect we will not get that, but it is the way forward. Having more draft legislation enables us to sort things out. The Law Commission has worked on the two other Bills we need. We would benefit from having draft Bill committees. It would be much easier for the Government and for everybody to get stuff through and to deal with the problems we all want to solve.

[Lord Khan of Burnley (Lab)]

My Lords, I thank the noble Baroness, Lady Pinnock, for introducing this group of amendments. It has been a fantastic, constructive debate, with some excellent points made across the Committee. I do not want to repeat the arguments, but I will speak particularly to the amendment in the name of my noble friend Lady Taylor of Stevenage, which many noble Lords have spoken about. I remind the Committee that this amendment would require the Government to set out a strategy for making commonhold the preferred alternative to leasehold, as recommended by the Law Commission in its report, Reinvigorating Commonhold: the Alternative to Leasehold Ownership.

The amendments in the name of the noble Lord, Lord Bailey of Paddington, and the noble Baroness, Lady Fox of Buckley, are both important. They all point towards a particular focus: that commonhold should be the future. We should help the move towards commonhold; it is overdue. The Government have had 14 years to deliver and have broken their promises to leaseholders, as mentioned by my noble friend Lord Kennedy of Southwark. Let me remind the Committee that an incoming Labour Government would be left to pick up the pieces should we have the opportunity to serve.

On these Benches, our commitment, as reiterated by my noble friend Lady Taylor of Stevenage, is to have comprehensive leasehold reform, and this has not changed. We will bring forward ambitious legislation to enact all the Law Commission’s remaining recommendations at the earliest opportunity if we are privileged enough to serve.

The important point made by my noble friend Lord Kennedy about not having a strategy is why, on these Benches, we have brought forward an amendment asking for a strategy as part of this Bill. It has been so long; commonhold was introduced in 2002 as a way of enabling the freehold ownership of flats and avoiding the shortcomings of leasehold ownership. However, fewer than 20 commonhold developments have been established since the commonhold legislation came into force. Flats in England and Wales continue to be owned, almost inevitably, on a leasehold basis.

Unlike practice in most other countries across the world, flat owners in England and Wales continue to hold leasehold interests that will expire at some point in the future, and landlords make the key decisions about the management and costs of their buildings. Commonhold enables flats to be owned on a freehold basis, so that owners’ interests can last for ever and gives decision-making powers to home owners.

The Law Commission published its final report in July 2020, in which it makes numerous recommendations that seek to make commonhold not only a workable but a preferred form of home ownership to residential leasehold. Its recommendations include measures designed to make it easier for leaseholders to convert to common- hold and gain greater control over their properties; to enable commonhold to be used for larger, mixed-use developments that accommodate not only residential properties but shops, restaurants and leisure facilities; and to allow shared ownership leases to be included within commonhold. The recommendations would give owners a greater say in how the costs of running their commonhold are met, and ensure they have sufficient funds for future repairs and emergency work. They would provide owners with flexibility to change the commonhold’s rules, while improving the protections available to those affected by the change.

I ask the Government whether they disagree with the benefits I have just outlined? If they do not, why are they not doing this? That is the fundamental question from this debate that numerous noble Lords have alluded to. There was clearly some appetite for it a few years ago, so why are they not doing this? Have the Government changed their mind or are they just not brave enough to do it?

In May 2021, the Government had even established a Commonhold Council as a partnership of industry, leaseholders and government that would prepare home owners and the market for the widespread take-up of commonhold. I ask the Minister what has happened to that council. When did it last meet and how often does it meet?

It is widely accepted that, in terms of this Bill, we will not have commonhold brought in now. However, there is still much miscommunication around commonhold in the industry. There needs to be more education and an awareness campaign. As contributions have highlighted today, commonhold is so much easier. You do not have complex laws; you talk to one another and work problems and disputes out. You have meetings and laws are prescribed so that it is easy for people to know what to do at each step of the way. There are things that could be done with commonhold in this Bill to strengthen it and pave the way to commonhold happening en masse. The amendment in the name of my noble friend Lady Taylor would help the Government ensure that there is a strategy in this Bill and fulfil their manifesto promise, as mentioned previously. I commend the amendment in the name of my noble friend, and I look forward to hearing from the Minister.

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[Baroness Scott of Bybrook (Con)]

I thank my noble friend for that. As I have said, we are working on it, we are working on further changes and we will come back in due course.

[Lord Khan of Burnley (Lab)]

If I can just probe the Minister on the answer she gave me, that the Commonhold Council met in September, can I just confirm that she is chairing that Commonhold Council? The government website still has the noble Lord, Lord Greenhalgh. As the Commonhold Council advises the Government, what advice did it give in relation to the plan for commonhold? Surely it was not, “Take your time”, was it?

[Baroness Scott of Bybrook (Con)]

I do not have that detail with me, but I will make sure the noble Lord gets it.

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[Lord Gascoigne (Con)]

My Lords, before I start, I declare that my wife is an employee at the Crown Estate, as set out in the register of ministerial interests.

Government Amendments 19 to 22, in the name of my noble friend Lady Scott, are consequential on the repeal of the right for public authorities to block freehold acquisition and lease extension claims of houses for the purposes of redevelopment. This relates to Section 28 of the Leasehold Reform Act 1967. Removing this blocker will allow more leaseholders to enfranchise.

The power to block enfranchisement was given to authorities named on a list in the same section of the Act. The list of authorities is, however, used for wider purposes. For example, the list may be used by separate legislation when a lease has reached its end and expired. When this happens, the listed public authorities could apply to the courts to seek possession, for the purposes of redevelopment. These amendments preserve the list and its use for wider current law, as it is moved into Clauses 29 and 38 of the Bill.

Government Amendments 25, 30 to 40, and 49 are also in the name of my noble friend Lady Scott. Government Amendment 32 addresses the enfranchisement valuation procedure regarding “chained” leases—that is where successive long leases of a house are treated as one single long lease. The amendment makes it clear that the exception for market rack-rent leases will apply only where the leaseholder’s current lease is a market rack-rent lease. It will not matter whether a previous lease was a market rent lease. This will protect leaseholders and mean that in the case of chained leases, where a previous lease might have been granted for no, or low, premium, freeholders will be prevented from unfairly gaining through the new valuation scheme.

Government Amendment 39 clarifies the rules on which lease to consider when valuing a lease comprising a chain of leases—treated as one single lease—where one of them was granted for a high rent and low, or no, premium. The amendment states that it is the most recent lease that should be looked at. This will determine whether the ground rent cap should apply in the enfranchisement valuation. This will protect leaseholders and mean that in the case of chained leases, where a previous lease might have been granted for a high ground rent, but for little or no premium, freeholders will be prevented from unfairly gaining through the new valuation scheme.

Government Amendments 25, 31, 33, 34, 35, 36, 37, 38 and 40 are minor amendments that will tidy up the Bill by aligning two different sets of terminology, used to mean the same thing, across the Bill. This will help to avoid any potential for confusion and has no material impact on the valuation provisions in the Bill.

