Leasehold and Freehold Reform Bill (Sixth sitting)

Matthew Pennycook Excerpts

Committee stage
Tuesday 23rd January 2024 Public Bill Committees

[Lee Rowley]

I am grateful to my hon. Friend for his comments. I accept the point that we need to get as much of that information to members of the Committee, the House and the public as quickly as we are able to do so. I know that he and other Members recognise that we have a process that we need to go through in that period, and I hope that we give enough information about the process and changes, although I accept the interaction that he indicates. My hon. Friend is an experienced Member; it is not my intention in any way, but forgive me if I say anything that he knows.

Obviously we must get through the process of working through the legal risk. It is a very contested area—we can see that already. There have already been indications that people will look at it extremely closely, so it would not surprise me if it was looked at extremely closely in most ways. There are potential legal issues on both sides, in that whatever we come out with, any public policy change often or always creates a group of people who do not like it, and they have an ability through due process and the law to see if there is anything in there that they dislike. I guess this is no different, but equally the Government are cognisant that it creates a challenge in this domain. We must go through the process of having the consultation, which only closed quite recently, and giving enough time for that to be considered and transacted on before we come to a conclusion; otherwise, there is potential legal risk there as well.

Part 6 sets out how a premium determined under parts 1 to 5 should be divided among multiple parties, such as intermediate landlords and freeholders. That creates a saving in process costs for leaseholders, as the work of dividing the premium is picked up by the affected parties. The part specifies that the division is made according to how each person’s interest has been devalued or lost by the claim, termed as “loss”. It sets a formula that takes the market value, provided for in parts 1 to 5, multiplies it by that person’s loss and divides it by the total losses of all the parties. Loss cannot include marriage value or hope value, which we are preventing from forming part of the premium.

Finally, part 7 of seven sets out how to calculate the term value—that is, the capitalised value of the ground rent payable for the remainder of the term of the lease. That is a component of the premium, as explained in part 5, under different rent review clauses. Depending on the lease, the ground rent payable may not be subject to review; or it may be subject to review such that the rent payable after the review is known; or it may be subject to a review that makes reference to price inflation, for example, or the capital or rental value of the property. Part 7 is entirely technical and sets out the formulae that apply in each case. The inputs into the formulae are the rent payable, the term for which it is payable and the capitalisation rate. In all cases, where the rent payable exceeds 0.1% of the freehold value of the property, the ground rent cap applies, so that the rent payable is treated as if it is only 0.1% of the freehold value. Part 7 gives a power for the Secretary of State to specify the capitalisation rate used to calculate the term value, and includes a requirement to review that rate every 10 years. I commend the schedule to the Committee.

I turn to schedule 3. As stated in debate on clause 11, schedule 3 sets out when, and to whom, “other compensation” must be paid by enfranchising leaseholders. “Other compensation” is a concept in law; it acts as a top-up payment that landlords and other parties can claim if an enfranchisement claim impacts on their interest. The schedule permits other “reasonable” compensation to be paid in two types of cases. Although it continues an existing practice, it works to ensure that the top-up cannot be used to claim for values already covered by the standard valuation method in part 5.

First, other compensation is available where the enfranchisement claim causes a devaluing of property outside the premises subject to the claim. Secondly, other compensation is available where loss is caused to other property not subject to the claim, but only to the extent that it is referable to a person’s ownership of any interest in other property. If, for example, a landlord owns an unbroken parade of terraced houses and there is a freehold acquisition of one house, the landlord might claim for other compensation if they can demonstrate that the value of the whole parade has been diminished due to one of the houses enfranchising. The schedule sets out that it does not matter whether the landlord had other options, such as leasebacks, but did not take them. It also sets out definitions, such as the meaning of development value. I commend the schedule to the Committee.

I turn to schedule 4, which defines many of the terms used in schedules 2 and 3 that determine the make-up of an enfranchisement premium. It points to different parts of the schedules to demonstrate the meaning of those terms. For instance, the meanings of “term value” and “reversion value” are as described in schedule 2. I commend the schedule to the Committee.

I turn to amendment 72 in my name, which corrects a typographical error in schedule 5 so that the provision works as intended. As a result of the amendment, Paragraph 7(3)(b) of that schedule will require the tenant, not the competent landlord, to pay into the tribunal the whole price payable. That is a new protection that could be used, for instance, where there are valid concerns about the conduct of a landlord handling the claim on behalf of others. I comment the amendment to the Committee.

Schedule 5 makes necessary consequential amendments that help to plug into existing law the new valuation methodology set out in clause 11 and schedule 2. It makes amendments to support the new valuation process in enfranchisement claims that involve multiple landlords, such as intermediate landlords and freeholders. That includes a fallback power, which enables leaseholders to require the transfer of property or grant of a lease, even if the landlords have not yet settled on how to divide the premium. That would be useful, for instance, if multiple landlords were in dispute with each other and it was threatening to hold up the claim.

The provisions also require the premium to be paid to the landlord handling the claim on behalf of the other landlords. They prevent landlords from requiring leaseholders to pay their share directly, as that would undermine the new valuation process where it involves intermediate leases. However, a new protection has been added that permits an individual landlord to require the whole price to be paid into the tribunal. That could be used, for example, where there are valid concerns about the conduct of a landlord handling the claim on behalf of others. With huge gratitude for allowing me to go through all of that, I commend schedule 5 to the Committee.

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

The Minister made a commendable effort to explain the various Government amendments and schedules in this part of the Bill. Briefly, for purposes of clarity, let me say that we have a lot to say about valuation, but we will do so when we debate schedule 2.

[Rachel Maclean (Redditch) (Con)]

I add my words of appreciation to those of the shadow Front-Bench spokesman for the Minister’s explanation. I want to add one brief point of clarity on marriage value, which was alluded to by my hon. Friend the Member for North East Bedfordshire. It is fair to say that marriage value is seen as one of the outdated, feudal and predatory practices of freeholders. It prevents people who have bought a house or flat in good faith from enjoying their property as we would expect them to do in a free country such as the UK.

I will not detain the Committee, but I recommend that anybody watching these proceedings or interested in the subject reads an absolutely fantastic article on leaseholdknowledge.com. That is a leaseholders’ charity that has done a superb and detailed work on this topic. An article by a gentleman called Linz Darlington explains that marriage value is particularly unfair, because people pay not only their own fees, but the freeholder’s fees, and there is a concept of hypothetical profit. The whole thing is just a massive racket—I am not qualified to explain it any better than that, so I leave my comments there. Many people have told me that marriage value should go. It is part of an outdated system. Read the article on the website. I commend the Government for bringing forward this very important part of the overall package of reforms.

