Leasehold and Freehold Reform Bill (Fourth sitting)

Matthew Pennycook Excerpts

Committee stage
Thursday 18th January 2024 Public Bill Committees

[The Chair]

Thank you.

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

Q281 Chair, may I just declare, for reasons of completeness, that my wife is the joint chief executive of the Law Commission, whose work we continue to cite on a regular basis?

Gentlemen, thank you for coming in to give evidence to us. I have two questions. First, in the 2020 update report on leasehold housing that the CMA published, you recommended reforms to

“the system of redress for leaseholders, to make it simpler and less costly for them to contest permission fees and service charges they think are unreasonable or excessive”.

What are your views on whether you think the Bill achieves that? If not, what needs to be incorporated to ensure that it does?

My second question is on the recommendations you also made on measures to address the assured tenancy trap, whereby leaseholders who pay ground rents in excess of £1,000 in London and £250 across the rest of the country

“risk having their home repossessed for non-payment”.

Again, does the Bill address that? If not, how specifically should we seek to improve it in that respect?

Simon Jones: I will deal with the second one first. Yes, we think that the proposals in the Bill at the moment will make a big difference. We thought that there were a number of ways to go about helping people: you could have created a duration threshold for leases, as in the current proposal—that works. You could have raised the threshold for rent. That, too, would work, although we would have been less in favour of it, because over time it would be less effective. Or you could have completely removed the provisions from the Housing Act. The approach that the Department has taken seems sensible.

[Matthew Pennycook]

Q Is that both recommendations, or just the second?

Simon Jones: That is on the second point. There are a number of ways to do it, but the problem was that there was no minimum length of lease that was not subject to the assured tenancy provisions. That just looked like an oversight, frankly, but that is going to be fixed. That seems like a positive step forward to us.

On redress, the problem that everybody told us about is that you can give leaseholders all the rights that you can, but that does not really help them if they cannot exercise them quickly, cheaply and efficiently. One of the problems—as you know, a big complaint people had—was that leases often had provisions that enabled landlords to recover the costs of litigation from the tenant, regardless of whether the landlord won or lost. That was a big problem, but that has been fixed.

[Matthew Pennycook]

Q May I press you on that? I asked a different witness about that this morning. The Government are saying that with low-value claims, the cost can be passed on, but that leaseholders would have to pay either that or a prescribed sum. I wondered, because we are talking about redress, given the challenges of going to the tribunal, will those leaseholders just end up paying the minimum prescribed amount for enfranchisement?

Simon Jones: I think that the proposal in the Bill is a positive change, but is it really all the change that could be made? This is quite difficult. The tribunal system exists to help leaseholders, but it is still complicated and expensive, and it is not local. Many of the disputes that we have are about costs.

For example, let us say you are a tenant and you have a service charge, but you think it is expensive. You will incur time and expense in trying to challenge it. What you want is probably something that is local, where the panel understands the costs in that area—for painting a stairwell or changing lights, that kind of thing. What we had in mind when we wrote the report was perhaps finding a way to use more local courts to provide more summary-type justice for people, through people who probably know more about what it costs in the local area to do something.

The other problem for consumers is that they do not understand what evidence is required to bring a challenge. I think that came through quite strongly for us. You cannot fix that with legislation, but it is another important point to bear in mind when thinking about how to help consumers help themselves.

[Matthew Pennycook]

Q Is it fair to say that with this legislation, we should look, where possible, to remove instances of where a leaseholder has to go to tribunal at all? In other words, if we said, “No leaseholder should be liable for a non-litigation cost in any circumstances”, on that particular point none of them would have to go to tribunal. Should we look to reduce the scope for tribunal use generally?

Simon Jones: If the purpose of all this is that the incentive for managing agents or landlords—whoever is responsible—is not to overcharge, then cost rules that encourage them to be more careful with the charges that they make ought to be advantageous.

[The Chair]

I remind the Committee that we have only another 10 minutes or so left on this session.

--- Later in debate ---

[The Chair]

Thank you. I remind the Committee that we have until 3.10 pm for this session.

[Matthew Pennycook]

Q Gentlemen, in our evidence sessions so far, we have had very wide-ranging discussions —let me put it that way—not just about the principle of the Bill but about property rights, the functioning of market capitalism and liberal democracy, and everything but. As the shadow Minister for the Bill, I would like to use your expertise to focus on what is actually in the Bill and how we might improve it, so my first question is a very specific one on clause 12. I think I put it more to Mr Freedman than to Mr Rainey because of that Law Society briefing. It relates to valuation, which is one of the more complex matters that the Bill deals with.

