Leasehold and Freehold Reform Bill (Second sitting)

Matthew Pennycook Excerpts

Committee stage
Tuesday 16th January 2024 Public Bill Committees

[The Chair]

Will Members please indicate whether they would like to ask a question of the witness? We will start with Matthew Pennycook.

[Matthew Pennycook (Greenwich and Woolwich) (Lab)]

Q I again put on the record my declaration of interest that my wife is a joint chief executive of the Law Commission, which Professor Hopkins is representing.

Professor Hopkins, thank you for coming to give evidence to us. I have two questions, perhaps three if we have time. My first relates to those clauses that implement options or recommendations made by Law Commission reports. Parts 1 and 2 of the Bill implement not all but a subset of those recommendations. I expect that the Law Commission will have had a dialogue with Government about what the clauses look like, but ultimately what goes into the Bill is a political choice for the Government. With a view to strengthening the Bill, I will be grateful if we can get a sense from you whether any of the clauses that draw on those options and recommendations is in any way problematic? Do they contain flaws? Are there omissions that mean they will not work in the way that the Law Commission intended them to?

My second question is related to the Law Commission’s reports as a whole. My understanding is that they were meant to work as a complete package. In drawing on only a subset of recommendations, is there a risk that some of the underlying rationales for the options and recommendations that you made will be blunted or limited by the fact that others have not been included?

Professor Hopkins: To answer your first question, I am confident that the clauses of the Bill that implement the Law Commission recommendations achieve their desired intent. I know from my team that there will be a number of technical amendments. I do not think that that is necessarily unusual, given the complexity of the legislation, and it reflects the continuous process of examining iterations of clauses to ensure that robust scrutiny is applied.

I should explain the Law Commission’s involvement in the clauses. We have worked in much the same way that we would in producing any Bill: Law Commission staff have written instructions to parliamentary counsel, scrutinised drafts and iterations of the clauses, and commented back to parliamentary counsel. We have provided our usual role in the development of draft clauses.

As for the robustness of the clauses, as you said, our reports—in particular on enfranchisement—gave recommendations that would have wiped away the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, to provide an entirely new and unified scheme for houses and flats. In the process of instructing counsel, the Government have made decisions on what to implement. We have had to think about how to carry over that policy in the context of legislation that performs keyhole surgery on existing legislation, rather than starting with a blank sheet. With that constraint in mind, however, I am confident that the clauses achieve their desired purpose.

[Matthew Pennycook]

Q To ensure that I have understood you correctly, do you expect some technical amendments, whether minor or not, to come to clarify the provisions?

Professor Hopkins: There will be some technical amendments to come that refine the operation of the clauses.

[Matthew Pennycook]

Q And on the package as a whole working?

Professor Hopkins: On the package as a whole, the Bill implements key recommendations that would be most impactful to leaseholders, in providing them with much greater security and control over their homes and in putting the financial value of the home in the leaseholder’s hands rather than in the landlord’s hands. It will also enable leaseholders to take control of the management of their block through the right to manage, enabling more leaseholders to do that than can do so at the moment. In particular, it extends the non-commercial threshold from 25% to 50%, which is a doubling, and it also enables more leaseholders to own their block through meeting that threshold.

What is there in the Bill will have a considerable impact for leaseholders exercising enfranchisement rights, whether individually or collectively, and for leaseholders who are exercising the right to manage. There are other things in our schemes that are not there, and other benefits that will not be obtained. For example, sweeping away the ’67 and ’93 Acts, and providing a unified scheme, would bring with it the ability to remove some procedural traps that can arise. So there are other things in our scheme as a whole that are not in the Bill, but what is there will have considerable impact and a very positive impact for leaseholders.

[Matthew Pennycook]

Q On what is not there, the Government have chosen to include none of the recommendations on commonhold. We very much think that commonhold should be the default tenure going forward. Without enacting all of the 121 recommendations on commonhold, are there any that could be included in the Bill fairly easily, and in a way that would pave the way for commonhold in the future?

Professor Hopkins: During Second Reading, the Secretary of State said that he thinks commonhold is preferable to leasehold, and I concur with that. We concluded that commonhold is a preferable tenure to leasehold. It gives the benefits of freehold ownership to owners of flats—the benefits that owners of houses already enjoy.

Commonhold does of course have a history. It was introduced in the Commonhold and Leasehold Reform Act 2002 and has not taken off. Our recommendations as a whole were designed to provide a legal scheme that would enable commonhold to work more flexibly and in all contexts—to work for complex, mixed-use developments. With commonhold having failed once, there is a risk of partial implementation, meaning that commonhold has a second false start, which would probably be fatal to it. I think that the legal regime for commonhold needs to be looked at as a whole, to ensure that it works properly for the unit owners, developers and lenders who lend mortgages over commonhold. We need the legal regime that works. We need to remove any other blocks on commonhold.

[Mike Amesbury (Weaver Vale) (Lab)]

Q Do you think that it is a missed opportunity not to take those recommendations on commonhold forward?

Professor Hopkins: It is our job at the Law Commission to make recommendations for Government reform and of course we would like to see those recommendations implemented, but ultimately what goes in the Bill is a matter for the Government to decide, not the Law Commission. There is a lot in this Bill that is very positive for leaseholders, albeit the commonhold recommendations are not there.