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[Richard Fuller]

Well, maybe. I am not a mind reader, either of the mind of the shadow spokesperson or the mind of the great British public. They will make their decision at the next election and, I hope, return a Conservative Government for a fifth consecutive term, but that is not the import of my points today.

My first point was that the public should beware when they see such circumstances, not because anything is necessarily wrong, but because it is a leading indication that consensus is overwhelming scrutiny.

[Matthew Pennycook]

I rise to make two points. The first is that I will speak in great detail about valuation when we come to schedule 2, as I have indicated, because the meat of the Opposition’s concern relates to the deferment rate, which we will come to. Secondly, does the hon. Gentleman broadly agree that one of the reasons why this or any Committee would struggle to properly scrutinise this large group of schedules and clauses is that none of us has relevant expertise as professional valuers? One of the reasons why the Levelling Up, Housing and Communities Committee asked to undertake pre-legislative scrutiny of the Bill was precisely that it is so complex in certain areas, this area being a case in point.

[Richard Fuller]

It is a fair point, but I think we can get our heads around most of it. The general principles in this Bill are no different from those of others. There are some formula there; and when we see a formula such as one over one minus c to the power of n with a deferment rate of theta, we get worried that we do not understand. It takes us back to doing calculus at school. However, we can understand it—though within it there are some important things. The shadow Minister makes a good point, but there are amendments to schedule 2: the Government’s, his, and mine. I will make the point—and if I am wrong the Clerks will correct me, through the Chair—that we are debating the overall principle of schedule 2, not just the detail, though it is fair to raise some points about that.

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[Richard Fuller]

My hon. Friend is absolutely right. That is why we are passing this legislation. I want to be clear about that, because there will be circumstances in freeholder-leaseholder relationships where the performance has been inadequate or poor. There may be circumstances where the performance has been perfectly reasonable.

[Matthew Pennycook]

In some ways, I am doing the Government’s job, but I would just probe the hon. Gentleman on the Government’s intention, specifically in relation to value. At least on the basis of my understanding, it is not to right an abuse in the system. It is to remove payments, which are very real for leaseholders, that are based on a hypothetical profit that some would argue should not exist in a fair market. It is not about righting specific wrongs but a systemic wrong in the valuation process, from the Government’s point of view.

The hon. Gentleman may take issue with that, perhaps because he does not agree with one of the main objectives of the Bill—to make the enfranchisement process cheaper for leaseholders—or maybe he just takes issue with the fact that we do not know the prescribed figures that the Secretary of State will set, so we do not have a real sense of the values. The clause is attempting to right a systemic wrong as regards marriage value and other components of the existing valuation method. It is not just dealing with specific abuses in the system by bad faith actors.

[Richard Fuller]

I agree with the shadow Minister. I am not trying to undermine the intentions of the Bill—I agree with them—but I want them to be legally secure, and I want to probe and understand them. He said that these are hypothetical profits, but they are not quite hypothetical. They would only be hypothetical if they were not real, but as we have already heard, they are. They are calculated profits, and it is a matter of how that calculation is determined that is at issue, not whether they are hypothetical or real.

[Matthew Pennycook]

The hon. Member tempts me to engage in the philosophical debate that the Minister alluded to, and I think it is debatable whether they are real. Let me put it to him like this. If I own a vase, is the value of a second vase increased by the fact that I own the first one? That is what marriage value is doing; it is the hypothetical profit from the joining of the leases. I think it is at least debatable as to whether it is real in the sense that he advances, although it is very real for leaseholders who have to pay it if they seek to enfranchise under the current system.

[Richard Fuller]

Somebody had to mention the vase.

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Where the shared ownership provider is the freeholder, they will be able to grant a lease extension to the shared ownership leaseholder. We will introduce further amendments to the Bill at a later stage to deal with situations where the shared ownership provider owns a headlease but is not the freeholder, in order to facilitate extensions by those providers. Even after we have introduced those further amendments, in a small number of cases shared ownership leaseholders may have to claim an extension against a landlord superior to the provider—that is likely to be the freeholder. Where that is the case, and a shared owner claims a lease extension from a landlord superior to the provider, new paragraph 5E allows the landlords to apply to the tribunal for a lease variation so that future staircasing payments made by the shared ownership leaseholder are shared between the provider and freeholder or other landlords to reflect their losses. New paragraph 5F inserts the important definitions of a shared ownership lease, the landlord’s share, and the tenant’s shar”, to give necessary clarity to the lease extension right.

[Matthew Pennycook]

With apologies for interrupting the Minister when he is providing a commendable explanation of this group of Government amendments, does he agree that although the Bill touches on shared ownership leases in a number of areas, it does not directly address many of the unique challenges that face shared owners? Is there a case for legislating separately to address the various challenges that shared owners face in the round? On this and a number of other issues that arose in the context of the Renters (Reform) Bill, it feels as if there is a good argument for doing so, to ensure that we are directly addressing the challenges that shared owners face.

[Lee Rowley]

I am grateful to the hon. Gentleman for his question. There is always a case for reform in all areas of public policy. I recognise the importance of getting it right on shared ownership. On both sides of the Committee, we share an objective to make sure that this works as best it can, given that it is giving people the opportunity of capital and a new opportunity to be able to acquire that in a way that is not available to them through other means that the market offers. In half-answering the question, which is that there are always things that can be done—obviously I cannot anticipate the great fifth Conservative election victory that is coming or what the manifesto and the outcome may be—but I will certainly take on board the hon. Gentleman’s comments, so that when that election victory comes we can accommodate his suggestion.

Part 1B amends the Leasehold Reform, Housing and Urban Development Act 1993 to make similar changes for flats. New paragraph 5I repeals the current exclusion, and 5K provides that shared ownership leaseholders are qualifying leaseholders for lease extension rights. New paragraph 5J excludes shared ownership leases from collective acquisition rights and gives a power to the Secretary of State to exclude other shared ownership leases from the same where they are not excluded by this section. New paragraph 5M requires leasebacks to the former freeholder of any shared ownership flats subject to a collective freehold acquisition if the former freeholder is the provider. New paragraph 5N deals with the sharing of staircasing premiums between relevant landlords, exactly as new paragraph 5E does for houses. Finally, new paragraph 5P inserts the necessary definitions, as new paragraph 5F did for houses. I commend the amendment to the Committee.

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[Matthew Pennycook]

I beg to move amendment 2, in schedule 2, page 98, line 25, at end insert—

“(7A) In setting the deferment rate the Secretary of State must have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 146, in schedule 2, page 98, line 25, at end insert—

“(7A) In setting the deferment rate the Secretary of State must have regard to market rates of interest.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to market rates of interest.