The Law Society has expressed concern that the provisions in clause 12 designed to protect most but not all leaseholders from non-litigation costs that landlords may incur when responding to an enfranchisement or lease extension claim may cause issues, because under the proposed new valuation method, the price payable may be below full open market value. Could you clarify why you believe that to be the case? The standard valuation method in schedule 5 provides for a market value element. Why does the Law Society believe that it does not represent full open market values?

Philip Freedman: This started with the Law Society’s recommendation to the Law Commission that one thing that might save costs for leaseholders was if they did not have to pay the landlord’s costs on a collective enfranchisement or lease extension. We put forward the view that if the enfranchisement price is market value, then each side should bear its own costs. If you were to buy a house, you would not pay the seller’s costs; each party would pay their own costs. That is what happens in the market. We said that in the context of enfranchisement being at market value. The Law Commission took that on board, and its report very clearly says that its recommendation that each side should pay some costs and tenants should not have to pay the landlord’s costs—

[Matthew Pennycook]

Q My question is: why do you not think that the valuation method in here is full market value?

Philip Freedman: Because the suggested notional capping of ground rent at 0.1%, in many cases, where it applies, will reduce the purchase price below what it is in the open market at the moment. At the moment, in the open market, the ground rent stated in the lease is payable. We are aware that there are proposals for retrospective legislation, as one might call it, to interfere with existing leases and to say that the ground rent should be capped at a certain amount, but at the moment those rents are lawful, and those rents are therefore reflected in the price that someone would pay to buy the flow of ground rent. Therefore, if you assessed the purchase price for the enfranchisement as if the ground rent were capped and would not be as much as it actually would, then you would be reducing the purchase price to below the market price.

[Matthew Pennycook]

Q That is very clear and very useful.

I have a second question, relating to clause 59, which concerns regulation of remedies for arrears of rentcharges. Do you agree with my view that the Government are trying to fix a historical law that is essentially beyond repair? Should we be looking to abolish section 121 of the Law of Property Act 1925?

Philip Freedman: I think yes. I had to draft some rentcharge provisions many years ago, when we were acting for clients who were selling some industrial buildings on a new estate. They wanted to sell them freehold. There was no commonhold at that time and the issue of enforcing positive covenants was difficult. We came up with the suggestion that the rentcharges legislation should be used to allow an estate company to collect service charges, maintain drainage systems and so forth. It was agreed that the Law of Property Act gave excessive remedies to landlords for non-payment. I am all in favour of limiting the remedies so that, if someone does not pay for something, they can be sued for it, just as with the amendment in relation to forfeiture. It seems to me—this is my personal view—that limiting forfeiture, as you have proposed doing through your amendment, is the right thing to do, although I do have three points to make on that.

[Matthew Pennycook]

Q I will quickly come to that, but do have anything to add in relation to clause 59, Mr Rainey?

Philip Rainey: I agree that forfeiture for non-payment of a rentcharge on an estate, which is usually a relatively small sum of money, is a sledgehammer to crack a nut. I would be in favour of replacing section 121 rather than repealing it, so that there is a coherent and measured set of remedies for rentcharges. That is bearing in mind, as Philip just said, that a lot of the estate rentcharges covered by that legislation have nothing to do with residential; they are quite common on industrial estates. That is one of the unintended consequences that might occur if you were simply to repeal section 121.

[Matthew Pennycook]

Q That is extremely useful. I wish that we had you both for more than half an hour.

I have one quick final question on the abolition of forfeiture. Would you agree that we should do away with forfeiture entirely—it sounds like you do—on the grounds that it is a wholly disproportionate response to the breach of a lease? If so, what should we replace it with? Is suing for a debt—as happens with any other debt—and an injunction if the breach relates to conduct a sufficient response or, if we abolish forfeiture, should we be looking to replace it with some other system of recompense?

Philip Freedman: My view is that there are three aspects of the proposed abolition of forfeiture for leasehold dwellings that we should look at. One is that it should apply to individual leases of single dwellings, rather like the ground rent abolition; it should not apply to leases of multiple dwellings, such as a lease of 50 flats to some lettings company, which is a commercial enterprise, effectively. It should apply to leases of individual dwellings granted at a premium.

