Leasehold and Freehold Reform Bill (Second sitting)

Mike Amesbury Excerpts

Committee stage
Tuesday 16th January 2024 Public Bill Committees

[Matthew Pennycook]

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

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

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

[Mike Amesbury (Weaver Vale) (Lab)]

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

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

[Mike Amesbury]

Q Have the Government spoken to you about why they have seemingly rowed back on the direction of travel on commonhold?

Professor Hopkins: Since we published our reports in 2020, we have been supporting the Government as they work through the reports and develop their legislative plans, but I cannot speak for what decisions they have made and what has led them to make those decisions on what is and is not in the Bill.

[Ms Marie Rimmer (St Helens South and Whiston) (Lab)]

Q Good afternoon, professor. You have provided several recommendations to the Government on leasehold enfranchisement. Do you believe that the provisions in the Bill will make it easier and cheaper to buy a freehold or extend a lease?

Professor Hopkins: Yes, they certainly will, and I will draw attention to a number of provisions. First, those that deal with the price that leaseholders will pay will ensure that it is cheaper. For the first time, how that price is calculated is mandated, and it is designed to identify the value of the asset that the leaseholder is receiving. At the moment, the focus is on compensating the freeholder for the asset they are losing. The price will consist of two elements. There will be a sum of money representing the terms and buying out the ground rent, but that will be capped so that onerous ground rents are not taken into account in calculating that sum, and a price representing the reversion, which would be the value today of either a freehold or a 990-year lease that will come into effect at the end of the current lease. In calculating those elements of the price, the deferment and capitalisation rates will be prescribed, so that will remove the current disputes.

The price is mandated and the price is cheaper, and there are other things in the Bill that will help, such as the ability of leaseholders to require the landlord to take leasebacks of property when they are exercising a collective enfranchisement so that, for example, they do not have to pay for the expense of commercial units that they do not want responsibility for. There is a lot in there. There is reducing price and also reducing the ability for disputes to arise.

I will also refer to the provisions on costs that will generally ensure that parties pay their own costs in relation to a claim. Leaseholders will not be paying the costs of freeholders.

--- Later in debate ---

[Rachel Maclean]

Q That is really helpful, although it was not quite what I was trying to get at. If you are a freeholder, you may also be an insurer. A lot of big freeholders are insurers, and pension funds and so on, that are underwriting the pensions of many people in the country—in the NHS and so on. The claim that they have made is that in the past some of the leaseholders have bought out their freeholds. I might have slightly misunderstood the situation, but it has been put to me that, now that this flow of insurance is no longer coming to the insurers—or, to put it another way, now that the service charges and so on that are paid by the leaseholder to the freeholder are no longer coming to the insurance industry—that will somehow destabilise the insurers’ balance sheets and make them unable to meet their commitments. Is that something that you recognise, from your industry perspective? I am not talking about the individual leaseholder.

Matt Brewis: I do not believe that the size of the insurance part of the market is significant enough to destabilise any firms. I have not heard that claim before, but I do not think that this part of the market, in the types of firms that we are talking about, is of a size that would cause structural issues.

[Mike Amesbury]

Q In September, Sheldon Mills, an executive director at the FCA, issued a strong statement:

“Insurance firms must now act in leaseholders’ best interests and ensure that their policies provide fair value.”

Now I will give you a live case, which happens to be in a neighbouring constituency to mine. It is called The Decks. They have a remediation day and Taylor Wimpey has accepted responsibility, yet insurance premiums are going up again—poor value and high cost, as I think was cited in the review. New year was going to be a new broom to intervene and shape the market, yet you have got insurance companies like this, and many more up and down the country, laughing at people in this room—key stakeholders such as yourselves. What are you going to do? What powers have you got to intervene? Also, we have discussed insurance. Are clauses 31 to 33 in part 3 sufficient to deal with the issue?

Matt Brewis: Our new rules around ensuring that these products are fair value came into force on 31 December last year. The cost of insurance of multiple-occupancy buildings has increased, and our report of 2022 found that this was not an area where insurers were making significant profits, or super-profits, of any form because of a number of different parts—around fire safety risks, but more to do with some of the structural issues around the quality of the buildings and how they had been constructed. Escape of water was something that was causing significant losses in these buildings.

We found some of the biggest issues around the brokerage charges, which were increasing, and the payaways—payments that insurance brokers were making to property managing agents for services that they were apparently providing for them. So our new rules require them to be very clear what value they are providing and how they are doing that as brokers, as managing agents, and for that to be made clear to the leaseholders. We are undertaking reviews of those with a number of firms. This will provide leaseholders with more information so that they can challenge their freeholders, so that they can challenge the insurers and the brokers at a tribunal if necessary.

Where this Bill goes one step further is that although, as I have explained, we are not responsible for the managing agents or the freeholders, by effectively banning those payments of any commissions, as the Bill does in the clauses that you mention, it will go significantly further than I can with the powers that the FCA has to restrict the payments to other parties and therefore to reduce the cost to leaseholders. In my view, this is in line with the recommendations that we made in that report and results in a better product—a cheaper product—for leaseholders.