Amendment 3, in schedule 2, page 99, line 25, at end insert—

“(6A) In setting the deferment rate the Secretary of State must have regard to the desirability of encouraging leaseholders to extend their lease at the lowest possible cost.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to the desirability of encouraging leaseholders to extend their lease at the lowest possible cost.

Amendment 147, in schedule 2, page 99, line 25, at end insert—

“(6A) In setting the deferment rate the Secretary of State must have regard to market rates of interest.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to market rates of interest.

Amendment 148, in schedule 2, page 105, line 28, at end insert—

“(1A) In determining the applicable capitalisation rate in relation to the right to vary a long lease to replace rent with peppercorn rent, the Secretary of State must have regard to market rates of interest.”

Amendment 149, in schedule 2, page 105, line 28, at end insert—

“(1B) In determining the applicable capitalisation rate in relation to the right to vary a long lease to replace rent with peppercorn rent, the Secretary of State must have regard to regional variations in market conditions.”

[Matthew Pennycook]

We have already discussed valuation in some detail, and it is right that we do so. The concerns raised by the hon. Member for North East Bedfordshire are genuine, and it is important that the Committee engages with them and the aim he has in mind to ensure that this is the most robust piece of legislation it can be.

As the Minister has demonstrated, schedule 2 is incredibly technical and complex, so I hope that members of the Committee will forgive me if in advancing my argument I set out once again what some of the provisions do. The Minister has made it clear that clauses 9 and 10 make amendments to the 1967 Act and the 1993 Act respectively to provide that the premium payable to acquire either the freehold or lease extension of either a house or flat must be calculated in accordance with clause 11. That clause provides that the premium payable when exercising any such enfranchisement rights, with the exception of premiums calculated under the preserved section (9)(1) of the 1967 Act, is to be comprised of the market value and any compensation payable. As the Minister said, schedule 3 sets out the circumstances in which other compensation is payable and how the amount is determined. Schedule 2 sets out how the market value is to be determined and, in instances where loss is suffered by certain landlords other than the landlord transferring the freehold or granting the new lease, how it is divided into shares.

The schedules, particularly schedule 2, make a number of significant changes to the two main bases of valuation currently used. First, as we have discussed, they ensure that marriage value—the hypothetical profit arising from the new lease that schedule 13 to the 1993 Act specifies must be shared equally between the parties—and hope value, which is the additional value that may arise from the potential for marriage value to be realised in the future, are no longer to be taken into account in calculating the premium payable. Secondly, aside from in exceptional circumstances, they impose a 0.1% cap on the treatment of ground rents in the valuation calculation, as the Minister detailed. Thirdly, they introduce a new standard valuation method with the aim of making the process simpler, more certain and more predictable.

In principle, we fully support the proposed new process for determining the price payable on enfranchisement or extension. There are the principled arguments in which we have engaged, and there is also the practical argument that the current valuation system has a number of flaws. The Law Commission argued in extensive detail in its 2020 report entitled “Report on options to reduce the price payable” that calculating premiums under the law as it stands is complex; has unpredictable and sometimes arbitrary outcomes; is subject to various inconsistencies and irrationalities inherent in the regime as a whole; and is affected by the artificiality of some of the statutory assumptions that valuers must work with. As I said in response to the hon. Member for North East Bedfordshire, this is not just a case of a couple of bad apples: these are systemic problems with the current valuation method. The result is that it regularly causes real difficulties for leaseholders and landlords engaged in the enfranchisement process.

In overhauling the process, however, it is important that we ensure that the new methodology not only addresses the various problems with the existing law, but reduces premiums for leaseholders across the board. That is an explicit objective of the Bill and—from memory—it is one of the terms of reference that the Government gave to the Law Commission when they asked it to produce its reports, and one that we very much share. It will be one of the tests in any litigation—I am sure litigation is to follow—but we believe it is a proportionate means of achieving a legitimate aim.

One of the most important inputs when it comes to the functioning of the proposed new standard valuation method will be the deferment rate, which I mentioned earlier. As the Committee will know, the deferment rate is the annual discount applied on a compound basis to an anticipated future receipt assessed at current prices, to arrive at its market value at an earlier date. We need not concern ourselves with the complexities of how such a rate is calculated precisely, but given its importance as an input in freehold acquisition or lease-extension claims, it is important that the Committee grapples with the implications of the Secretary of State being given the power to prescribe both that and the capitalisation rate used to calculate the value of either the freehold reversion or the new 990-year lease, because that is what schedules 2 and 3 provide for.

Proposing to hand Ministers responsibility for setting both those rates is not uncontroversial. Some would argue that it will be detrimental to the interests of leaseholders and freeholders to seek to set fixed rates in legislation. I have had it put to me by several specialist leasehold valuers with considerable experience acting for both leaseholders and freeholders—indeed, Mr Fanshawe who gave evidence to the Committee last week made this point, too—that as a result of the 2007 Cadogan v. Sportelli case, rates of 4.75% for houses and 5% for flats are now the accepted starting point in any claim for determining what deferment rate should be applied for leases with at least 20 years to run. Those people would argue that the result is not only that such rates are rarely ever a matter of dispute, but that deviation from them tends to benefit leaseholders.

The problem with setting a fixed deferment rate in legislation, such individuals would argue, is that a one-size-fits-all fixed rate will stop leaseholders from agreeing higher and more favourable deferment rates in circumstances where that is a possibility—for example, in relation to buildings at risk of obsolescence at the expiry of the lease term or where an intermediate leaseholder is involved—and, as such, will leave those leaseholders worse off, because they will be denied the opportunity to acquire their freehold or extend their lease at a fair price. The concern that a fixed rate may prohibit leaseholders from benefiting from more favourable rates in certain circumstances should not be dismissed, given the objective of reducing premiums as well as simplifying the process by which they are calculated.

On balance, however, we believe it is right that the Secretary of State be given the power to set both the capitalisation and the deferment rates used to calculate the price payable on enfranchisement or extension. It may indeed be the case that the Sportelli judgment has produced deferment rates that are broadly adhered to as a starting point in most claims for leases with at least 20 years to run, but there are real problems in relying on 17-year-old case law to maintain generic rates over the long term, not least in terms of vested interests attempting to overturn the relevant judgments and because there is evidence to suggest that the assumptions made about the risk-free rate in that judgment require review. There are also clear benefits in simpler negotiations and reduced litigation to introducing greater certainty as to what the enfranchisement premium will be.