Government Amendment 30 is a minor amendment to Schedule 4. As currently drafted, the Bill would incorrectly require a valuation of a freehold for a lease extension. We are fixing this to align with the new valuation scheme, so that a lease extension will require a valuation of a notional lease. This will ensure that the provision works for lease extensions as intended. This amendment does not change the scope or effect of Assumption 3 in Schedule 4; it simply makes sure that it is phrased correctly.

Government Amendment 49 is a minor correction of a grammatical error in Clause 41 so that it refers to the appropriate tribunal. In this case, the appropriate tribunal can make orders regarding the new right for intermediate landlords to commute—that is, reduce—the rent they pay following lease extensions and ground rent buyout claims by their tenants.

Turning to government Amendments 50, 51, 52, 53 and 56 in the name of my noble friend Lady Scott, as noble Lords are aware, whenever making new legislation, it is of the utmost importance that we review any consequential amendments required to be made, including to other Acts of Parliament. We have therefore conducted a thorough review of how the reforms brought forward in this Bill will require necessary changes. The following amendments focus specifically on consequential changes resulting from Part 2 of the Bill.

Government Amendment 52 is a minor and technical amendment which reflects the movement of material from Section 175 of the Housing Act 1985 into the new Section 7A of the 1967 Act. The amendment preserves a part of the current law which deals with a number of exemptions for the valuation of a freehold acquisition under Section 9(1) of the 1967 Act which will still be available under a “preserved law claim”. This will make sure that the Bill retains the current restrictions and will remove any potential for unintentionally expanding the number of tenants who qualify for a Section 9(1) valuation and consequently for a preserved law claim. Right-to-buy tenants who qualify for enfranchisement rights will be no worse off and benefit in the same way from the new valuation scheme as other leaseholders.

Government Amendment 53 inserts a new clause, which acts as a paving amendment to introduce a new schedule. This new schedule brings together the consequential amendments to other legislation. As a result of this new schedule, government Amendments 50 and 51 remove consequential amendments to the Housing and Planning Act 1986, which are currently contained in Schedule 8; these are now addressed in the new schedule.

Amendment 56 inserts the new schedule, entitled “Part 2: consequential amendments to other legislation”. This new schedule is extensive and brings together the consequential amendments across 19 other Acts into a single place. None of the amendments makes separate, substantive changes, but, rather, the new schedule allows this Bill to mesh with and integrate seamlessly with other legislation. These consequential amendments will: remove provisions which will become obsolete as a result of the changes made by the Bill; enable freehold acquisition claims of houses under Section 9(1) of the Leasehold Reform Act 1967 to continue to operate as they do currently, while making sure that provisions in other legislation do not override our new valuation scheme; make clear how to treat the valuation of freehold acquisitions for right-to-buy tenants; preserve the current law so that non-litigation costs payable on enfranchisement do not attract stamp duty land tax, allowing the operations of stamp duty land tax to continue as intended; and make sure that provisions of other Acts governing shared ownership leases will still function properly following the repeal of some shared ownership provisions in the 1967 Act.

Government Amendments 88 and 89 are tidying-up amendments to align the terminology in Clause 77 with terminology used elsewhere in Part 5.

Finally, with sincere thanks to noble Lords for bearing with me and for their patience, I turn to government Amendment 90. This is a clarificatory amendment which seeks to deal with any potential confusion over the extent to which the Bill applies to event fees. As noble Lords may know, some leases require the leaseholder to pay a fee on certain events, such as the sale of the premises or a change of occupancy. These so-called event fees are common in specialist housing for older people. How event fee terms are drafted varies from one lease to the next, as does what the money is used for. This amendment is not concerned with the regulation of event fees; the Government have committed to making event fees fairer and more transparent and will implement agreed Law Commission recommendations when parliamentary time allows. There is a risk in the current drafting of the Bill that the specific nature and purpose of event fees may be regarded as an administration charge under Clause 81. That would, in turn, mean that they are subject to the test of reasonableness, which we do not consider appropriate for a fee of this nature. The amendment therefore sets out a definition of an event fee and makes it clear, for the avoidance of doubt, that any event fee is not to be regarded as an administration charge. I beg to move.

[Lord Khan of Burnley (Lab)]

I thank my fellow east Lancastrian, the Minister, for introducing these technical, tidying-up and clarificatory amendments.

[Lord Gascoigne (Con)]

I have spoken ad nauseam about many of these amendments. I too thank my long-lost brother from east Lancashire, the noble Lord, Lord Khan, and say what a pleasure it is to follow him.

Leasehold and Freehold Reform Bill

Lord Khan of Burnley Excerpts

Committee stage
Wednesday 24th April 2024 Lords Chamber

[Baroness Pinnock (LD)]

I thank the noble Earl for that intervention, because he is right in many cases. I am not a lawyer, but I know that the 1925 property Act made a huge change away from the old system, which was feudal at that point, and modernised property legislation. This Bill may do the same. In some instances, as we have heard this afternoon, it will have big consequences—for freeholders, in the context of this set of amendments. I accept that maybe there ought to have been—as we heard on Monday from the noble Lord, Lord Young of Cookham—a draft Bill on commonhold. Maybe it requires an in-depth, cross-House, cross-party committee to get into the detail, rather than the 300 or so pages of the Bill that we have in front of us, in order to get to grips with the consequences of what is being proposed.

I go back to the principle, and the principle has to be right. We are trying to rebalance the rights between freehold and leasehold. There is frequent talk on the Conservative Benches that the basis of Conservative philosophy is a property-owning democracy, but leaseholders will not be full participants in that until these changes are made. So it will be interesting to hear what the Minister has to say with regard to this very challenging debate.

[Lord Khan of Burnley (Lab)]

My Lords, this has been a more wide-ranging debate than was anticipated at the beginning of the group. The noble Lords, Lord Howard and Lord Moylan, made some interesting points in introducing their amendments, and it is for the Minister to clarify and address her noble friends’ concerns. All three amendments in this group attempt to make changes to Schedule 4, which is where the market- value element of the premium for any enfranchisement claim is determined.

I listened to the noble Baroness, Lady Fox of Buckley, in relation to the European Convention on Human Rights. Although we have differing views on that, it is interesting how legislation and the regard for international law are debated in different debates in this House—without pinpointing any noble Lord in particular.

The noble Baroness, Lady Deech, laid out and stipulated the complexity of the issue as a teacher in property law, while the noble Lord, Lord Thurlow, as a student of property law, made some interesting points about complexity and about working and bringing change in a fair manner.

In conclusion, I ask the Minister what consideration the Government have given to the principles of grandfathering for leases of various lengths and other conditions when developing the Bill? For example, in the instance of a lease of a very short length, when the Bill becomes law, what are the ramifications of the Bill as it is written? Do the Government think that some shorter leases are going to be treated in a way that may be fairer on wider principle but do not seem appropriate, given the shorter lengths? If so, did they consider any mitigation?

I finish by referring to my noble friend Lord Truscott, who advocated in a diligent manner the ending of marriage value and talked about the wider unfairness in leasehold properties. I look forward to the Minister’s response.

[Baroness Scott of Bybrook (Con)]

My Lords, I thank my noble friends Lord Howard and Lord Moylan for their amendments in this group. Amendments 26 and 27 would require marriage value or possible hope value to be payable by a leaseholder who has fewer than 80 years remaining on their lease on the passage of the Act.