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[The Chair]

Mindful of the fact that we will be drawing this to a close at half-past, I call Matthew Pennycook.

[Matthew Pennycook]

May I press you a bit further on valuation? This is a phenomenally complex area to understand, and the standard valuation method in schedule 2 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.

In all your work, did you wrestle at all with the fact that there may be some leaseholders who do not benefit from a fixed rate, in the sense they could have negotiated higher and more favourable rates in certain circumstances? Is that potentially a risk? Related to that, will it be the case that the Government need to set multiple rates to account for regional variations? Is a single fixed rate going to be an issue?

Professor Hopkins: In answer to both questions, I cannot sit here and say that every leaseholder will pay less. I can identify the fact that leaseholders with 80 years or less on their lease will pay less, because they will not pay marriage value, and that leaseholders with onerous rents will pay less, because of the cap on those taken into account.

Overall across the system, having the prescribed rates will be a considerable saving for leaseholders on the whole, because that takes out the legal and valuation costs in negotiating a rate and a price. It takes out that entire source of dispute, which will be beneficial—

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[The Chair]

We will now hear from Matt Brewis, director of insurance at the Financial Conduct Authority. We have until 3 pm for this next session. Will the witness please introduce himself for the record?

Matt Brewis: Hi. I am Matthew Brewis. I am director of insurance at the FCA, so I am responsible for regulation of all brokers and insurers that operate in the UK.

[Matthew Pennycook]

Thank you for coming to give us evidence, Mr Brewis. The FCA published a report in September 2022 on insurance for multi-occupancy buildings. In a general sense, on the basis of the recommendations and potential remedies you outlined, to what degree do clauses 31 and 32 faithfully enact those recommendations? Furthermore, it would be useful to know whether the FCA might have any ongoing role in the arrangements that those clauses will introduce. Finally, in that report, the FCA made a recommendation about a pooled risk insurance scheme. Could that be introduced into the Bill as an additional means of providing leaseholders with protection?

Matt Brewis: I will set out what the FCA is responsible for and what it is not, because that is the context for this and probably the questions to follow. Insurers write a policy and brokers sell it to a freeholder or property management agent who is the customer. They pass on charges to the leaseholder, who is partly a beneficiary of the product, but the primary beneficiary is the freeholder. The FCA is responsible for the insurer and the broker, the creation and selling of the product. That is where its role ends.

Traditionally, the customer has been the freeholder, who has been the beneficiary, but our review found that there was no benefit in freeholders shopping around to get the best price, because they simply pass on the cost to the leaseholder, often with significant add-on charges and other functions. We found that the risk price that insurers charged between 2016 and 2021 pretty much doubled. The brokerage charge by brokers increased by more than three times, or 260%-ish. The service charges added on increased by about 160%, so they more than doubled.

In our report, we recommended a number of pieces, including that leaseholders should be partially party to the contract, in that they should be provided with a copy of the documentation—previously, they have not been—and that insurers and brokers, when creating and selling products, should consider the needs of leaseholders, the people who are paying, in a way that insurers and brokers have previously not been required to.

We also made a number of recommendations about the parts that were not relevant to FCA regulation but were part of the chain and to do with freeholders and property management agents. That is where the clauses that you mention, 31 and 32, come into effect—where there is a restriction on the commission that can be charged by the brokers or by the property management agents to the leaseholders. I think that how much impact these clauses will have will depend on how broadly or tightly the secondary legislation around these points is drafted. Of course, I and my colleagues will work closely with the Department as that gets put together.

In terms of your second question, “Should a pooling scheme be included as part of the legislation?”, we believe, based on how parts of the market currently work, that pooling does work. By putting together buildings under one roof, as it were, for an insurance contract, you spread the risk; that reduces the cost of insurance. We see that as how it operates at the moment. We recommended that the Association of British Insurers work with the market in order to put together a pooling arrangement, which they have been working on—

[Matthew Pennycook]

Q For a very long time.

Matt Brewis: For a very long time. Unfortunately, I do not have the power to force anybody to write business that they do not want to. But the ABI has been working closely with a number of firms, and progress is being made. I believe that pooling remains the best option to reduce the cost to leaseholders. In terms of how that could be achieved, I think it is appropriate that the market try to do that. It is always possible for the Government to step behind that, albeit that would be at a significant cost—

[Matthew Pennycook]

Q But it would not necessarily require primary legislation—or would it, in your view, in terms of how you would implement such a recommendation?

Matt Brewis: It does not require primary legislation for the market to do it itself, as it is seeking to do at the moment, working with us, working with the brokers and working with colleagues at DLUHC.

[Rachel Maclean]

Q Mr Brewis, thank you for coming here. Is it within your remit or do you have any helpful information for the Committee to understand a point that has been put to me and that I am seeking to test with you, which is that when some of these freeholds have been sold off in the past, the insurance obviously is then sold off—sorry, let me start again; it is very complicated. The contention is that in the past some leaseholds have been sold off or converted, so now the freeholder, which may be an insurance company or a pension scheme, does not have that income stream that it used to have, and there is a consequent risk on insurance companies or pension funds that have previously been reliant on that income stream to make the returns to the pensioners. Is that something that you recognise? Do you have any powers to update us on it? Do you have any powers to investigate it? Do you have any thoughts on it?