Getting that rate right, however, as well as keeping it under regular review so as to respond quickly to any unintended or adverse consequences that might arise from selecting one, will be key to the effective functioning of the new process. Here we come to the point made by the hon. Member for North East Bedfordshire: as things stand, we do not know what those rates are. As with much of the Bill, we await future regulations to understand the process by which the Secretary of State will determine those rates and what the initial rate that he determines will be.

With that in mind, I would be grateful if the Minister confirmed whether, first, it is the Government’s intention, before they introduce the regulations required to bring the new process into force, to undertake a public consultation on precisely how the “applicable deferment rate” under part 5 of schedule 2 should be determined. I would also be grateful if he confirmed that it is the Government’s intention to keep the deferment rate under regular review. The relevant paragraphs on pages 98 and 99 only commit the Secretary of State to review the rate or rates every 10 years, which feels a little too infrequent. Would that 10-year stipulation function as a minimum period for review, with Ministers in future free to undertake more frequent reviews if they felt it necessary? If not, we think that a degree of flexibility may be required for more regular assessments of whether the rate is correct.

[Rachel Maclean]

I am listening with interest to the shadow Minister’s comments. He is making a valid point and advancing a logical argument for the setting of these rates, which we all agree is vital. If it were not to be the case that the Secretary of State had the powers in this legislation to set these rates, what does he think is the best alternative? How would those rates be set?

[Matthew Pennycook]

I thank the hon. Lady for her intervention. To be very clear, we agree with the Government’s proposal that the Secretary of State set the rate. The alternative would be, as Mr Fanshawe put to us in the evidence sessions, that we rely as a starting point on the Sportelli judgment, with its 4.75% and 5% rates respectively, and that leaseholders are free in the process of dispute to argue for more favourable rates on the grounds of particular circumstances being implied. On balance, we think that it is right that the Secretary of State sets the rate. What I am trying to drive at, which I will get to, is that how the Secretary of State sets the rate and what it should be are crucial to the outcomes for leaseholders in terms of the premium payable.

When it comes to the regulations required to bring the new valuation process into force, we obviously recognise that they are the means by which the detailed methodology for setting the applicable deferment rate will be brought forward. However, while it would not be right to pre-empt those regulations in Committee, we believe that the objective underpinning the setting of the deferment rate should be set out in the Bill. While the rate or rates will need to be set at a level that does not unfairly denude freeholders of value, we think it is important that the Bill states clearly that in determining what should be the rate or rates, the Secretary of State must have at the forefront of their mind the need to reduce premiums for leaseholders. Amendments 2 and 3 would ensure that that is the case in relation to both freehold acquisition and lease extensions. While other considerations will clearly need to be taken into account, not least how to ensure that landlords receive adequate compensation to reflect their legitimate property interests, these amendments would oblige Ministers to set a rate or rates with the overriding objective of encouraging leaseholders to acquire their freehold at the lowest possible cost.

That is important because with marriage and hope value abolished and the treatment of ground rents in the valuation calculation capped at peppercorn rates, it is the deferment rate that will be the primary driver of price to be paid by leaseholders in enfranchisement or extension claims. It is essential that reducing premiums for leaseholders is the determining factor in the process by which such a rate or rates will be set and reviewed, and it must therefore be put on the face of the Bill. On that basis, I hope the Minister will consider accepting both amendments. I look forward to his response.

[Richard Fuller]

I rise in support of my amendments 146 to 149, which, similarly to the shadow Minister’s amendment 2, seek to provide some framework and guidance around, and a better understanding of, how the Secretary of State will determine these very important discount rates. I go back to the point about the importance of trying to give as much clarity as possible about what we are passing into legislation and to avoid unintended consequences. The Minister will be aware that some of the businesses affected may be subject to statutory disclosures. It is very hard to make a formal statutory disclosure if one is not clear what the impact will be. My amendment seeks to provide that.

I want to explain some of the reasons why I have chosen to focus on the issues of market rates and interest, and regional trends. The shadow Minister made some very good points that I am sure the Minister will respond to. It is important to understand that it is always possible for Government to fix market rates and interest, either directly or by the courts, but interest rates do change; the world does change. We can find ourselves adrift on interest rates relatively quickly. The Sportelli judgment, I think, was made at a time when the Bank rate was 4.5%. In that context, the setting of the discount rate did not seem particularly inappropriate. Three years later, the Bank rate went to 0.5% as a consequence of quantitative easing, and stayed like that for seven years. Obviously, it is in the interests of party A for the rate to be set high and in the interests of party B for the rate to be set low, but there is a concern about the rate being fixed without certain guidance.

The shadow Minister has argued that the rate should have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost; that fits the imperative that informed the Bill. My view is that we ought to first encourage the Secretary of State to anchor his or her judgment on the market rate of interest—not a specific market rate of interest, but a set of market rates of interest. The reason is that there will be leases of certain terms: five, 10, 15, 30, 50 or 100 years. When someone buys an investment and ties up their money for a longer period of time, they pay a different rate of interest than when they do so for a shorter period of time. It is appropriate for the Government to have regard to that when setting the discount rates. That is why I have tabled this amendment. I am interested to know what the Minister has to say about it.

Amendment 149 is about regional variations in market conditions. The Minister will know that a large part of the Bill relates to London, but not all of it. The way property prices move in Bedfordshire—I see that another Bedfordshire MP, the hon. Member for Mid Bedfordshire, is here—and in other parts of the country is different from London. Market conditions vary. In order to be fair to participants, it is important that the Secretary of State has regard to regional variations. I hope the Minister can provide some encouraging words on market conditions and tying the discount rate to some form of understanding of market interest rates.

[Lee Rowley]

I am grateful to the hon. Member for Greenwich and Woolwich and my hon. Friend the Member for North East Bedfordshire for their contributions. We effectively have two sets of amendments from different sides of the discussion, which demonstrates both the importance and the challenge of getting this right. Before I turn to their points, the question before the Committee is whether we want to put further constraints or further elements into primary legislation, or are content in principle to allow most of them to be covered by the Secretary of State of the day at the time. The Government’s view is that the latter is more proportionate and reasonable. That is why we have come forward with the current proposal. As a result, we will not be accepting the amendments, but I will add a few more comments to try to convince the hon. Gentlemen to withdraw their amendments.

The hon. Member for Greenwich and Woolwich made a number of points on consultation. Although I cannot anticipate or confirm at this stage, I think it is absolutely the case that we would need further discussion and careful consideration of the approach, as I hope we have made clear throughout the debate. On his point about the review every 10 years, the existing judgment has now stood for going on 16 years—I know he knows that, because he has referenced it—and has done so relatively successfully. However, I take his point about tribunals being able to change things. Effectively, this is coming in through a tribunal in the first instance. There is a balance to be struck.