The Government’s stated objective is to make it cheaper and easier for leaseholders to extend their lease or acquire their freehold. We want them to attain greater security of tenure. The amendments are directly counter to our objective. In particular, they would prevent us from helping the trapped leaseholder—that is, a leaseholder with a short lease who is unable to afford to extend because of the prohibitive marriage value payable, and so is trapped with an asset of diminishing value.

We do not believe that the leaseholder should have to pay marriage value. For the freeholder, the marriage value that is payable under the current law is a windfall created by the freehold and leasehold interests being married earlier than they otherwise would have been—namely, at the end of the lease. It is a sum that the freeholder would not receive if the lease ran its course. Parliament has previously determined that the value should be split equally and the leaseholder should pay half of it to the freeholder on enfranchisement, but we do not believe that freeholders should continue to receive that windfall.

The leaseholder needs to enfranchise, because by its very nature a lease is a wasting asset. Without either extending their lease or buying their freehold, they will suffer financial loss as the lease runs down or lose possession when it has fully run down. Nor has the lease- holder meaningfully chosen to enter such an arrangement, since leasehold is very often the only available form of tenure outside the rented sector at certain price points or in certain locations. The lease- holder’s need to enfranchise is born out of their insecurity of tenure; that is, out of the inherent injustice of the leasehold system. Our objective is to enable them to obtain greater security and to address that inherent injustice. By not having to pay marriage value to the freeholder, the leaseholder’s ability to obtain security of tenure is much improved.

A third party who bought the landowner’s interest would not pay marriage value, and we do not think it is right that the leaseholder should pay more than that same interest. Requiring leaseholders to pay more than a third party—or, in other words, enabling the freeholder to profit from the sale to a leaseholder by comparison to a third party—is to punish the leaseholder for their need to enfranchise, and therefore to affirm the very injustice we are trying to address.

The noble Earl, Lord Lytton, and many other noble Lords brought up compensation. Under our valuation scheme, the freeholder is compensated as if the lease simply ran its course. We believe that this is adequate compensation; it is sufficient to reflect their legitimate property interests.

Amendments 26 and 27 would also further complicate an already complex system. They would create a new two-tier system, with different rules for leases that were under 80 years at the time of the Act and those that fell under 80 years thereafter. This is undesirable, as it runs contrary to our stated aim to simplify this complex tenure.

Before I move on to Amendment 29, I will answer one or two specifics. First, the issue of human rights has been brought up by a number of noble Lords. The Government consider that all provisions in the Bill are compatible with the relevant convention rights and that in the case of the provisions engaging Article 8 and A1P1 any interference is justified and proportionate. There is a GOV.UK page where noble Lords can read further information on that should they wish.

The noble Baroness, Lady Deech, also brought up phasing, which is important. Following Royal Assent, we will allow time for a smooth transition to a new system, while making sure that leaseholders and freehold home owners on private and mixed-tenure estates— which is an issue—can benefit from it as soon as reasonably possible. We will also support leaseholders, freeholders, landlords and agents to adjust to and understand the new rules. We will work with delivery partners to make sure that the necessary support is in place, including through the publication of appropriate guidance.

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[Baroness Pinnock (LD)]

My Lords, for me, this is a very technical set of amendments, but they are very important. As we have heard, this issue can have significant implications.

I always go back to first principles. One of the aims of the Bill is to make enfranchisement cheaper than it is currently, and so more readily available. However, as we have heard, that will entirely depend on the deferment rate and how it is set. My understanding was that the current deferment rate was set by the Court of Appeal in 2007, as the noble Lord, Lord Young of Cookham, said. The debate is around whether it is right for that to continue; whether another process should be used, such as that proposed by the noble Lord, Lord Borwick, in his amendment about using the bank rate as a base for setting a deferment rate; or whether, as in the Bill, the responsibility is passed to the Secretary of State to determine the deferment rate. I have to agree with the noble Lords, Lord Moylan and Lord Young of Cookham, that the latter does not seem right.

When I was investigating the deferment rate issue, I noticed that Homehold Services Ltd gave evidence to the Commons Public Bill Committee that was very telling. It criticised the fact that the “applicable deferment rate” was referenced throughout the Bill

“without specifying what this will be”.

It provided an example of what effect a change in the deferment rate could have on the cost of enfranchisement. It said:

“A lease extension … on a £200k flat with 80 years unexpired and no ground rent would be c. £4,000”.


That is the example given by Homehold Services Ltd; as it is one of the experts, I thought it might be right. It continues:

“If the deferment rate was reduced from 5% to 4%, the premium would increase to c. £8,500. At 3.5% it would be … £12,000”.


Those small changes in percentages have very high consequences for the leaseholders. This is important—that is what the evidence told me when I read it.

The argument from Homehold Services Ltd was that the deferment rate must be set no lower than that set by the appeal judgment in 2007. Otherwise, the consequence is that the rate can escalate considerably, as the noble Lord, Lord Moylan, pointed out. The cost of enfranchisement would increase, removing the ability of many leaseholders to continue with the process—contrary to one of the objectives of the Bill. Can the Minister say what consideration the Government have given to the deferment rate?

The noble Lord, Lord Young of Cookham, said that the Chancellor’s department has had a consultation on this and come up with some figures. Why are those not being adopted in this instance to set the rate in the Bill? As we have heard, it is very important to know exactly what the deferment rate will be. I do not believe that it is satisfactory to leave the applicable deferment rate to be set by a statutory instrument some time in the future. Surely, if the Government’s intentions are as they are set out in the Bill—to make it cheaper for leaseholders to enfranchise—one of the key rates must be this one. Therefore, I would have thought that we would want to see it set during the course of this Bill, rather than wait for a statutory instrument.

I have a lot of sympathy with the arguments that have been made by the mover of the amendment and others about the need for certainty here, rather than a principle and uncertainty as to the exact figure at which the deferment rate will be set.

[Lord Khan of Burnley (Lab)]

My Lords, I will speak to Amendment 42 in the name of my noble friend Lady Taylor of Stevenage, which was well supported by my noble friend Lord Truscott in his earlier remarks.

Deferment rates are a phenomenally complex area to understand, and the standard valuation method in Schedule 4 is extremely technical. The Law Commission set out options. It did not make recommendations, but the Government have chosen to allow the Secretary of State to prescribe the applicable deferment rate. I thank the noble Lord, Lord Borwick, for his contribution and for seeking to make the process for setting the deferment rate more efficient and asking for more clarity and certainty.

Our amendment is clear and would ensure that, when determining the applicable deferment rate,

“the Secretary of State must have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost”.

We understand that the 2007 Cadogan v Sportelli judgment, which has broadly set deferment rates, was made in the context of 0.5% interest rates. If the Government are minded to remain of the view that the Secretary of State should fix the deferment rates, how best should they do that? Although it may work in London, what would need to be taken into account for other parts of the country? Is there a need to set multiple rates for different parts of the country to deal with the variations?