Matt Brewis: If I understand your question correctly, you are saying, “Is there pressure on freeholders to charge more to make increased returns to pension funds?” I cannot answer that question, I am afraid; it was not part of our review to date. Sorry, I cannot tell you—

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[Barry Gardiner]

I think the law has done a pretty good job of that over the years.

[Matthew Pennycook]

Q To further explore Mr Gardiner’s point about fees, not commissions, what is your understanding of proposed new section 20G of the 1985 Act, which defines these excluded insurance costs? What would that cover? Or is that something for the secondary legislation as well? In which case, what should it cover, to fully protect leaseholders from all types of insurance costs that might be passed on unreasonably?

Matt Brewis: It is quite a significant list. The question effectively is: what are the reasonable costs of writing an insurance policy, and then the appropriate checks to be carried out to ensure that that policy is enforceable? From my perspective, that is focused on providing the information to the insurer or the broker that allows them to appropriately price the insurance—to understand the risk factors of that building, to determine the likelihood of escape of water, the quality of its fire defences and other things, all of which in sum add up to whatever the risk price is. There are different methods for determining what is an appropriate brokerage fee. We have seen some firms come out to suggest that it should be a maximum of, say, 10% of the cost. Others take a time-and-costs-incurred approach, based on how much work they have done. Being clear about things that are directly relevant to the pricing of the insurance is the best starting point for what should be allowed to be charged.

[Matthew Pennycook]

Q In general terms, do I take from that that we should seek to define excluded insurance costs fairly widely, beyond a strict definition of commission, to ensure that we are broadly protecting leaseholders from the problems that you outlined in your September 2022 report?

Matt Brewis: Yes.

[The Chair]

Thank you. If there are no further questions from Members, I thank the witness. We will now move on to the next panel.

Examination of Witnesses

Harry Scoffin, Karolina Zoltaniecka, Cathy Priestley and Halima Ali gave evidence.

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[The Chair]

We are very grateful that you are here, Cathy. Thank you very much. I call Matthew Pennycook to start us off.

[Matthew Pennycook]

Q Thank you all for coming to give evidence. I have two questions—one for Harry and Karolina and then one for Cathy and Halima.

Harry and Karolina, we heard earlier from Professor Hopkins from the Law Commission, which had 121 recommendations on commonhold. It is clearly not feasible to add all those to the limited Bill we have in front of us at Committee stage. Professor Hopkins says there is a risk of partial commonhold legislation that might create unintended consequences. Are there any of those recommendations that we can reasonably add in that might make things easier in the future and pave the way for commonhold? That is my question to both of you.

Cathy and Halima, clause 59 in part 4 of the Bill seeks to amend the Law of Property Act 1925. Would you agree that section 121 of that Act needs to be done away with? Are we attempting to, if you like, ameliorate an historic law that should really just be freehold forfeiture and should be done away with? On part 4 generally, we have sought to introduce by amendment an RTM regime for private estates. Are there any other tweaks to part 4 that we could reasonably look to make?

Harry Scoffin: In terms of the commonhold point, obviously, attitudinally, I have accepted that it will be seen as out of scope of the Bill. But we also have to remind ourselves that England and Wales are the only two jurisdictions in the world that persist with this fundamentally unfair system. The Law Commission—we heard from Nick Hopkins earlier—gave a big endorsement of commonhold in 2020. They flew officials out to Australia and Singapore, where I grew up and where we lived under strata title, a form of commonhold where residents are in control. But there is no point crying over spilt milk.

There is a good alternative, interim measure before second-generation commonhold eventually comes through. Bear in mind that I have been campaigning now for six years—that is six years of my life that I have wasted trying to abolish leasehold. The fact is that the time to have brought in commonhold was now. We did not even necessarily have a guarantee that this Bill would be here. After the Queen’s Speech in 2022, it was dropped at the last minute because of pressure from No. 10. So I am not going to hold my breath for commonhold.

However, one thing we can do, which is a pragmatic halfway-house compromise, is to say that all new leasehold flats come with a share of the freehold. That still persists with the leasehold system, but residents have control from day one. They are like Alan Sugar on “The Apprentice”: if they are being ripped off, they say, “You’re fired,” and they get a better company in—that is capitalism, that is choice and that is the right way forward for now if we are not doing commonhold, which is obviously too meaty.

Secondly, all new leases must be 990 years. At the moment, shared ownership leases under the new model lease through Homes England and the Greater London Authority must be 990 years. I think it is obscene that, after this Bill comes in, people can buy a brand-new flat from one of these developers and be hit with a 99 or 125-year lease. They need to be able to get a 990-year lease from the beginning, given that Parliament has already got rid of ground rents—two years ago, it got rid of ground rents—and our argument is that the value in the freehold is now valueless.