We have put a reference to 10 years in the Bill so that there is a recognition that there would need to be a review—as opposed to an open-ended ability with no indication of when it is used—while being clear that, although it would be for the Government of the day to determine, regular reviews will have potential impacts and potential challenges to the market, and there has to be some form of consistency or clarity in order to give people the confidence to invest and make decisions on an economic basis. The reason we have approached the provision from this angle is both to provide flexibility through the ability to change not being in primary legislation, but also giving guidance that there will be reviews at least every 10 years—albeit not indicating that they should be on a more frequent basis in order not to get into a discussion about whether there is too much movement for consistency and clarity.

My hon. Friend the Member for North East Bedfordshire made a number of important points, particularly with regard to his general point about market conditions and the importance of getting that right, and also that there are regional variations. This is another detailed part of the conversation, which the Government seek to move into another discussion rather than being on the face of the Bill. I recognise that sometimes that is not ideal, but one reason we want to preserve flexibility is to give the Secretary of State of the day the ability to respond to market conditions where necessary.

On the first point that my hon. Friend raised, we have been clear from the outset—when the Government announced the reforms—that rates should be set at market value to ensure that the amount landlords are compensated reflects their legitimate property interest. It is important that landlords receive sufficient compensation. To his earlier questions about legality, this is an important safeguard to ensure compatibility with various rights-based legislation, which we talk about extensively in this place.

The Secretary of State will set the deferment rate in secondary legislation. We have been engaging, and continue to engage, with the sector to understand its position to ensure that rates are set in a way that is fair to all those whose property rights are changed and interfered with, and fair to leaseholders. Although I cannot give an indication or a guarantee around regionality, I am happy to say that we want to set the levels at market rates, but also with the recognition that many different elements need to be considered, one of which may be regionality. That is why we need to continue this conversation beyond this discussion. The proposition that the Government are now putting to the Committee is to set these elements in primary legislation and to continue the discussions that my hon. Friend and others have asked for through other means that will come forward in due course.

[Matthew Pennycook]

I welcome that response from the Minister, in particular about the review period. If I have understood him correctly, he is saying that there must be a review every 10 years at a minimum, but there may be ongoing reviews within that time period if necessary—he can correct me if I have misunderstood. That would be welcome. There is a need to keep the rate, whatever it may be ultimately, under more regular review than just once every 10 years. I welcome also the indication he gave that the rate or rates may include some regional variation.

Where I take issue with the Minister’s response is the debate about how much we need to prescribe on the face of the Bill. It may be the case that, when the methodology comes forward in regulations, it is an explicit objective of the rate-setting process that premiums for leaseholders are reduced to their lowest possible level, but we have no guarantee, and all hon. Members know the constraints under which we operate when it comes to secondary legislation and our ability to influence and scrutinise instruments. We think it important that this particular objective be put on the face of the Bill, and I will be frank with the Committee about why.

We are worried about a situation where either this Government or a future one are lobbied by vested interests to set a deferment rate that will be punitive for leaseholders—that is, lower than the Sportelli judgment rates. As things stand, that is a distinct possibility. We are not attempting to prescribe the rates; I think that there should be consultation to ensure that Parliament’s view can be sustained, have legitimacy and have public backing. As the Minister will know, post-consultation is part of a regular process, as well as what this House attempts.

We are very much minded to say that, when setting the rate, there should be a guiding principle that, yes, it has to balance a number of considerations, but chief among them must be reducing premiums for leaseholders to their lowest possible level. It is explicit in the explanatory notes—and other parts of the Bill make reference to it—that the provision is to drive down costs for leaseholders; it is not set out in this schedule. For that reason, I am minded to press amendment 2 to the vote and also amendment 3, if we were to be successful in securing amendment 2—though it does not look so, from the balance of numbers.

[Lee Rowley]

I will take 10 seconds to try to convince the hon. Gentleman not to do that, although I might be unsuccessful.

On the ability to set these rates at a greater frequency, it is absolutely the case that “every ten years” is an indication as opposed to a limitation. Although I understand the hon. Gentleman’s point about putting things on the face of the Bill—and I fear that my exhortation will not be successful—we cannot save ourselves from each other; there will always be the ability to change things. It would be a strange Government who were elected on the certain propositions that he has indicated. There will always be a way to untangle these things. I understand the point about making things more difficult, but giving the Secretary of State the flexibility to make these decisions is paramount. We will oppose the amendment if he pushes it to a vote.

[Matthew Pennycook]

I am afraid the Minister is right in that he has failed to convince me. I fear he may misunderstand the point I am trying to make. It is not that we take issue with the Secretary of State having the flexibility to set the rate; we want instead to make very clear what must be the overriding objective in their mind when doing so, and we do think there is a strong case to put that on the face of the Bill in order to achieve the objectives that the Government have set themselves to make premiums as cheap as possible for leaseholders. For that reason, I will press amendment 2 to a vote.

Question put, That the amendment be made.

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Finally, in reply to the question of my hon. Friend the Member for Walsall North on insurance, the answer is generally no. There is little reason why insurance should be part of the process. There may be exceptions; if there are, we will write to my hon. Friend to indicate them, but the general answer is no.

[Matthew Pennycook]

I thank the Minister for his explanation of the Government amendments and for his initial response to my amendments and the amendment tabled by my hon. Friend the Member for Brent North.

We welcome the new costs regime provided for by these provisions. The Minister is absolutely right that, as things stand, there is no balance of power: the playing field is tilted very much in favour of landlords rather than leaseholders. That needs to be addressed. Under the current law, leaseholders are required to pay for certain non-litigation costs incurred by their landlord when responding to an enfranchisement or lease extension claim. That obviously does not reflect normal practice in residential conveyancing, where each party bears their own costs.

The argument for imposing non-litigation costs has always been that in enfranchisement or lease extension claims, a landlord is being forced to sell his or her asset, and that that justifies a departure from the costs arrangements that operate in open market sales of residential property, where any valuations and final price will reflect the fact that each party must pay their own costs. However, when it comes to lease extensions or freehold purchases, a landlord is obviously not simply being compensated for the value of the asset they are being compelled to sell. They are instead securing, through the payable premium, a share of the profit to be made from selling to the leaseholders in question. In addition, as things stand, through capitalised ground rents they are extracting funds from leaseholders over long periods—often decades—prior to securing that profit share for no explicit services in return, a point that the hon. Member for Redditch made.

The valuations of lease extensions and freehold acquisitions under the existing statutory regime rely on prices agreed via an open market transaction, but those valuations do not account for the fact that leaseholders are expected to pay their landlord’s non-litigation costs. A landlord in an enfranchisement or extension transaction therefore receives both a price for the asset being sold, which reflects the market rate without non-litigation costs factored in, and their reasonably incurred non-litigation costs on top.