The other thing is that the threat of forfeiture is over the top in relation to financial debt—arrears of rent, service charges or whatever. You can sue for those. There may be refinements in relation to suing, but basically you can sue for them. But if a tenant has knocked down walls that they should not have, caused a nuisance or annoyance to other tenants in the building, or used the property for some unlawful purpose, then the remedy would be to threaten an injunction, as you have indicated. An injunction is a difficult remedy to enforce: it is very costly and it is at the discretion of the court—there are all sort of hurdles about injunctions. If, in the residential sector, the first-tier tribunal was given the power and jurisdiction to order parties to a lease to comply with the terms of the lease, free from the constraints of existing law in relation to injunctions, then one could avoid the need for forfeiture. Removing forfeiture for financial payments and damages is fine, but for other breaches it presents a problem.

The only other point is that we need to look at section 153 of the 1925 Act, which is the right for tenants, if they have a very long lease, do not pay any ground rent—it is a peppercorn—and are not susceptible to forfeiture, to enlarge into the freehold. That is a whole area of unclear law. It is not clear what the effect would be if you had one tenant in a block who declares that he now owns the freehold; it would be very unclear whether the management of the block would be affected. I think these things need to be addressed if one is going along that line with regard to forfeiture.

Philip Rainey: Because I appreciate that we have limited time to answer, the only thing I would add is that forfeiture is arguably, again, a sledgehammer to crack a nut, but so can be an injunction: the remedy for breach of an injunction is essentially committal to prison. The prospect of not being able to forfeit and instead there being rafts of committal applications to fill up the jails with people who are, for whatever reason, refusing to comply with some kind of covenant—that is very annoying, but ultimately they should not be in prison—is also unattractive.

Ultimately, there needs to be some sort of measured method of removing a problem tenant from a block. We very much concentrate on the position of landlords against tenants, but one very difficult tenant in a block can ruin life for everybody else. The Law Commission proposed a replacement scheme, and I suggest that that should be dusted off and looked at. A lot of the objections to it come from the commercial sector, so bring it into force for residential leasehold first.

[Matthew Pennycook]

That is all extremely helpful. Thank you very much.

[Richard Fuller]

Q Our previous witness, Mr Vitali, talked about potential concerns about the effect of regulation on people’s understanding of property rights. Do you have any significant concerns about how the Bill affects property rights? If you do, what should we do about them?

Philip Rainey: In a sense, that is a conceptual question.

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[The Chair]

We will now hear oral evidence from our seventh panel. Jack Spearman is chair of leasehold reform at the Residential Freehold Association. For this session, we have until 3.30 pm. Could the witness please introduce himself for the record?

Jack Spearman: Good afternoon. My name is Jack Spearman. I am from the Residential Freehold Association. We are a representative organisation for the UK’s largest professional freeholders. Our members represent, or have management over, about 1 million leasehold properties in England and Wales. I chair the British Property Federation’s committee on leasehold reform. I am also a director at Long Harbour, which is a regulated investment manager, and we have invested in residential freeholds.

[Matthew Pennycook]

Q Mr Spearman, thank you for coming to give evidence to us. The Government’s 2017 consultation on tackling unfair practices in the leasehold market, which I think attracted more than 6,000 responses, found that freeholders regularly price-gouge leaseholders on service charges, ground rents, lease extensions and freehold acquisitions, as well as making arbitrary and unjust rules about what leaseholders can and cannot do with their homes. Is it not the case that many, if not all, of your members routinely engage in rent-seeking behaviour by gouging leaseholders as a matter of course and that the concerns of the RFA about the Bill are almost entirely related in various ways to how it might frustrate them or prohibit them from doing so?

Jack Spearman: Each lease will set out the terms of what can and cannot happen under that lease, so when people talk about changing terms, you have to be quite careful about what you are actually saying. The rent is set as a rent and a review is set as a review, so you cannot just change rent arbitrarily—the same as for service charge and many other things. I think what you are talking about is some of the aspects that are frustrating, whether it enfranchisement or lease extensions. It will probably surprise a number of you that our members do support a large number of the measures in the Bill, including a number of the amendments that you have put forward in Committee.

[Matthew Pennycook]

Q Okay. I may come back to some other specific issues if we have time, but specifically on insurance, the Financial Conduct Authority’s report of September last year on insurance for multi-occupancy buildings found evidence of high commission rates and poor practice, which were

“not consistent with driving fair value to the customer”.

It also found that the mean absolute value of commissions more than doubled between 2016 and 2021 for managing agents and freeholders of buildings with fire safety defects. Is it not fair to say that, again, many, if not all, of your members have benefited hugely from soaring buildings insurance premiums over recent years, so do you think the Government are entirely justified in seeking by means of clause 31 to limit their ability to charge insurance costs?