Ground rents have gone, so why do you not just require developers to hand over a freehold with a resident management company? I understand that Matthew Pennycook is halfway there with an amendment to bring in resident management companies; we just need the freehold. If we do not have the freehold, we will allow the expensive middleman, the rip-off freeholder, to have some form of control going forward. I know of developments with an RMC, where you might think, “Bob’s your uncle, they’ve got control,” yet they are still being ripped off on things like insurance, even though they appoint the managing agent.

From that point of view, let us not let perfect be the enemy of the good, but leasehold must stop and, with leasehold, we must get rid of its toxic forms so that everyone has a share of the freehold from day one. As we heard from Nick Hopkins, it would be much easier for those guys to convert to commonhold later, but we should give people the ability to have the freehold to begin with.

It is not just me who says that; in 2006, an academic who is on the Commonhold Council—this is in my written submission—expressed the view that, if people have super-long leases of 990 years and zero ground rent, it is asking nothing of developers to hand over the freehold, because the freehold is valueless. They might as well give the freehold, as opposed to expecting leaseholders to go through the rigmarole, stress and cost of buying it later. Also—we might get on to this later—getting 50% of a large block is impossible, so doing that is absolutely the right thing.

Another point is that the market for leasehold flats has collapsed, so the gap between the average price of a house and that of a flat is at its widest in England in 30 years. The fact is that buyers have woken up to the toxicity of leasehold, particularly after Grenfell and the cladding situation. They have worked out that this is a hideously one-sided deal. It is like the sub-postmasters, this idea that, every way you turn, people say, “You signed the contract. You’re responsible for the shortfalls. That’s the law, that’s the contract,” but it is so hideously one-sided.

If you can do only one thing to the Bill, even though it will not directly help existing leaseholders, it should be to say that all new flats must be share of freehold with a resident management company. Give us control of our homes, our lives and our money, please. It is 22 years since the last Act. Let’s do this.

[Matthew Pennycook]

Q Halima and Cathy, on part 4 and rent charges—unless you have something to say, Karolina. I am leaving it to you to self-police.

Karolina Zoltaniecka: The Bill is very welcome. It does remove a few of the barriers to commonhold, but I feel that a few more things could be done, through amendments, to take steps towards commonhold and to make it easier to convert once we enfranchise and buy the freehold. We could lower the agreement rate from 100% to 75%. They have that in Australia already; you only need that amount to have a special resolution. There is already a trial for 20 blocks in the country. We cannot say it is not working, because it is working.

There is a lot of miscommunication around commonhold in the industry. There could be an education and awareness campaign. The Bill could also be amended to introduce a sunset clause for existing flats. There could be some sort of agreement between the commercial and the leasehold residential blocks to pave the way for how this will be defined when we get to commonhold and people can convert. That would prepare people and get them ready, in practical terms, for how to run and maintain their blocks. There could be long-term maintenance plans and we could give people real, practical skills in how to do that.

Commonhold is so much easier. Having a strata, I know that. You do not have complex laws. You talk to each other and work problems and disputes out. You have meetings. Laws are prescribed, so it is easy for people to know what to do each step of the way. I do believe that there are things that could be done with commonhold in the Bill to pave the way and say that we have a future with commonhold and it will happen en masse.

[Matthew Pennycook]

Q Thank you. Halima and Cathy on part 4, please?

Halima Ali: Overall, I want to say that the model of maintenance that has been implemented is a scam, and all this Bill is really doing is legitimising the scam. Homeowners are being fleeced. This needs to be brought under control. In terms of the Law of Property Act, this is a positive step, but I would argue as a homeowner that a management company should not have its foot on my neck. This is my property. It is my hard-earned future for my family and kids, and no management company should have any rights over it. I feel that the model should be abolished altogether. There are two different tiers—fixed rent charges and variable rent charges—that are being allowed to continue in the private estate model. This needs to be abolished altogether.

Cathy Priestley: I do not really have anything to add except to say, would all the measures in the Bill really be necessary if the fundamental, underlying problem of private estate management was addressed? The estates we are talking about are not gated; they are not private. They contain public facilities, public open space, play parks and community centres. They might have private sewage systems and pumping stations. They almost always have sustainable urban drainage systems, because that is the way that flooding is mitigated these days. In the past, all these areas would have been adopted by the local authorities, but they are not being. If they were, there would not be any need for regulating managing agents or for the abolition of section 121.

[Matthew Pennycook]

Q I agree with you about the underlying point, and we may seek to address that, but if we have to work with this new regulation of estate management regime, are there any ways you would like to see it strengthened or tightened?

Cathy Priestley: It would be helpful for those who are on truly private estates and who do have private management, but we do not see any reason why homebuyers on estates should suddenly become estate managers for their local community.

Halima Ali: It is exactly as Cathy said: normal homebuyers are not qualified to manage estates. If we are given the right to manage, if we are looking at a development of over 100 homes, it is really hard to get in touch with 100 people who will agree and be on the same page. It is not workable. The Government are insisting on regulating, but realistically the Bill is not doing anything for us. Literally all it is doing is maintaining a scam.

[The Chair]

I am mindful of the fact that we will have to bring this session to a conclusion at 3.40 pm and five more Members have indicated that they would like to speak, so you can time yourselves accordingly. I will start with Andy Carter.

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[The Chair]

Thank you for the clarification. I call Matthew Pennycook to start us off.