--- Later in debate ---

[Baroness Pinnock (LD)]

My Lords, I congratulate the noble Lords, Lord Young of Cookham and Lord Berkeley, on exposing and exploring the exceptions to the general rule in the legislation and its application. If we live in a democracy, the rule of law should apply to everyone without heed or hindrance, so I am grateful to both noble Lords for bringing this to the attention of the House. I hope that when the Minister responds she will be able to confirm that the Bill will apply to the Crown Estate and the Duchy of Cornwall, because it ought to.

[Lord Khan of Burnley (Lab)]

My Lords, I rise briefly to thank the noble Lord, Lord Young of Cookham, and my noble friend Lord Berkeley for providing the detail, with diligence and eloquence, in calling for what the noble Lord, Lord Young, called a level and equitable playing field for all leaseholders in that situation, particularly in relation to Crown land. I want to press the Minister on getting information from the Government about to what extent Crown and Duchy of Cornwall land would be affected by the amendments, and on providing clarification on the important and pertinent points that both noble Lords raised.

[Baroness Scott of Bybrook (Con)]

My Lords, I will briefly speak to the amendments in my name before turning to the amendments in the names of my noble friend Lord Young of Cookham and the noble Lord, Lord Berkeley. Government Amendment 83 is a clarificatory amendment. Clause 67 outlines that all of Sections 18 to 30P of the Landlord and Tenant Act 1985 bind the Crown, and that the relevant provisions bind the Crown whether or not they relate to Crown land.

As a result, Section 172(1)(a) of the Commonhold and Leasehold Reform Act 2002 will be repealed. Since subsections (4) and (7) of Section 112 of the Building Safety Act 2022 amend the 2002 Act, these subsections are no longer necessary.

I now turn to the amendments in the names of my noble friend Lord Young, and the noble Lord, Lord Berkeley. I thank my noble friend Lord Young for his Amendment 54, which seeks to bind the Crown to the enfranchisement measures in the Bill and to apply those measures to properties subject to escheat. It is a long-established principle that legislation does not bind Crown lands, including the Duchies of Lancaster and Cornwall, unless the Act expressly states so or by necessary implication. Where an Act, or a part of an Act, does not bind the Crown, the Crown can and often does agree to act in accordance with the legislation.

The current position is that most Crown leaseholders enjoy the same lease extension and enfranchisement opportunities as other leaseholders, by virtue of the Crown’s undertaking given to Parliament to act by analogy with the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, which are not directly binding on the Crown. We also expect that the Crown will agree to act by analogy with the Bill before us. The effect will be that most leaseholders of the Crown will have the same opportunity to extend their lease or buy their freehold as any other leaseholder would, except in certain special circumstances set out in an undertaking we expect to be given by the Crown. Therefore, the outcomes the Government want to see can be achieved without legislation, and the amendment is unnecessary.

I would also like to thank my noble friend for raising an important point in his amendment about properties subject to escheat. The Government recognise that when the freehold becomes ownerless, it can cause problems for some of those leaseholders. However, the amendment would not achieve its intended aim because when a property escheats to the Crown the freehold no longer exists, and the Bill is not the appropriate place for a review of the complex law surrounding ownerless land. When a property becomes ownerless the land and buildings escheat to the Crown. If a purchaser is interested, the Crown can sell it so that it goes back into private ownership.

Leasehold and Freehold Reform Bill

Lord Khan of Burnley Excerpts

Committee stage
Wednesday 24th April 2024 Lords Chamber

Moved by

[Lord Khan of Burnley]

57: Schedule 9, page 204, line 15, leave out sub-paragraph (a)
Member's explanatory statement
This amendment would ensure that all leaseholders, not just those with residential leases of 150 years or over, have the right to vary their lease to replace rent with peppercorn rent.

[Lord Khan of Burnley (Lab)]

My Lords, I will speak to Amendment 57 in the name of my noble friend Lady Taylor of Stevenage. Schedule 9 makes provision for a new enfranchisement right to buy out the ground rent and to vary it permanently to replace the relevant part of the rent with a peppercorn rent, without having to extend the lease. We welcome the intent of the schedule. The reform will ensure that leaseholders can enjoy reduced premiums and secure nominal ground rent ownership of their properties, without the need to go through the challenge and expense of repeated lease extensions.

The schedule implements the Law Commission’s recommendation for the right to extinguish the ground rent only. However, we have brought an amendment that would delete the Government’s proposed 150-year threshold, to press the Minister on the reason for which the Government have decided to confer that right only on leaseholders with leases with an unexpired term of more than 150 years.

The Law Commission recommended that the threshold should be set at 250 years on the basis that the reversion is of negligible value at that lease length. The Government chose not to accept that recommendation and, instead, are proposing a threshold of 150 years. The Minister may provide us with a different answer in due course, but we assume the reason that they did so is simply that this will make the new right to extinguish a ground- rent available to many more leaseholders. However, if that is the case, it obviously follows that setting a threshold of, say, 125 or 100 years would make it available to even more of them.

As my honourable friend Matthew Pennycook MP stipulated in the other place,

“any long lease threshold for the new right is ultimately entirely arbitrary, as evidenced by the fact that the Government chose a different threshold from the one recommended by the Law Commission”.—[Official Report, Commons, 27/02/2024; col. 201.]

There is a principled argument that we should trust leaseholders to make decisions based on what is right for them and their individual circumstances, rather than denying a broad category of leaseholders a new statutory right on the basis that Ministers know best what is in their interests.

If unamended, Schedule 9 will ensure that some leaseholders can enjoy reduced premiums and secure nominal ground rent ownership of their properties, without the need to go through the challenge and expense of repeated lease extensions. However, we remain unconvinced by the Government’s proposed conferral of this new right only on leaseholders with leases with an unexpired term of more than 150 years. There could be all sorts of reasons why someone with a lease shorter than 150 years might want to buy out only the ground rent, including simply that they are unable to afford the premium required to secure a 990-year lease. Denying them that right on the grounds that other leaseholders might advertently or inadvertently disadvantage themselves, by using the new right to extinguish only the ground rent, strikes us as overly paternalistic and misguided.

We remain of the view that there is a strong case for simply deleting the 150-year threshold entirely, given that the remaining years test that applies is arbitrary and the most common forms of lease are 90, 99 and 125 years. Amendment 57 would do that, thereby making the new right to replace rent with a peppercorn rent available to all existing leaseholders. I beg to move.

[Baroness Thornhill (LD)]

My Lords, I support Amendment 57 in the name of the noble Baroness, Lady Taylor of Stevenage. As has been said, Schedule 9 confers on a qualifying tenant the right to buy out the ground rent and replace it with a peppercorn rent. Instead of the extended leases that are paid for each time, it is a decision to make a one-off payment—job done once and for all.

This is a welcome measure. However, as has been said, under paragraph 2 of Schedule 9, the tenant must have at least 150 years left on their lease to qualify. Amendment 57 from the noble Baroness, Lady Taylor of Stevenage, would ensure that all leaseholders, not just those with residential leases of 150 years or over, have the right to vary their lease in this way and replace it with a peppercorn rent.