Jack Spearman: In terms of insurance premiums, they have generally all risen, for a number of reasons that you will be aware of, whether that is cost inflation, inflation generally or insurance premium tax. Let us not forget that the Government benefit from a lot of these things, and they are all rising at the same time.

What I would say is that there is merit in making sure that people who are actually providing services to administer the insurance work have some form of compensation for what they are doing. If the insurance premium was to double because there is an issue with cladding, why should someone take the benefit of that? The same could be said for remediation projects, for example, where VAT is paid. But, yes, I agree that a measured form of that would be helpful. The problem with the Bill currently is that it leaves all of that to secondary legislation, as you know. It would be helpful to see the primary legislation set out how that might work, and that is one of our recommendations.

Clearly, our members do a lot of work on insurance, whether that is administering claims, dealing with inquiries or sending out invoices to collect the insurance premium over hundreds of people—it is a job that someone has to do. It could be risk management, so telling the insurer what is on the building. You would be amazed to see how many insurers that our members deal with offer to insure a building without knowing what is on it. When we tell them what is on it and what is in it, a very different type of cover can be offered. So there is value, contrary to what people will say, although I do accept, clearly, that, like in any system, there are bad practices.

[Matthew Pennycook]

Q Just briefly while we are on that, have you got any sense of whether your members are complying, or are prepared to comply, with the new FCA rules that are coming into force at the end of this month with regard to the right to request to see the insurance?

Jack Spearman: Again, our members have always been of the view that the insurance is for the benefit of leaseholders. They provide the cover, and they provide the certificates; it is something that we have all been doing for a large number of years. So, yes, we do, and those that do not will obviously have to anyway under the FCA regulations.

[Andy Carter]

Q Thank you very much for your written submission to us. You say in there: “The RFA has serious concerns that the Government’s proposals to cap ground rent will lead to significant cost to the UK taxpayer…and have…negative consequences for leaseholders” What are the costs for UK taxpayers of this piece of legislation?

Jack Spearman: One of the key and largest impacts of this Bill has not even been considered yet, because it has not been introduced. Some form of restriction on ground rent is going to be introduced at some point as an amendment. You are being asked to scrutinise a piece of primary legislation that does not have a number of impacts in it—for example, setting capitalisation rates, deferment rates and dealing with ground itself. So you are scrutinising something that is incomplete, and the impact of which none of us here know.

Going to the taxpayer point, the Government say that no compensation will be paid, but unfortunately they also know that that is probably not going to be compliant with the European convention on human rights. Compensation is going to have to be paid, and it is either paid by the taxpayer or the leaseholder. That is what we mean by that.

--- Later in debate ---

[Andy Carter]

Q That is very helpful. Thank you very much. Do you have any views on the requirements for regulation of building managers?

Giles Grover: I have a lot of views on that area. Part of the issue was that under the Building Safety Act there were building safety managers in place with certain duties. At the last minute, that legislation was moved away from, but those duties still exist. A lot of the high-rise buildings that have registered with the Building Safety Regulator are facing enormous costs of compliance, and there are real fears about the work that will need to be done. We are seeing bills land on our doorstep all over again. I got one—thankfully, I am a residential management company director and can challenge it more—with an estimate of £500 a year extra per leaseholder to comply with the Building Safety Regulator if we had not moved away from some of the strange costs that were in there.

I have seen that for other buildings: leaseholders who have just got the freehold have suddenly got a demand saying, “You are also going to have to pay for compliance with building safety.” It is very worrying and strange that the innocent leaseholders we are meant to be protecting are now going to have to pay, but just in a slightly different way, to ensure the safety of the buildings that should have been made safe and should be maintained. Fire doors are another example that I could really get into, but I only have 20 minutes so I will hand back to you.

[Matthew Pennycook]

Q Giles, thank you for giving up your time to come and speak to us. I want to follow up on Mike’s and Andy’s questions. You may have said everything you can say about what you would like the legislation to do, but if you have some more detail it would be useful.

Mike and I tabled new clauses 27 and 28 to address some of the “in principle” issues we have been pushing for a long time on—qualifying and non-qualifying leaseholders and building height. Specifically, in terms of what the Government might feasibly bring forward, what is your experience from cases across the country of the operational elements of the Building Safety Act that are not working effectively? I am just trying to get from you a more realistic sense of what you might expect the Government to bring forward, in terms of extending this Bill to ensure the Building Safety Act operates as intended. What tweaks to the Building Safety Act are required, in as much detail as you can in the time you have?