[Matthew Pennycook]

Q Thank you, gentlemen, for giving us your time this afternoon. I have a question for each of you. Andrew, in the regulation of managing agents, do you think it is necessary to ensure that the provisions of the Bill work effectively? Your Best working group report is slightly out of scope, but if we do not introduce the parts—if not the entirety—of it, on the regulation of managing agents as it impacts on the Bill, would that harm the operation of the measures in the Bill? That is my question to you.

Angus, we have exchanged correspondence on valuation, and I know that you take the view that the deferment rate should not be fixed by the Secretary of State. I wanted to explore that a bit further, in the sense that the 2007 Cadogan v. Sportelli judgment, which has broadly set deferment rates, was made in the context of 0.5% interest rates. I have heard it put to me by people in other parts of the country that it may work in London, but it is very out of kilter with what works in different regions. If the Government are minded to remain of the view that the Secretary of State should fix the deferment rates, how best should the Secretary of State do that? What would need to be taken into account? Is there a need to set multiple rates for different parts of the country to deal with the variations? I want to explore the prescribed rates a bit more and how they can function most effectively if schedule 2 is to remain.

Mr Andrew Bulmer: Thank you for the question. On the regulation of managing agents, I should also declare that I was on Lord Best’s working group. There were three components to Lord Best’s recommendations: first, there should be a regulator; secondly, the regulator should have a code of practice through which to hold the industry to account; and, thirdly, there should be mandatory competency standards. That applies to sales and lettings as well as to block, or leasehold block management. He made a distinction with block: because of the large sums of money and the high risks involved, block should be qualified to a higher standard—indeed, minimum level 4.

There is a compelling reason why regulation is required. The way to think of it is the apocryphal tale of “The Ambulance Down in the Valley”, a famous poem. There is a large cliff, and people fall off it. Should there be a fence at the top of the cliff or an ambulance down in the valley? Redress and the first-tier tribunal, as well as the ombudsman, are the ambulance down in the valley, but it would be better to prevent harm occurring in the first place. Minimum competency standards and a regulated sector are the fence at the top of the cliff.

Lord Best made his recommendations four or five years ago now and I wholeheartedly support them—we support them. If we take Lord Best’s basket of reasons, put it on the table in front of us and acknowledge that, we will then have to consider where the industry has moved. Since that time, we have had the Building Safety Act, which was supposed to introduce a building safety manager. That was abandoned and the building safety manager is now in effect the property manager. The property manager now has to learn half of a new profession. The responsibilities and the technical knowledge that go with that are considerable.

For leaseholders who are RMC directors, the Building Safety Act also makes the RMC the principal accountable person, and to whom do they turn? The first port of call is the building manager. The Building Safety Act has the unfortunate consequence of inevitably driving leaseholders, who may be very intelligent individuals—such as the lead violinist of the London Philharmonic Orchestra, a brilliant individual but not an expert in building safety management—to their building manager. That means the Act is now driving lay consumers into the hands of an unregulated sector. That is another basket of reasons, in addition to Lord Best’s basket, on why the sector should be regulated.

Then we come to this Bill, which we warmly welcome and very much support. We can go into the details of it, but let us be very clear that we think it is a Bill that is going in the right direction. One of the Bill’s effects is going to be empowering leaseholders to look after their own affairs, and that is a good thing. But, again, we have the leaseholder, who is not daft—they could be a brilliant surgeon, or a lead violinist—but are none the less not property experts, so, again, the move towards self-determination and self-control means that they are being driven into the hands of an agency sector that is entirely unregulated. If Lord Best’s basket of reasons were not enough, if we add to it the Building Safety Act, then we add to it the inexorable drive towards leaseholder control of their own homes and their own affairs, it is surely now time that the sector was regulated.

If there is no appetite to regulate in this Bill, with its limited time going through Parliament, at the very least we should introduce minimum competency standards. It has been done already, swiftly and elegantly, following the death of poor Awaab Ishak, where mandatory qualifications were brought in in the social sector.

Many buildings are mixed use. A building manager will be walking down a corridor, qualified to manage the units on the left-hand side but not the units—or homes, I should say—on the right-hand side. That is inequitable and it makes no sense. Further, it also assumes that those in the private sector are not vulnerable. Vulnerable people live in the private sector too. The argument for, at the very least, having a code of practice and mandatory qualifications for building managers is, in my view, all-compelling.

Angus Fanshawe: On fixing rates and the deferment rate, before the Cadogan v. Sportelli case, which you mentioned, the deferment rate was always a contentious point. In my years of practising, that case has probably been the most important; really, it removed the deferment rate as something that was in dispute. Since that case, I cannot recall that I have ever had a disagreement on a deferment rate or a problem with agreeing the deferment rate.

Cadogan v. Sportelli set the rate at 4.75% for houses and 5% for flats. There are a couple of exceptions—well, maybe one or two more than that, but there are two significant exceptions where you can depart from 4.75% or 5%. My concern is that if we fix the rate, we will remove the opportunity, as is the case now, for leaseholders to agree a higher rate than 4.75% or 5%.