The provisions on the variation of leases and removal of ground rent are complex, but they are based on the principle of granting leaseholders flexibility and a recognition that different solutions might be preferable for the different situations that they are in. The argument has been put forward that these provisions should apply to leases that are sufficiently long, with the Law Commission recommending a very long length of 250 years and the Government settling on 150. Therefore, Amendment 57 rightly probes that length. If not 250 years, why not 125 years, 90 years or indeed no threshold for length at all?

Data on this was hard to find, but DLUHC’s English Housing Survey of owner-occupier leaseholders for the year 2020-21 found that 45% of leaseholders had a leasehold term between 71 and 120 years, and that the median length of leases was 112 years. This suggests that there could be lots of leaseholders with reasonably long leases who would not be given these rights in relation to ground rent.

I would also like colleagues to note that mortgage lenders are now getting very active on ground rent terms and taking an ever more conservative view on ground rent clauses. They are refusing to lend on leasehold homes where the ground rent is seen as onerous—the definition of that might be that it continues to double or that there are other strictures in place. This means that some leaseholders will be left with flats that are difficult to sell, as well as an escalating ground rent.

We would therefore welcome further information from the Minister about whether these provisions could be extended to cover more leaseholders, especially given their own figures.

[Baroness Scott of Bybrook (Con)]

My Lords, I will speak to government Amendments 58 and 59 in my name. Government Amendment 59 changes “premium” to “price”, referring to the sum paid for a ground rent buyout, to make the language consistent with the rest of the Bill. Government Amendment 58 makes a minor wording change to clarify that it is “the appropriate tribunal” that may make an order to appoint a person to vary a lease on behalf of the landlord or tenant in the case of a commutation following a ground rent buyout. I hope noble Lords will therefore support these amendments.

I turn to Amendment 57 from the noble Baroness, Lady Taylor, and moved by the noble Lord, Lord Khan of Burnley. This seeks to remove the threshold for the ground rent buyout right. I appreciate the concerns that lie behind this amendment and understand that the noble Baroness is seeking to ensure that as many leaseholders as possible can benefit from the new right. First, it is very important to note that all leaseholders, regardless of their term remaining, have the means to buy out their ground rent. They do so whenever they extend their lease or buy their freehold. It is only the right to buy out the ground rent without extending the lease or buying the freehold that is limited to leaseholders with 150 years or more remaining. The 150-year threshold exists to protect those leaseholders with shorter leases who will, at some point, require an extension from being financially disadvantaged by first buying out their rent, only having to extend later and paying more in total for doing so. However, we understand the argument that all leaseholders should be able to buy out their rent without extending their lease or buying their freehold if they want to, and we are listening carefully to that argument.

The Law Commission recommended 250 years, but it noted that the department might want to set the threshold lower. The department’s analysis showed that 150 years would enable more leaseholders to take advantage of the ground rent buyout right, while still being a long enough term remaining that the leaseholder does not need to extend if they do not want to. A lower minimum term would create a risk that poorly advised leaseholders might buy out the ground rent when an extension is in their best interest, then find out that they need to extend later and have to pay a higher premium, except for the extension, and two sets of transaction costs. We believe this is helping the leaseholder.

I hope that the noble Baroness will appreciate the reasons we have given for the existence of the threshold, and those assurances, and withdraw her amendment.

[Lord Khan of Burnley (Lab)]

My Lords, I rise very briefly to thank the Minister for her response. I appreciate the comments made by the noble Baroness, Lady Thornhill. In the future, we will look to work with colleagues across the House to see where we are on this. In the meantime, I beg leave to withdraw my amendment.

Amendment 57 withdrawn.

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[Lord Khan of Burnley (Lab)]

My Lords, at this late stage of the evening, I will be brief in speaking to Amendment 65 in the name of my noble friend Lady Taylor of Stevenage. The amendment would require the Government to publish their response to their consultation on a cap on ground rents and set out its implementation within a month of the Bill passing. It is a pleasure to follow the noble Baroness, Lady Pinnock. She described ground rent as something for nothing and something that you would not get away with in Yorkshire. Let me assure her that the noble Lord opposite can confirm that you would not get away with it in Lancashire either.

In the past five or six days we have seen a lot of press in relation to the new £250 yearly ground rent cap for 20 years. However, we still have not had confirmation here at this stage of the Bill from the Government. I want to press the Minister on the comments of the Secretary of State, who said in November that the

“consultation was launched to help protect those leaseholders who can be faced with ground rent clauses in their leases, which result in spiralling payments with no benefit in return”.

How are those press announcements happening, when we have not had a consultation analysis and we have not had feedback on the findings of the consultation? We find out in the media what the Government are thinking, and that is not right; we challenge that operation and procedure as a way of working, whereby we find in the media numerous reports about the Government’s intentions.

--- Later in debate ---

[Baroness Scott of Bybrook (Con)]

I think there was a question there, and my response is that we went out, quite rightly, to consult, and the consultation did not finish until towards the end of January. This is a complex issue. If we do it badly or wrong then we will make mistakes and these people will potentially be in a more difficult situation. From the end of January to April is not a long time. We are doing it as fast as we can, and we will come back to the House with further details.

[Lord Khan of Burnley (Lab)]

I understand the response the Minister has given, but she has to understand that this consultation has its own process and in due course we will look at the analysis. I do not know whether I am accidentally calling for another meeting here, but how did we end up with reports in the newspapers? That causes more uncertainty and instability for people in their homes who are getting their information from the media. Surely there needs to be a statement or some clarification through the next stages of the Bill, so that, very early on, we can look at getting a clear, certain message out to the millions of leaseholders who have been adversely affected by the ground rent situation.

[Baroness Scott of Bybrook (Con)]

The Government have no control over what goes into the media, and it is something that the Government have to accept.

Leasehold and Freehold Reform Bill

Lord Khan of Burnley Excerpts

Committee stage
Monday 29th April 2024 Lords Chamber

[Baroness Thornhill (LD)]

My Lords, I will speak to my Amendment 77 and make a few brief comments on other amendments. Amendment 77 would allow leaseholders to apply to the appropriate tribunal to ensure that freeholders who do not provide the agreed estate management services and allow a block to become run-down can be subject to a penalty at the sale of the freehold. There is clearly an issue of absent freeholders and little penalty when a managing agent is not appointed or adequate estate management services are not provided. The amendment would create a mechanism by which a penalty could be placed on the enfranchisement value and mean that leaseholders who have suffered from freeholder failures and consequently had to take the step towards acquiring the freehold should pay a lower cost for the collective enfranchisement of that freehold. This would reflect the freeholder’s dereliction of duty if a tribunal deemed it was warranted.

The Bill aims to remove barriers and rebalance legal costs for leaseholders to challenge freeholders at tribunal. Clause 56 addresses the enforcement of freeholders’ duties relating to service charges, and it includes provisions for tenants to make an application to the appropriate tribunal and the measures tribunals may put in place. As such, the amendment would just add to that. As well as having a power to make a landlord pay damages to a tenant for failure to carry out duties related to service charges, a tribunal would also have the power to apply a penalty to the enfranchisement value at the sale of the freehold to leaseholders. It does not seem fair, after having taken action to gain control of the freehold due to an absent freeholder, that leaseholders then have to compensate the freeholder with no penalty for that dereliction of duty. This is a modest amendment that would leave the judgment in the hands of the appropriate tribunal as to whether a penalty was warranted.