Giles Grover: One of the major tweaks is on an issue we were first made aware of in November 2022 due to the residents of a building in Greater Manchester being forced to pay for interim measures. The council is now paying for those interim measures but it has been told that it cannot recover them through the Building Safety Act because the legislation is not in place. That is a simple one that could help.

You could ensure that resident management companies and right to manage companies can raise the legal costs where they might be needed in respect of building safety and relevant defects. There are some wider elements that are already in the Bill, in terms of stopping freeholders re-charging their legal fees. Our concern is whether that will protect non-qualifying leaseholders who are still being forced to pay fees.

This is where I can get into the specifics. I am no lawyer as such—you have had a lot of very intelligent people on before me—but I say this from the campaigning aspect of it. We need to see a fair bit more detail about exactly what happens when a freeholder is avoiding their liabilities and not giving a landlord certificate within the stated time period. The Government may tell us, “Oh, don’t worry. That means they can’t pass the costs on,” but theoretically I cannot sell my flat without that certificate because the conveyancer is asking for it, so why not have an express duty for them to provide it? To be completely frank, the whole landlord certificate/leaseholder certificate process is an absolute quagmire and a nightmare on the ground. I would personally prefer it if the Government did away with that.

There are lots of issues like that. There are points about court-appointed managers, which cannot be the accountable person, which seems quite strange to me. We have been told that there is another route through the Building Safety Regulator, but that would require the special measures manager legislation to be enforced. There are issues with shared owners in complex tenures where you have a housing association as the head leaseholder. Will they be protected from all costs? Will they have the same rights as all leaseholders?

Philosophically, the simplistic approach should be that you have the full protection. New clauses 27 and 28 would be a massive relief. It is then a case of whether legislation is needed or whether you can use the current measures. With the developer scheme, where it is for over 11-metre buildings—could that be extended to under 11-metre buildings? The cladding safety scheme is now for mid-rise buildings; could that be extended for low-rise buildings? Could the cladding safety scheme be extended to become a building safety scheme?

For a lot of this the pushback will be, “There is not enough money,” but there is money out there. There is money that can be got from industry. There are further parties, such as construction product manufacturers and providers, and the Secretary of State said they would make them pay two years ago; they have not paid yet. There are a lot more parties that could be brought into the pool. So operationally there is more they could do by saying, “We’ve got seven different funding schemes;” —or however many it is—“where is the oversight of all of them? Who is talking to each other? Are these regulators? How does DLUHC talk to the recovery strategy unit? Are they talking to the Building Safety Regulator? Is Homes England involved? The local regulators now have new money to take action; are they taking action?”

So, arguably, a lot of it is already in place; but what is needed is the comprehensive oversight and the proper grip to say, “Right: all these buildings—10,000 of them—are going to get fixed. This is how—this is where the money is coming from. Cladding costs are here. Non-cladding costs will come from there.” What you really need to do is put the money up front, recover it. The Government say that their leaseholder protections mean that the majority of leaseholders won’t have to pay. If they have got the confidence in their legislation then they can take over the burden from leaseholders.

[Barry Gardiner]

Q First, may I declare an interest? I am not sure whether it is necessary, but our witness Mr Grover participated in a documentary that I am making about leaseholds, so we have a knowledge of each other. First, Mr Grover, thank you for all the campaigning that you and your colleagues in End Our Cladding Scandal have done; it has been magnificent over the past few years.

You raised the issue, in response to Matthew Pennycook’s questions, of section 24 of the Landlord and Tenant Act 1987 and applying for an officer of the court to be installed to do the works and turn around a building. Clearly, it would be something much to be wished, for many people who found themselves involved a building safety issue, if they were able to do that. Related to that, I know you are aware of the Building Safety Act 2022 ban on section 24 managers being the accountable person.

This is a matter we have discussed with a number of witnesses such as yourself. Are you aware that at one development, the management control regarding safety and remediation was given back to a freeholder who was the one who took, the tribunal found, £1.6 million in insurance commissions unreasonably? They will now be handed £20 million because of that BSA anomaly, by the Government. So the very people who could not be trusted with money are now being given £20 million to remedy the defects that they were responsible for in that building.

Giles Grover: I am very aware of it. I have watched some of the sessions, and I was made aware of it last year by one of the leaseholders at that building. I have looked into this. I have had various conversations with various lawyers. It still just seems bizarre that the manager who has been appointed by the court cannot be the accountable person. I am just a simple man: I do not understand why that cannot happen—why the Government, or the judge, based upon the legislation that is out there, think it is a reasonable or positive outcome for that money to go back to that rogue landlord, shall we say. I do not get it, to be honest.