As I say, there are two cases where there are significant exceptions. The first is that if you have an intermediate leasehold—so, you have a head leaseholder who has a reversionary period—then commonly you would agree that at something higher than 5%, normally 5.5%, to the benefit of the leaseholder. Also, with some buildings there is an element of obsolescence—so, will the building actually be there at the expiry of the lease in, say, 80 years’ time? With a building built in the 1960s or 1970s, which perhaps has a life expectancy of 50 or 60 years, is there certainty that it will be there at the end of the term? In those circumstances, you can agree—I do not think with too much controversy—a slightly higher rate than 5%, again to the benefit of the leaseholder. If you are going to fix the rates, that will bring an unfairness, either to the leaseholder or the freeholder, depending on what rate you are going to fix.

It also ties in with capitalisation rates, if you are going to fix the capitalisation of the ground rent. There was a case on capitalisation rates—Nicholson v. Goff in 2007—that set out very clearly how the capitalisation rate should be assessed: so, the length of the lease term, security of the recovery, the size of the ground rent and the rent review provisions, if any.

Every ground rent is different; every circumstance is different. Again, if you are going to fix the capitalisation rate in the same way that you are going to fix the deferment rate, that could certainly bring about unfairness. It could be unfair to freeholds, it could be unfair to leaseholders, but the problem with fixing the rate is that it does bring unfairness.

[Matthew Pennycook]

Q Just to probe you further on why, from your point of view, the Cadogan v. Sportelli rates are 4.75% and 5%, is that just for central London or is it your view that it works broadly across the country?

Angus Fanshawe: Yes, you are right. The case was about a flat in Cadogan Gardens—so, London SW3, prime central London. However, it was very clear. It set out how the deferment rate should be assessed. If the rate is to be assessed, I think the Cadogan v. Sportelli case sets out very clearly how it should be assessed. That would be the starting point: if the Government decide to do that, that is the starting point.

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[The Chair]

Q We will now hear from Kate Faulkner OBE, the chair of the Home Buying and Selling Group, and Beth Rudolf, the director of delivery for the Conveyancing Association. We have until 4.50 pm for this session. Will the witnesses please introduce themselves for the record, starting with you, Beth?

Beth Rudolf: I am Beth Rudolf. As you say, I am the director of delivery at the Conveyancing Association. I started my working life as an estate agent, became a licensed conveyancer and now work with the Conveyancing Association to improve the home-moving process for the consumer.

Kate Faulkner: Hi, my name is Kate Faulkner. I am chair of the Home Buying and Selling Group. If you are not familiar with it, it is a massive volunteer group. Our steering group has more than 30 different organisations, because that is how complicated it is to buy and sell a home in this country, be it leasehold or not. We have participants who are practitioners, as well as all the trade bodies, regulators and redress schemes. Our aim to improve the home buying and selling process, to prevent the one third of fall-throughs when a sale has been agreed after the offer stage and to reduce the length of time, which impacts on people’s uncertainty of life when they are buying a home. I have worked in all property sectors, from part-exchange to helping people who need to move into a retirement home and working with agents. Most of my work involves trying to communicate to consumers from an industry or Government perspective.

[Matthew Pennycook]

Q Thank you, ladies, for your time. Unless I have overlooked them, there are no provisions in the Bill to mandate or impose any requirements on time and fee for providing home buying and selling information. Several witnesses referred to that being a problem and to not having relevant information at the point of a sale going through. Should those clauses be added to the Bill?

Kate Faulkner: There are various issues. I heard one of the best descriptions of this recently, which was that, if I ask you to bake a cake with 20 ingredients but I only give you five of them, it is a bit difficult to do. Once you have made the offer and the legal companies have had a look at it and at the agreements, in a couple of months’ time you might get up to 10 of those ingredients. Eventually, four or five months later, you might have all 20 and you can then buy and sell that property. That is the biggest problem we have.

One of the massive opportunities with the Bill is to mandate the information required for people to understand what they are purchasing with a leasehold property. A key thing that we do not have in the property sector that other areas have—I have worked in the health, beauty, food and drink sectors—is an awful lot of natural education on how to buy things. We have nothing; there is no natural education of the public in our sector, apart from in the media, where any property story is particularly negative.

The work we are doing now has been fantastic. It has improved consumers’ education so that they really understand what they are buying into and that leasehold is very different from freehold, but they have now got the impression that leasehold is a bad thing. When leasehold works, it is not a bad thing.

From my perspective, and certainly from all the work we do with our participants on the Home Buying and Selling Group, it is essential that information be provided up front. Fantastic work has been done by the group that worked with trading standards, who now require up-front information, but it is not mandated. Although agents are supposed to understand all the property rules and regulations, from the discussion you had earlier, apparently nobody thinks that they should be qualified, and there is no regulation, so one problem is that agents have no idea about the trading standards up-front information that is coming through. A lot of good work is being done; the issue is that it is not working on the ground.

On leasehold specifically, people have to get hold of leasehold packs. There is a cost associated with them, and the time it takes can be excruciating. Anything that can be done to cap those costs would be welcome, but we need to make sure that quality is still required. The danger of the cost being too low is that we do not get quality leasehold packs, and they are essential due to the complexity of leasehold. The time it takes is also essential. Mandating up-front information specifically for leasehold would help us to reduce fall-throughs and reduce the time it takes, but most importantly, it would mean that people could get on with their lives more quickly than they currently can.