As the Law Commission’s 2020 final report on enfranchisement puts it, the effect of the law and current market practice is that

“the landlord is over-compensated for the non-litigation costs that he or she has to incur in order to transfer the interest to the leaseholder.”

In addition to the fact that landlords are over-compensated for non-litigation costs, many of those who are better resourced use the fact that such costs are borne by leaseholders as leverage in negotiations on the price of the lease extension or freehold acquisition, confident that the expense of challenging those costs in tribunal will dissuade many leaseholders from doing so.

The Opposition’s view is that freeholders should not receive compensation in respect of non-litigation costs. The fact that a landlord sells his or her asset and receives a share of the profit as a result is not sufficient justification for departing from an arrangement in which reasonable non-litigation costs are factored into the ultimate price. That is not least because the decision to enfranchise or extend a lease is often not discretionary; it is often a requirement brought about by the fact that a lease is due to expire, because the payable premium is rising as the lease shortens or as a result of the decision to move or re-mortgage.

We therefore fully support the intention behind clauses 12 and 13 to provide for a new regime based on the principle that leaseholders are not required to pay the freeholder’s non-litigation costs in those circumstances. We note the Law Society’s concern that landlords are being asked to bear their own non-litigation costs despite the fact that the proposed standard valuation method provided for by schedule 2, which the Committee has just considered, will lead to payable premiums below full open market value because it caps the capitalisation rate. However—this point touches on one of our previous debates—political decisions set the rules of the game for market competition. In our view, it is simply not the case that there is some kind of inherent market value for premiums that is entirely independent and autonomous of legislation in this area. Every sale of a flat and every lease extension process relating to a flat since 1993 has been undertaken against the backdrop of the 1993 Act, which reduced ground rents to a peppercorn.

The market value for premiums is shaped by the laws this House passes, and it is right in principle that, to achieve the Bill’s objectives of making it cheaper and easier for leaseholders in houses and flats to extend their lease or buy their freehold, leaseholders do not pay non-litigation costs in addition to the payment of a premium, as determined by the new method proposed in schedules 2 and 3. It is because we believe that leaseholders should not be liable for these costs as a result of an enfranchisement or lease extension claim on principle, irrespective of the method by which the premium is calculated, that we take issue with the fact that the clause as drafted does not protect all leaseholders from liability for costs incurred.

As the Minister has made clear, the clause entails only a selective extension of rights in this area, because it does not ensure—as the press release that accompanied the publication of the Bill claims it does—that all leaseholders will no longer have to pay their freeholder’s costs when making a claim. Instead, by means of proposed new section 19C, it makes exceptions to the general rule whereby the price payable for the freehold or extended lease is below an amount to be prescribed in regulations.

We understand the rationale for the proposed new section, namely that leaseholders should pay a freeholder’s non-litigation costs in such circumstances, so that low-value claims do not cost the freeholder money; the Minister has been very clear that the Government believe that that must happen to ensure that the process is fair for both sides. We also appreciate that there are risks in prohibiting a landlord from passing on non-litigation costs to leaseholders in instances in which they would be required to spend more in carrying out the transaction than they received for the asset. The Law Commission highlighted a number of those risks in its final report on enfranchisement, including the incentive created for landlords not to co-operate with a claim, or for them to transfer the low-value freehold into the name of a shell company, then liquidate the company and ensure that the lease becomes bona vacantia.

We are concerned, however, that exempting claims below a certain value will create a different set of practical problems. I hope I can get the Minister to engage with those problems, with a view to convincing him to reconsider. They include costly and time-consuming disputes in cases in which the price payable is close to the level of the non-litigation costs in question for low-value claims, and the potential for landlords to game the new system by arguing for a price payable below the threshold, in order to secure both it and associated non-litigation costs because of the burden of disputing the amount.

We appreciate that the Government have incorporated into the clause the Law Commission’s recommended remedy, namely that in low value claims for which the non-litigation costs are higher than the premium payable, the leaseholder would be required to pay the lower of the two values, one of which is to be prescribed by the Secretary of State. However, we believe that it does not entirely remove the potential for significant disputes to arise between leaseholders and freeholders, with leaseholders in a weak position to challenge them because of the cost and time required. We therefore worry that the prescribed sum, at whatever level it is ultimately set, will become the minimum sum payable to enfranchise. We are concerned that the difficulties of challenging a claim to the prescribed sum will deter some leaseholders from initiating the process of extending their lease or from acquiring their freehold altogether.

Taking a step back, we fail to see the logic in the Government’s position. On the one hand, they seem to be ignoring the Law Commission’s recommendations in relation to costs; they have chosen to provide for a general rule that leaseholders are not required to make a contribution to their landlord’s non-litigation costs, but have not chosen to adopt a valuation methodology that seeks to reflect open market value, which was the commission’s stated prerequisite for such a rule. On the other hand, they are following strictly the commission’s recommendations in respect of low-value claims.

Put simply, we believe that, by means of this Bill, we should take the political decision—it is an explicit political decision—to exempt all leaseholders from paying the costs incurred by landlords in processing enfranchisement or lease extension claims. Amendments 4 and 5 would omit proposed new section 19C of the 1967 Act and proposed new section 89C of the 1993 Act, thereby removing any exception to the general rule that leaseholders are not required to pay the freeholder’s non-litigation costs in such circumstances. Having argued my case on the basis of the practicalities, I live in hope that the Minister might reconsider.

[Barry Gardiner]

Can my hon. Friend clarify whether the proposals in his amendments 4 and 5 would cover my own amendment 128, which deals with the exactly parallel situation in which each side bears its own costs, but in relation to leasebacks?

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[Matthew Pennycook]

I will have to come back to my hon. Friend on that point, but my understanding is that, by deleting the relevant proposed new sections, amendments 4 and 5 would ensure that in all circumstances non-litigation costs will not be chargeable to leaseholders. That was certainly the Opposition’s intent in proposing the amendments.

[Rachel Maclean]

I ask the Minister to clarify a couple of points. It is extremely unusual for me ever to find anything in his comments to disagree with or depart from. If I heard him correctly, however, I think he stated that he thought it was unlikely that landlords would ever seek to circumvent the intent of the Bill. Possibly I took that out of context, but I suggest strongly that, on the contrary, it is extremely likely that landlords will intend or try to circumvent the intent of the Bill, because that is what we have seen from freeholders over decades. That is why we are in the position that we are in.