[Andy Carter (Warrington South) (Con)]

Q This morning, we heard from the founders of the National Leasehold Campaign about some of the poor practices that their members had told them about. Do you think that provisions in this Bill make it easier for consumers? Do they address the challenge of transparency and the ability to obtain information from freeholders in a way that will be noticeable to owners of leasehold properties?

Matt Brewis: In terms of the provision of information, yes. And it goes alongside the rules that we have introduced that require brokers and insurers to pass information to the freeholder to pass on to the leaseholder. This further tightens up that. It allows for leaseholders to take their freeholders to tribunal to reclaim costs, as necessary, that have been incurred. So this does go further, and I welcome that.

--- Later in debate ---

[Rachel Maclean]

Q Thank you. I will ask a second question, if I may. You mentioned the issue of the pump room. Can you explain very briefly what the issue of the pump room is? Is this for a conversion or an enfranchisement claim? Where is the pump room issue coming into play?

Harry Scoffin: It is for mixed-use buildings that would otherwise benefit from the 25% non-residential premises limit going up to 50%. Let us say that you have an underground car park, a plant room or maybe, more recently, a heat network. Basically, because you are now linked, almost like Siamese twins, with a hotel, for example, or some shops, under the current 2002 Act for right to manage and even the 1993 Act for buying your freehold, you are out. So even though the Law Commission and the Government mean well, saying, “We’re going to liberate mixed-use leaseholders,” for many of those mixed-use leaseholders, where they are completely linked with the commercial, it is game over; you will never be able to qualify. That definitely needs to be revisited because the Government will not get any political benefit from moving, rightly, from 25% up to 50% and even to mandatory leasebacks for when you buy the commercial.

The quick argument—the Law Commission understood it—is that at the moment, the plant room will normally be managed, yes, by the hotel, but the freeholder for the flats will appoint a managing agent who will also have access to the plant room. We are not changing that position. The only difference is that the managing agent that the freeholder appointed, who has access to the plant room, would now be working directly for people like my mum. So it is not disrupting—we are not going to become hoteliers. We are not going to become shop owners. If we rely on a service and are paying for it—53%, mind—we should have access to it, but the key thing is that we need the right to manage. Without right to manage, or without buying the freehold, you are, literally, perpetually in this abusive relationship with a freeholder who has your cheque book and is spending it how he likes, whether that is reasonable or not. That is a fact.

On the point about section 24, that needs to be revisited so that the manager, where a tribunal deems it appropriate, can be the accountable person. In our building, we have mobilised—ironically, it is over 50% of the leaseholders. We now face going back to them—with their cash, by the way—and saying, “We can’t now get one because of this unintended consequence of the Building Safety Act”. That is a quick bit of drafting— I have spoken to lawyers about it. It would be very easy for you guys and that would help, particularly on cladding developments, where the cladding is not getting done because the freeholders are sitting on their hands. You need an officer of the court who is going to turn around the development and be accountable.

Karolina Zoltaniecka: Can I say something about the right to manage? At the moment, the process is so complex. There are three notices that need to be served. I believe there needs to be only one, to say to the freeholder, “We are taking over the right to manage and this is the date we are going to do it on”, and that is it. There are solicitors who specialise in analysing notices to pick holes in them to prolong the process, so that leaseholders give up, and costs just go up and up. And I completely agree with the forfeiture point from Harry. It is unnecessary and a breach of lease, and especially, arrears can be taken to the county court to recover if the arrears are real.

[Mike Amesbury]

Q Is leasehold ownership home ownership?

Harry Scoffin: No, it is a tenancy scam. You do not own anything. You own the right to sell on a bit of space in a flat you occupy. You do not own, even though you may have paid a freehold price and you thought you owned it—you do not.

[Mike Amesbury]

Q Given that the Bill does not ban new leasehold flats—70% of leaseholds happen to be flats—is leasehold, the feudal system, still alive and kicking?

Harry Scoffin: Completely, because—

[Mike Amesbury]

In England and Wales?

Harry Scoffin: Yes, because people are coining it in and they want to keep it that way. I understand that a political decision was made by No. 10 not to have commonhold in the Bill and not to say even “a share of freehold”. Let us do that. Let us work with the Government to get share of freehold in. That is maybe an English fudge, but at least it gets us halfway to the ideal of commonhold, whenever it comes. I am not going to hold my breath for commonhold, sadly, because we have wasted the last seven years talking about it.

[Mike Amesbury]

Keep going.

Karolina Zoltaniecka: I would not give up on it; it is well worth waiting for.

Harry Scoffin: We need share of freehold in the meantime, at least.

[Richard Fuller]

Q Part 4 of the Bill is called “Regulation of estate management”, which I think is a particular area of interest for you. You said that it all starts at the beginning, when councils and developers decide to do that. Do you think that getting control of that is an essential part of the effective regulation of estate management?

Halima Ali: I do not agree that it is. All it is doing is creating a two-tier system where a set of homeowners, like myself, living on a private estate are dealing with this situation, whereas other homeowners are not. I do not see how regulating it is helping, because overall, the management company still get to set the fee.