Beth Rudolf: I am the co-ordinator of the leasehold property enquiry form and the freehold management enquiry form, which are supported by TPI, RICS, the Law Society, the Conveyancing Association and right across the sector. The intention of the forms was to create a standard template for the information required. It is noticeable that, of the questions raised, only five are time-sensitive, such as failings to pay ground rent or the current budget—the kinds of things that change over time. Most of the information is standardised across the whole of that estate; nothing is going to change. Certainly, when we were looking at the regulation of property agents with Lord Best, it was clear that some of the bigger managing agents already have templated tenant portals where people can go to get that information. That needs to be put across the whole of the leasehold sector, the rent charges and the managed freehold estates, because we are seeing charges of up to £800 for the information.

We are also seeing the duplication of those charges. We will go to the landlord and they will say, “We only answer the ground rent ones, but we still want £400 to answer those. You will need to go to the managing agent to get the information about the service charges.” The managing agent says, “Right, well, we charge £400 for that, but you will need to go to the Tenants Association to get information about disputes and consents,” and so it goes on.

The timescale to getting the information having paid for it is about 57 days. For the consumer, it is an absolute nightmare. As Kate says, guidance from National Trading Standards came out on 30 November 2023 which sets out the material information—the information that would be relevant to the average consumer. It is not all the information. What we need mandated is what information and what data should be reviewed to identify what the relevant material information is, because without that how do we know if somebody has the information from the leasehold property inquiries or from the seller’s or the estate agent’s guesswork? Certainly, without the regulation of property agents, there is nothing to say, if they do just make it up, that anybody can take anything against them. We absolutely need that to be incorporated. It was promised and there was an announcement, I think, in 2018 that the leasehold property inquiry information should be made available at a cost of £200, with a refreshment fee for those time-sensitive elements of £50, and that that information should be made available within 10 working days. We have still not seen that and there is nothing in the Bill that identifies that.

[Rachel Maclean]

Q I have one question for each witness. Kate, if I can come to you first. You made the point that leasehold works for some leaseholders. We know that there are something like 4.98 million leasehold properties. How many would you say it is working for? That might be impossible, but what is your gut feeling?

Kate Faulkner: I do not think we have ever asked that question, so it is very difficult to answer. Also, the issue with property is that people change a lot. As a result, you could have a block that works brilliantly because we have a wonderful violinist or—my grandma used to own a little place at The Poplars in West Bridgford in Nottingham and, through complications, the family still owns a garage where my grandma used to live. The two guys who run that estate—the guy who does the accounts and the guy who does the overall management—are absolutely fantastic. They are a pleasure to deal with, and it is an extraordinarily well-run block. Now, if either of those were to move on, who knows whether there is anybody to replace them?

If we take another situation—I must say that this was quite a shock for me and I was a bit green in those days—I owned a flat and I thought it was safe to buy because it was owned by a housing association. Thirty per cent of those flats were owned privately. We were treated abominably by that housing association, and I would go as far as to say that they really did not like private leaseholders. I understood; they were social homes originally and they did not want us to own them. I felt we were treated as if we were an ATM machine. The original agreement that we signed up for with the housing association was a good one, but we found that they were changing that agreement over time and changing it so fast with so much paperwork that by the time the roof needed to be replaced, all the reasons we had bought that property, which we thought was safe, had been taken away from us. I know what I am doing and I asked all the right questions, but we still ended up with a situation where we had no control whatsoever over what was happening.

You have two cases there. In one, you have a wonderfully-run estate, but that could change overnight if different people take over, and in the other, you have a situation where I thought I would be safe with the housing association, only to find all the rules were changed.

To give you some idea, I think it is the complexity of this that is so scary. However good anybody is, the missing qualifications are just horrendous. That just has to be sorted. The best way I could describe it to you is that when I moved, I had a bag. Do you remember those big Asda bags? Not the ones that they do now, because they seem to have got smaller, like everything else. I had a big Asda bag, and after owning this flat with the housing association for 10 years, I had three lever-arch files full of paperwork.

When we brought the complaint against the housing association about how they had dealt with the roof renovations, it took a year to take that to a complaint situation. When I suggested that I take it to a first-tier tribunal, I was told—this is one of the good things—that if I drove my other leaseholders into taking them to a first-tier tribunal, it would cost more than £30,000. I was asked whether I wanted that responsibility on my shoulders. Taking that cost off is one of the good things, but my worry is that however good we do, until you give the leaseholders parity with the legals—the surveying and the accounting expertise of the freeholder or agent or whoever it might be—we will still never dig ourselves out of the situation we have. That parity service has to be free, or every leaseholder puts in a hundred quid a year or something to provide them with some sort of service.

--- Later in debate ---

[The Chair]

Apologies, Douglas, I have one eye on the screen, where the Minister is now on his feet in the Chamber—we do not want to keep you waiting while we do lots of voting. Douglas Maxwell of Henderson Chambers, will you introduce yourself quickly for the record, please?