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[Lee Rowley]

I will briefly address those points. I understand the broad point made by the hon. Member for Greenwich and Woolwich. If we need to look at specific areas in more detail, I would be happy to receive those from him outside the Committee. We think that the structure will work and is effective. On the point that my hon. Friend the Member for Redditch made a moment ago, officials have spent a significant amount of time trying to make the provisions as watertight as possible. Can I guarantee on absolutely everything that there is no possibility that we have missed something? No. That is why I am happy to take further information from any colleagues on the Committee, but we think that this is a valid prospectus on which to proceed.

My hon. Friend made a point about my potential naivety, although that is not how she described it. I assure her that having dealt with freeholders from a building safety perspective now for 16 months, even though I have dealt with this sector for only a couple of months, I am under no illusions about the cynicism of part of that sector. Even when we go through legal processes—I know that colleagues in this room have had a great deal of this, particularly those who represent urban areas—and it is absolutely clear and staring us in the face that there are responsibilities and requirements to do things with regard to building safety, it is absolutely extraordinary that some freeholders continue to seek to get around their obligations and must be dragged kicking and screaming to them.

I listened to a rather erroneous and misleading discussion on the “Today” programme this morning where the BBC presenter said, “It is all terrible on building safety. An insufficient amount of progress has been made in terms of building safety a number of years on from the very sad events of Grenfell.” It is also the case that a substantial amount of work is going into dragging some of the freeholders to do the things that they are supposed to do in the first place and have the basic humanity to recognise that they need to provide buildings that are safe for people to live in.

I hope that I have assured the Committee that, if nothing else, I am absolutely cognisant of some of the challenges that were indicated by my hon. Friend the Member for Redditch. We hope that the elements that I articulated in my initial comments address some of the egregious situations. One of the reasons why we are tightening covenants is to ensure that there is not a workaround or way around some of the things that we have talked about.

I say to all three hon. Members, including the hon. Member for Brent North, that there is always a balance to be struck, but we are trying to make this as watertight as it can be. Although we cannot accept the amendment, if there is something that we genuinely think we have forgotten or missed, I will happily take further information, separately, and look at it again. We think this provision is okay, but I am always happy to take further information, if it would be helpful.

[Matthew Pennycook]

I thank the Minister for that response. Before turning to amendments 4 and 5, I have a brief note about the amendment tabled by my hon. Friend the Member for Brent North. It is a very strong idea, and there is a genuine deficiency in the law. If he is minded to press it to a vote, I would certainly support him. He may want to return to it at another date.

On amendments 4 and 5, perhaps I have misunderstood the Minister. We are not trying to make the argument that the Government have forgotten to include something in the Bill or that there is something missing; the point is that the exemption that they are providing for low-value claims will cause problems. I have taken on board what the Minister said about the Government’s position being that the exemption is essential to ensure that the new process is fair, but we are very concerned that the prescribed sum that the Secretary of State will bring forward will become the de facto minimum amount payable for those low-value claims. Because of the problems challenging that, I think that leaseholders will be deterred from taking this process forward. That is the best-case scenario.

The worst-case scenario—I fear that this is the more likely scenario, for the reasons outlined by my hon. Friend the Member for Brent North and the hon. Member for Redditch in relation to the behaviour of some freeholders —is that it will become a recipe for litigation and gaming of the low-value exemption in ways that will be detrimental to leaseholders. With that in mind, I am minded to press amendment 4 to a vote and, if that is successful, amendment 5 as well.

[Barry Gardiner]

There is a word in the clause that the Minister should pay very specific attention to. Line 29 of proposed new section 89D states that

“‘non-litigation costs’ means costs that are or could be incurred by a freeholder”—

I stress “could”. If the Minister is minded to look at this again, he should ask his officials to do some calculations about what the costs could be. I recognise the figures and have no wish to detain the Committee by pressing this to a vote. I am happy to support my hon. Friend in pressing amendment 4 to a vote, but if the Minister can give me an assurance that he will ask his officials to do that homework, I will not press the amendment.

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[Matthew Pennycook]

We take no issue with any of the Government amendments in the group. I rise to speak briefly in relation to clauses 14 to 17, which, as the Minister has said, concern the jurisdiction of the county court and tribunals.

The current law divides the responsibility for resolving enfranchisement disputes between the county court and the tribunal, but there is considerable evidence that this creates complexity, can cause confusion and additional expense for the parties, and creates discrepancies due to the differing powers of the county court and of the tribunal to order one party to pay the other’s litigation costs. The workaround that has been attempted—namely, the increased deployment of tribunal judges as county court judges and vice versa—has not overcome the inherent tensions regarding the division of power in this area.

As the Minister has said, clauses 14 to 17 variously amend both the 1967 and 1993 Acts to transfer jurisdiction from the county court to the first-tier tribunal for a number of matters and provide the FTT with the necessary additional powers to exercise its expanded jurisdiction. We welcome these sensible clauses, which enact recommendation 82 of the Law Commission’s final report on leasehold enfranchisement. Although it is our hope that a number of measures in the Bill will have the effect of reducing the frequency with which disputes arise during enfranchisement claims, a great many still will. It is sensible to give a single body responsibility for them, and for that body to be the FTT, given its skills and expertise.

We welcome these clauses, but I want to probe the Minister on the issue of the first-tier tribunal’s ability to deal with all enfranchisement disputes. The tribunal’s present caseload is not unduly onerous, but, following the end of the pandemic, it has reported a gradual increase in its leasehold management work—in particular, challenges relating to service charge costs—as well as more applications for rent repayment orders. In addition, it now has responsibility for resolving the vast majority of disputes arising from the Building Safety Act 2022, including those concerning remediation orders and remediation contribution orders under part 5 of that Act.

The Government are proposing to increase the tribunal’s workload through the changes that they are making through the Renters (Reform) Bill, which is still making its way through the House. In particular, the new statutory procedure for increases of rent that that Bill provides for, with an expanded right for tenants to challenge, is likely to see the level of market rent referrals that the tribunal deals with rise. Now the Government are proposing, through this Bill, that the tribunal also be given responsibility for resolving all enfranchisement disputes. As I said, although we welcome the proposal to do so, the obvious risk of enacting this combination of further and expanded jurisdictions for the tribunal, in the absence of additional funding, judges and court staff, is that it will result in backlogs.

We therefore seek reassurances from the Minister that the Government are thinking seriously about how they will ensure that the first-tier tribunal will be adequately resourced to effectively and efficiently discharge all its new and proposed responsibilities, including in relation to this Bill. Could he tell us what additional resources the Government are proposing to allocate to the property tribunal, and what initiatives are being considered to ensure that it has the relevant skills and capacity to guarantee that it can do that?