On Amendments 67 and 69, in the name of the noble Baroness, Lady Taylor of Stevenage, it is only right that leaseholders with old leases that have fixed service charges can challenge the reasonableness of those fees at tribunal. Evidence of costs being passed on in service charges is evident. This also ties in with Amendment 98D from the noble Earl, Lord Lytton.

We on these Benches support Amendment 69. We do not agree with the Government having a power to remove certain landlords from being subject to basic service charge transparency rules; all leaseholders are owed clarity on what they are paying for. We do not understand why that should not be the case.

I turn to Amendment 78 from the noble Baroness, Lady Fox of Buckley. We agree that leaseholders should be fully consulted on major works that they pay for; the noble Baroness showed that some of these costs are eye-watering. We agree with her proposal to restore the major works scheme in the Commonhold and Leasehold Reform Act 2002, which was eviscerated by the Daejan ruling by the Supreme Court in 2013, which the noble Baroness mentioned. We agree with the dissenting Lord Wilson in that decision, who said that the majority had subverted the intention of Parliament. It is not right that landlords no longer have to involve leaseholders in the decision-making process. We should use this Bill to at least restore the position to pre-Daejan so that transparency and accountability on major works are increased for leaseholders.

Amendment 78A, from the noble Lord, Lord Bailey of Paddington, would require a landlord who had lost a service charge determination, and who was meant to return the money to the leaseholders, to pay up in two months or else face compound interest. While Section 19(2) of the 1985 Act requires that overcharges be returned to leaseholders, landlords can and do ignore this. The same applies to similar provisions in leases. Where a tribunal has determined that a service charge or portion of it has been excessive, it should be relatively straightforward for leaseholders to get that money back. We on these Benches support that part of the thrust of the amendment—to ensure that landlords are under pressure to account to leaseholders in a timely manner, or otherwise experience financial penalties, as debtors in other parts of our economy do.

I turn to the mighty avalanche of amendments from the noble Earl, Lord Lytton. For us, Amendments 78D and 78E stand out. Amendment 78D provides for a new, tighter and more objective test of value for money to replace the current test of “reasonably incurred”, which could be open to a wide range of interpretation—obviously, this is in relation to service group charge costs. Amendment 78E pushes the Government to go further in the entitlement of leaseholders to have more and better information. Given the rationale behind the amendments from the noble Earl, Lord Lytton, we believe it is worth the Government giving them serious consideration.

Finally, although we have not yet heard from the noble Lord, Lord Moylan, we are minded to agree with his amendments, as right-to-manage and residential management companies are thinly capitalised. Unlike big freeholders, they will not have lending facilities, so would be unable to pay legal costs up front to take non-paying leaseholders to tribunal or county court. Right-to-manage and residential management companies are non-trading companies and have nothing except the service charges in their coffers. I look forward to the Minister’s responses.

[Lord Khan of Burnley (Lab)]

My Lords, I rise to speak to Amendments 67, 69, 76, 78I and 78J, in the name of my noble friend Lady Taylor of Stevenage. Noble Lords across the House have been emailed and briefed in relation to some very troubling real-life examples in the area of service charges—in fact, we heard earlier from the noble Baroness, Lady Fox of Buckley, about an unscrupulous situation.

In the other place, honourable friends have shared some horrific casework examples which clearly expose the unfit and unjust system leaseholders have been subject to. My honourable friend Matthew Pennycook MP, said:

“Soaring service charges are placing an intolerable financial strain on leaseholders and those with shared ownership across the country. Among the main drivers of the eye-watering demands with which many have been served over recent months are staggering rises in buildings insurance premiums and the passing on of significant costs relating to the functioning of the new building safety regime. Given that many leaseholders are being pushed to the very limits of what they can afford, do the Government now accept that the service charge transparency provisions in the Leasehold and Freehold Reform Bill … are not enough, and that Ministers should explore with urgency what further measures could be included to protect leaseholders better from unreasonable charges and give them more control over their buildings?”—[Official Report, Commons, 22/4/24; col. 636.]

--- Later in debate ---

I also thank the noble Earl, Lord Lytton, for his Amendment 80B, which aims to prevent the misuse of insurance proceeds in the event of a claim. The noble Earl may have a particular case in mind, and I agree with his intentions, but I am of the view that such misuse is already prohibited. The creation of a new statutory offence, therefore, is not necessary. The amendment as drafted, although well meaning, would not lead to rogue landlords changing their behaviour. I hope that, with these reassurances, the noble Earl will not press his amendments.

[Lord Khan of Burnley (Lab)]

My Lords, I know that the Minister has been speaking for a while, but I want to press her on this important point as we are talking about charges. There is a huge, fundamental area of concern in that the ground rent consultation has yet to be published. I know that it is unreasonable for me to ask the Minister to talk about any leaks or media announcements. However, how will this House be able to scrutinise it at this late stage of the Bill’s passage?

[Baroness Scott of Bybrook (Con)]

We debated ground rents last week, and I do not have anything to add. If there are any changes to the Bill, we will give sufficient time for all noble Lords to consider them.

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[Lord Moylan (Con)]

My Lords, I had assumed that the noble Baroness had risen to speak to the amendment standing in the name of her noble friend Lady Pinnock. I will speak to the amendments in my name in this group. Although there are eight of them, they fall into three broad topics, so I hope to dispose of them fairly quickly.

The first are Amendments 81 and 81A. These relate to the ability of right-to-manage companies to bring legal proceedings and charge the costs to the service charge. The effect of the Bill is that freeholders will not be able to charge legal costs to the service charge unless they obtain a ruling from a tribunal. In the case of right-to-manage companies exercising the functions of the freeholder, they have no source of income apart from the service charge. If they are not able to charge their legal costs to the service charge, then they will not be able to bring legal action at all. In fact, without that ability, they would not even be able to initiate legal action unless the directors of the company were willing to fund the preliminary legal activities from their own pockets. If they were willing to do that, and they proceeded to court, they might find that the court or tribunal did not find that they were entitled to recover their costs or find that they could recover only part of their costs as a result. Again, they would have no recourse to any source of funds apart from their own individual pockets in such circumstances.

The second amendment, Amendment 81A, would extend this provision not just to right-to-manage companies but to residential management companies. Right-to-manage companies were established under the Commonhold and Leasehold Reform Act 2002, but there are other residential management companies that exist that are not right-to-manage companies under that Act. These two amendments are alternatives; they are both probing.

I have heard that the Government are aware that this is a problem and are willing to do something to address it, so I hope that this particular probe will find a positive response from my noble friend on the Front Bench, because it cannot seriously be the Government’s intention to make it virtually impossible for anyone to become a director of a right-to-manage company without having to face serious personal financial risks that were never envisaged when RTM companies were established in 2002.

