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.]

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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.