[Lee Rowley]

I welcome the support from the Opposition. As the hon. Gentleman also indicates, these are sensible approaches to take. He is right to highlight his very valid point about capacity within the first-tier tribunal; I am glad that we agree on the principle. He is absolutely right that there is a practicality element, should it survive the continuation of the processes in both this House and the other House. It would be subject to a justice impact test, which, as I understand it, includes a review of capacity, and it would be considered at that point, should it progress through to legislation.

[Matthew Pennycook]

I welcome those reassurances from the Minister.

Amendment 35 agreed to.

Amendments made: 36, in clause 14, page 27, line 27, leave out subsections (3) and (4) and insert—

“(3) An application may not be made under subsection (1) to the court unless the application relates to proceedings in respect of which the court has jurisdiction under or by virtue of any provision of this Part (including section 21ZA).”

This amendment provides that applications under section 21A of the 1967 Act may be made to the county court only if the court is dealing with related proceedings under the 1967 Act.

Amendment 37, in clause 14, page 28, line 5, leave out subsection (7).

This amendment is consequential on Amendment 36.

Amendment 38, in clause 14, page 29, line 8, leave out from beginning to end of line 41.—(Lee Rowley.)

This amendment removes provision that is reproduced by Amendment 35.

Clause 14, as amended, ordered to stand part of the Bill.

Clause 15 ordered to stand part of the Bill.

Clause 16

Amendment of Part 1 of the LRHUDA 1993

Amendments made: 39, in clause 16, page 32, line 43, at end insert—

“(ha) any matter arising under paragraph 12 of Schedule 11 (reduction of rent under intermediate leases on grant of a new lease), including what rent under an intermediate lease is apportioned to the flat;”.

This amendment is consequential on Amendment 73.

Amendment 40, in clause 16, page 33, line 26, at end insert—

“(5A) In relation to paragraph 12 of Schedule 11—

(a) if the landlord under a qualifying intermediate lease cannot be found or their identity cannot be ascertained, the appropriate tribunal may make such order as it thinks fit, including—

(i) an order dispensing with the requirement to give notice under paragraph 12(3) of Schedule 11 to that landlord, or

(ii) an order that such a notice has effect and has been property served even though it has not been served on that landlord;

(b) make an order appointing a person to vary a lease in accordance with paragraph 12 of Schedule 11 on behalf of the landlord or tenant;

(c) if the appropriate tribunal makes a determination that a notice under paragraph 12(3) of Schedule 11 was of no effect, it may—

(i) determine whether another landlord or tenant could have given such a notice, and

(ii) if it determines that they could have done so, order that paragraph 12 of Schedule 11 is to apply as if they had done so.

(5B) The variation of a lease on behalf of a party in consequence of an order under subsection (5A)(b) has the same force and effect (for all purposes) as if it had been executed by that party.”

This would give the tribunal jurisdiction to deal with cases where landlords cannot be found or identified, to appoint a person to execute a variation of a lease (eg. if a party to the lease is absent or unco-operative), and to enable the Schedule to continue to apply if the notice given was of no effect.

Amendment 41, in clause 16, page 34, line 36, leave out from beginning to end of line 2 on page 35 and insert—

“(3) An application may not be made under subsection (1) to the court unless the application relates to proceedings in respect of which the court has jurisdiction under or by virtue of any provision of Chapter 1, 2 or 7 (including section 91A).”

This amendment provides that applications under section 92 of the 1993 Act may be made to the county court only if the court is dealing with related proceedings under the 1993 Act.

Amendment 42, in clause 16, page 35, line 17, leave out subsection (7).—(Lee Rowley.)

This amendment is consequential on Amendment 41.

Clause 16, as amended, ordered to stand part of the Bill.

Clause 17 ordered to stand part of the Bill.

Clause 18

No first-instance applications to the High Court in tribunal matters

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[Lee Rowley]

The ground rent buy-out right was recommended by the Law Commission and enables leaseholders to buy out their ground rent without extending their lease. As the buy-out is subject to the 0.1% freehold value cap, with some exceptions, the right will be especially useful for leaseholders with high or escalating rents. The right is introduced by clause 21, which introduces schedule 7, where the right is detailed. Ground rent buy-out claims can be brought by the leaseholder serving a rent variation notice on the landlord for the lease to be varied on payment of a premium, so that the rent payable is a peppercorn. The ground rent buy-out amendments, which stand in my name, mostly simplify and clarify the provisions in schedule 7.

Amendments 44 and 75 concern the nature of, and right to, a ground rent buy-out. Amendment 44 would amend clause 21, and amendment 75 would make a similar amendment to the first paragraph of schedule 7. Both have the intention of better describing the nature of the right, and I commend the amendments to the Committee.

I turn now to clause 21 itself. As I have explained, leaseholders with very long remaining leases may want to buy out their ground rent without having to extend their lease. For some leaseholders, adding further years to an already long lease might be considered unnecessary or involve additional costs. The buy-out will be useful to those leaseholders with high or escalating ground rents who find themselves in difficulty when trying to sell or remortgage their property. There is currently no statutory right for buying out ground rent without extending a lease, and a voluntary buy-out, if it could be negotiated, would not benefit from the cap. A new right for leaseholders to buy out their ground rent is therefore necessary.

Clause 21 brings schedule 7 into effect. Schedule 7 makes provision for a new right to buy out the ground rent under a lease with a remaining term of 150 years or more. As we discussed this morning, 150 years was chosen as the threshold for this right so that the term remaining is long enough for the leaseholder to be unlikely to want to extend the lease. A lower minimum term would create a risk that poorly advised leaseholders might buy out the ground rent when an extension is in their interest, only to find that they need to extend later and have to pay for two sets of transaction costs.

On the payment of a premium to the landlord, the lease is varied so that the future ground rent payable is a peppercorn. The buy-out premium is subject to a 0.1% freehold value cap, so any future ground rent payable that exceeds 0.1% of the freehold value of the property is treated in the calculation of the premium as if it is only 0.1% of the freehold value. This ensures that high or escalating ground rents, such as those that were articulated in the Committee’s discussions last week, do not make the premium unaffordable for leaseholders. As such, the ground rent buy-out right will be especially useful for leaseholders with long terms remaining who have high or escalating ground rents. I commend the clause to the Committee.

[Matthew Pennycook]

For the purposes of anyone following our proceedings, there are several issues that we wish to raise in relation to clause 21 and schedule 7, but we will do so when we come specifically to debate schedule 7, which, as the Minister said, is where the right is detailed.

[Rachel Maclean]

If it is the case that I can speak to schedule 7 at a later time, I will defer my comments till then.