Amendments 81B, 81C, 81D and 81E all work together. They relate to a different problem, which is that the Bill allows a court or tribunal to award costs to a freeholder in certain circumstances specified in the Bill. However, if these costs are not paid, the only recourse the freeholder has is to go back to the court and seek a new judgment to have the costs awarded to them, whereas the normal method of dealing with such a matter is to make a simple online claim for a judgment in default. That course of action is precluded, as I understand the Bill, in the case of freeholders seeking to recover the legal costs that have been awarded to them. All this will do is burden the courts with more applications, which can and should be, and are normally, dealt with through an online process that takes a few weeks to go through. That surely should be available to freeholders.

The third topic in this group relates to Amendments 82A and 82B. These, again, are probing amendments to understand why the Government are extending the protection in relation to legal costs to all leaseholders, when surely the intention must be to extend it to those leaseholders who are home owners—that is, who own the property that is the subject of the legal dispute. The Bill has the effect of giving this protection also to investor leaseholders—those who hold the property entirely as an investment. I do not understand the Government’s logic in doing this, and these amendments probe that by suggesting that it should benefit home owners only.

[Lord Khan of Burnley (Lab)]

My Lords, I thank the noble Lord, Lord Bailey of Paddington, for introducing this group, setting the context for this debate about insurance payments and asking for clarity in relation to his amendment, which I am sure was also the intention of the noble Lord, Lord Moylan, in asking for clarity with one of his amendments and probing efficiency in his other amendments. I agree with the noble Baroness, Lady Thornhill, about the extortionate increases in insurance charges passed on to leaseholders. We found that the risk price that insurers charged between 2016 and 2021 pretty much doubled. The brokerage charge increased by more than three times. The service charges added on increased by about 160%, so they more than doubled, and those charges were passed on to leaseholders.

I will quickly speak to Amendment 82, in the name of my noble friend Lady Taylor of Stevenage. This new clause would prohibit landlords from claiming litigation costs from tenants other than in limited circumstances determined by the Secretary of State.

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[Baroness Thornhill (LD)]

My Lords, I support Amendment 84, in the name of the noble Baroness, Lady Fox of Buckley. There is no doubt that mis-selling of leasehold homes is going on. Indeed, some developers insist that you can buy a flat from them only if you go with one of their approved solicitors. These solicitors will most likely not alert you to the negative aspects of that lease. Public awareness and understanding are low, as the noble Baroness showed from personal experience. The noble Baroness mentioned estate agents. I went on to Rightmove’s website and found that it provides buyers no search function to differentiate between freehold and leasehold homes, which I mention because, apart from this feeling disingenuous, it highlights that the problem starts at the very beginning of the process.

As has been mentioned, the Levelling Up, Housing and Communities Committee did an inquiry into leasehold in 2018-19. Its report said:

“Many leaseholders reported that they were surprised to learn that they did not own the properties they had purchased in the same way as they might have owned a freehold property. One leaseholder, Jo Darbyshire of the National Leasehold Campaign, told us there was ‘a fundamental lack of understanding about what leasehold tenure means to consumers out there.’ Shula Rich, from the Federation of Private Residents’ Associations, described leasehold as ‘the fag end of a timeshare … it is not owning anything’ and called for greater clarity from the Government and industry that purchasing a leasehold should not be sold as the ‘ownership’ of a property in the same way as freehold”.


They are leaseholders, not home owners, and they did not get help to buy or anything other than the right to live in a building for the term of the lease.

It is important that key information is provided in ways that are accessible and easily understandable for consumers. We believe that managing agents and landlords should provide key information about leasehold properties at the marketing stage in a standardised format. The information should include the lease length, estimates of enfranchisement costs, the ground rent and service charging information, as required by National Trading Standards for marketing a property.

There are clearly significant differences between freehold and leasehold tenures, but these are not always apparent to prospective purchasers at the point of sale. It has been mooted that it would be more appropriate to refer to this tenure as “lease rental”. We agree with that—it would at least be honest.

[Lord Khan of Burnley (Lab)]

My Lords, I rise briefly to thank the noble Baroness, Lady Fox of Buckley, for introducing Amendment 84. The arguments that the noble Baroness made were the very reason why we should end leasehold and move towards commonhold. I hope the Minister can clarify some of the important concerns that she has raised.

[Lord Gascoigne (Con)]

My Lords, I thank the noble Baroness, Lady Fox of Buckley, for her Amendment 84, which seeks to ensure that potential property purchasers understand the ongoing obligations of a leasehold property they are thinking of purchasing. I share the noble Baroness’s concern that purchasers should know about service charges and ground rent before they move into their home. Speaking personally, I completely understand the stress and frustration when you receive a bill that you knew nothing about.

The National Trading Standards Estate and Letting Agency Team has developed guidance for property agents on what constitutes material information when marketing a property. This information should be included within property listings to meet their obligations under the Consumer Protection from Unfair Trading Regulations 2008. The guidance specifies that tenure and the length of the lease are material and therefore should be included in the property listing. Ongoing charges, such as service charges and ground rent, are also considered material, as they will impact on the decision to purchase. This means that purchasers get information on the lease and expected level of ongoing financial obligations when they see the property particulars, so before they have even viewed the property, let alone made an offer. In addition, the measures that we are including in this Bill to require leasehold sales information to be provided to potential sellers mean that conveyancers acting on behalf of sellers will be able to quickly get the detailed information they need to provide to potential purchasers. This would include information about service charges and ground rent, as well as other information to help a purchaser make a decision, such as previous accounts.

The Government support significant provision of advice for leaseholders through the Leasehold Advisory Service, an arm’s-length body providing free, high-quality advice to leaseholders and other tenures by legally trained advisers. The Government have also published a How to Lease guide aimed at those thinking of purchasing a leasehold property, to help them to understand their rights and responsibilities, providing suggested questions to ask and suggesting how to get help if things go wrong. This guide will be updated to reflect the provisions in this Bill.

Leasehold and Freehold Reform Bill

Lord Khan of Burnley Excerpts

Committee stage
Wednesday 1st May 2024 Lords Chamber

Moved by

[Lord Khan of Burnley]

92: After Clause 95, insert the following new Clause—
“Requirement to establish and operate a management company under leaseholder control(1) The Secretary of State may by regulations make provision—(a) requiring any long lease of a dwelling to include a residents management company (“RMC”) as a party to that lease, and(b) for that company to discharge under the long lease such management functions as may be prescribed by the regulations.(2) Regulations under subsection (1) must provide—(a) for the RMC to be a company limited by share (with each share to have a value not to exceed £1), and(b) for such shares to be allocated (for no consideration) to the leaseholder of the dwelling for the time being.(3) Regulations under subsection (1) must prescribe the content and form of the articles of association of an RMC.(4) The content and form of articles prescribed in accordance with subsection (3) have effect in relation to an RMC whether or not such articles are adopted by the company.(5) A provision of the articles of an RMC has no effect to the extent that it is inconsistent with the content or form of articles prescribed in accordance with subsection (3).(6) Section 20 of the Companies Act 2006 (default application of model articles) does not apply to an RMC.(7) The Secretary of State may by regulations make such provision as the Secretary of State sees fit for the enforcement of regulations made under subsection (1), and such provision may (among other things) include provision—(a) conferring power on the First-Tier Tribunal to order that leases be varied to give effect to this section;(b) providing for terms to be implied into leases without the need for any order of any court or tribunal.(8) The Secretary of State may by regulations prescribe descriptions of buildings in respect of which regulations may be made under subsection (1).(9) In this section—“dwelling” means a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, or outhouses and appurtenances belonging to it or usually enjoyed with it;“long lease” has the meaning given by sections 76 and 77 of the Commonhold and Leasehold Reform Act 2002;“management function” has the meaning given by section 96(5) of the Commonhold and Leasehold Reform Act 2002.(10) The Secretary of State may by regulations amend the definition of “management function” for the purposes of this section.”Member's explanatory statement
This new Clause would ensure that leases on new flats include a requirement to establish and operate a residents’ management company responsible for all service charge matters, with each leaseholder given a share.