Dr Maxwell: Good afternoon. My name is Douglas Maxwell. I am a barrister in private practice at Henderson Chambers in London.

[Matthew Pennycook]

Q Dr Maxwell, I want to ask you about two things: A1P1 and compensation. The Secretary of State’s view is that clause 21 is compatible with the relevant ECHR provisions. I presume you agree. The Government have five options out for public consultation at present. There is a sliding scale of risk in the potential for litigation—although they might well all be litigated in due course—from the capping of the peppercorn down to the freezing of ground rents at their current levels.

On the existing ground rents, to what extent do you think that any of those courses of action in the five options will be compatible with the provisions of A1P1? On compensation, how credible do you find the figure in the Government’s impact assessment? They cite the figure of £27.3 billion as the estimated change in asset value from calculating the loss of ground rent income on the relevant leases. Do you find that a credible figure, or is it subject to a heavy amount of caveats, assumptions and so on?

Dr Maxwell: To deal with your first question, I think it is important to start by looking at how the European Court of Human Rights, the Strasbourg Court, considers applications under article 1 of the first protocol. The Court has said consistently that where a deprivation of property occurs—article 7 interprets that effectively as when your entire right to property is extinguished and all economic value is lost—there is what is called a presumption of compensation. I am not entirely sure, because we do not have the proposals set out in statute—we simply have the consultation document—

[Matthew Pennycook]

Q But the Secretary of State has expressed a preference for the first option, so let us say it is capping a peppercorn.

Dr Maxwell: In most instances, it would appear that that would fall within control of use: the freeholder’s right to property is not entirely extinguished, because they retain the ability to use, sell or whatever that property, and they retain the ability to make money through other means such as enfranchisement fees or lease extension fees. I discussed this yesterday with Professor Bright at the APPG, which I know some of you were present at, but there might be instances where it falls within the category of a deprivation, or certainly gets close to that category, where the entirety of the income is derived from ground rent and the removal of that would effectively remove the value.

Absent sight of those sorts of leases and the relevant facts, we are dealing only in hypotheticals here, so that brings us to another question, which is to look at the macro picture of the options as a whole and the micro application of that to certain facts. It might be that on the macro approach, looking at the totality, we are dealing with a control of use, which means that there is no presumption of compensation, but it could be that if we looked at the micro analysis, certain individual circumstances do fall into that. Again, absent the relevant facts, it is only possible to speculate. It is a very broad market and there are lots of different leases.

[Matthew Pennycook]

Q Understood. What about the impact assessment figure?

Dr Maxwell: I am not an economist. I have skimmed the impact assessment figures and noted the figures that seemed to be quite substantial. I noted for option 1— correct me if I am wrong, but I do not have a copy in front of me—I think it said that in the first 10 years, the loss of ground rent might be £5 billion, and then a loss of value of about £27 billion. I am not an economist, so I cannot really comment on whether that figure is remotely correct or reflective at all.

[Matthew Pennycook]

Q Understood. On a practical level, would you expect any of the five options that are out to consultation to be the subject of litigation on the part of landlords? Or are there some that are safe, well beyond the infringements we are discussing?

Dr Maxwell: If any of the options are implemented, it will result in a significant loss in value of freeholds. As a result, there is a prospect of challenges being brought. I cannot comment on where those challenges will come from, but it would be slightly naive to say that any of those options are completely safe from challenge. However, the prospect of a challenge being brought is very different from the finding of a violation; seeking to bring or threatening judicial review is very different from the actual court finding that a violation has occurred. Obviously, the risk register—if you want to call it that—of the finding of a breach is effectively reduced if you go down the relevant options to the final one of freezing ground rent, and there are other questions about the proposals as set out in there.

This was discussed last night with the APPG, but it is important to recognise that there is Strasbourg case authority concerning cases from Norway that went to Strasbourg on the capping of ground rent. Obviously, ground rent in Norway is not exactly the same as it is in England and Wales, but there are some similarities. There was an initial case called Lindheim where the Strasbourg Court said that a cap of 0.2% in Norway breached the right to property of article 1 of the first protocol. That was because, effectively, the value was completely lost.

The Norwegian Government engaged in a process like this—a very considered discussion and consideration within the political sphere of the best way forward—and they effectively set a cap, which was the equivalent of about £600 a decare—I had to look that up—which is 0.2 acres. They set a cap, which again was challenged in a case called The Karibu Foundation, and that was when the ground rent related to about 0.6% of the land’s value. In that case, the European Court of Human Rights said, “No, there is not a violation here, because the Norwegian Parliament have clearly considered this and they have what the Strasbourg Court calls a ‘broad margin of appreciation’. These sorts of questions are for Parliament”—they are for you. The EHCR said that it had been adequately considered, they have retained the property, and that is reflected. Therefore, there cannot be seen to be what the Strasbourg Court usually refers to as an “individual and excessive burden” on this foundation, and it said that a breach had not occurred.

The principle is that a cap or a limit on ground rent is not necessarily a violation, but you have to apply it to the certain facts and see whether it falls within causing an “individual and excessive burden.” But we are absent from facts and again dealing in hypotheticals here. We have to look at the macroanalysis.

[The Chair]

Are there any further questions?