[Lord Khan of Burnley (Lab)]

My Lords, I will speak to Amendment 92 on behalf of my noble friend Lady Taylor of Stevenage. This new clause would ensure that leases on new flats included a requirement to establish and operate a residents’ management company responsible for all service charge matters, with each leaseholder given a share. The amendment has dual purposes. It would remedy two significant current flaws in the leasehold system that the Bill does not address, and it would provide a step forward to commonhold, without doing so in a piecemeal way.

I turn to the current flaws. First, unless leaseholders in blocks of flats acquire the right to manage, collectively enfranchise and then establish a residents’ management company, or buy a property in a development where a residents’ management company has already been set up, they have no control whatever over how their money is spent. This is despite having to pay all the costs to maintain and manage their buildings. Secondly, the rights that leaseholders do have to exercise control over how their buildings are managed—whether through a tribunal, the appointment of a manager or the right to manage—are locked behind difficult and often costly legal processes to which many will not have access.

Our amendment would address both these problems by requiring that when a new residential block of flats was constructed and its units sold the development should be a three-way lease between the freeholder, the leaseholder and the new residents’ management company. Each leaseholder in the block would then own a share of the residents’ management company, and it would be under their exclusive control, giving them full responsibility for services, repairs, maintenance, improvements, insurance and the cost of managing their building. This would give them control over how their money was spent. This ability to influence the management of their building would come at no additional cost.

The Minister will no doubt say that our amendment leaves no space either for limited cases in which a mandatory residents’ management company is not appropriate or where leaseholders simply do not want this responsibility. The Government have said many times that they are keen to give more home owners control over the management of their buildings, and we welcome that the Bill is moving in the right direction. Would it not make sense to have leaseholder management of their buildings to be the default?

Where mandatory residents’ management companies are not appropriate, could the Government not put forward such cases to be incorporated as exceptions? In the case of leaseholders not wanting to be compelled to manage their buildings, could there not be a provision for leaseholders to use the power of the management company to appoint a manager or simply return management to the freeholder? I would be keen to hear the Minister’s thoughts on these alternative options.

The real importance of this clause, however, comes from it being a key way of laying the groundwork for a future where commonhold is the default and leasehold becomes obsolete. It would help to create a cohort of leaseholders who have experience in running their buildings, as they would under a commonhold arrangement, even if that experience is limited both in time and the extent to which they have carried it out.

This is certainly not a perfect solution. It would do little for leaseholders who have already purchased their flats and do not currently have a residents’ management company. We need other solutions, building on measures already in the Bill to address the challenges they will continue to face. I look forward to the Minister’s response and beg to move Amendment 92.

[Baroness Thornhill (LD)]

My Lords, I support Amendment 92 in the name of the noble Baroness, Lady Taylor of Stevenage, and explained so well by the noble Lord, Lord Khan of Burnley. The right to manage was first introduced in the leasehold reform Act of 2002. From the start, it was, as the noble Lord said, intended as a simple and cost-effective alternative to collective enfranchisement, but, despite the happy intentions of that Act, the reality was quite different. Take-up has not been what we would all have hoped for or expected, because the right to manage has proved incredibly problematic in practice.

These problems culminated in the Law Commission’s final report in 2020—time has marched on—on exercising the right to manage. It summarises the difficulties as follows:

“The ‘simple’ RTM process envisaged in the original consultation which led to the 2002 Act has not come to pass. The requirement for strict compliance with the statutory procedures, such as the service of certain notices on particular parties, can be unforgiving to leaseholders. In many cases, small mistakes made by the RTM company have afforded landlords opportunities to frustrate or delay otherwise valid claims. The Court of Appeal has noted that while the procedures ‘should be as simple as possible to reduce the potential for challenges by an obstructive landlord’, in fact they ‘contain traps for the unwary’”.


This is not a good advert for anyone seeking to exercise the right to manage, which we believe is fundamental to the change we need. The Law Commission subsequently made 101 recommendations, of which the then Government adopted two.

Whole swathes of actions could be happening to make this process simpler and to encourage residents to take this up. We have no doubt that the process is not an easy one and that the provisions in the Bill as it stands are actually quite limited. The uplift from 25% to 50% is welcome, as are the beneficial changes in cost provision, and minor changes to courts and tribunals. They are all positive but underwhelming—a far cry from the 101 recommendations.

In debates throughout the course of the Bill we have heard numerous instances of excessive charges and unfair practices, from both Houses. The Law Commission summed it up best when it said that

“the landlord and leaseholder have opposing financial interests—generally speaking, any financial gain for the landlord will be at the expense of the leaseholder, and vice versa …Their interests are diametrically opposed, and consensus will be impossible to achieve”.

This amendment is quite realistic: it is starting only with new build, but what it does is symbolic, in that it draws a line under the past and clearly points the way forward. Noble Lords will notice that I am not wearing rose-coloured spectacles, and we are not saying that the residents’ right to manage will be any easier—but it will be fairer. Those paying the bills control the bills and can remove any poorly performing providers. We believe that a leaseholder-controlled resident management company with an elected board, accountable to all leaseholders, is a far more democratic arrangement than one middleman freeholder controlling block management, spending leaseholders’ money freely and not involving them in the decision-making processes. It is fundamentally a better way to go, and there seems to be widespread support for it.

We support this amendment because we believe that it is a step in the right direction and could reinvigorate right to manage with the right support. It seems that the Government are finding reasons not to do something instead of working to enable something better to happen.

--- Later in debate ---

I am acutely aware that, before and during the passage of this Bill, there has been much debate about commonhold across the House. We fully support a move to commonhold and, while we cannot go as far as many noble Lords would like, it is a journey. With that, I humbly request that the noble Lord withdraw the amendment.

[Lord Khan of Burnley (Lab)]

My Lords, I thank the Minister for his response, although it does not satisfy exactly the issues that we have raised. I thank the noble Baroness, Lady Thornhill, for saying that this

“draws a line under the past”

and is a

“step in the right direction”.

It is a fairer process when those who are paying the bills have control of the bills.

We would not need this amendment if the Government had followed the Law Commission recommendations to move to a commonhold system now. This is a missed opportunity. That is why we have argued that this is a limited Bill. I wish that the noble and Lancastrian Lord had gone for the Lancastrian approach and been absolutely candid and answered the questions. In the meantime, I accept his reasoning and beg leave to withdraw the amendment.

Amendment 92 withdrawn.