Leasehold and Freehold Reform Bill

Richard Fuller Excerpts

2nd reading
Monday 11th December 2023 Commons Chamber

[Michael Gove]

I won’t at this stage.

I freely admit that this Bill does not go as far as some in the House and elsewhere would like. Strong arguments have been made about how property agents can be better regulated and Lord Best in another place has made arguments that I find incredibly persuasive—so why not legislate for them now? Well, as I mentioned earlier, this Bill has many clauses, deals with technical aspects of property law, requires close scrutiny and is likely to face a lobbying exercise from deep-pocketed interests outside attempting to derail it. Legislating to give effect to Lord Best’s proposals and to set up a new regulator—I am always a wee bit wary about setting up new quangos but on this occasion he makes a good case—would require significant additional legislative time of a kind we simply do not have in the lifetime of this Parliament. There are changes we are making overall in order to deal with some of the abuses for which managing agents are responsible, but there is still some unfinished business. I happily grant that, and there are organisations like FirstPort, which many of us will be familiar with from our work as constituency MPs, that require some gentle direction towards behaving in a better fashion.

[Richard Fuller (North East Bedfordshire) (Con)]

I am grateful to my right hon. Friend, my hon. Friend the Member for Redditch (Rachel Maclean) and Ministers for bringing the Bill forward. The Secretary of State spoke about leasehold improvements and improving the rights of leaseholders, but he will be aware that part 4 of the Bill looks to protect and improve the rights of families who hold the freehold of their property against the estate management charges about which he is speaking; the Bill does a lot to meet some of the requests of many of my Conservative colleagues on this matter.

One issue that is not addressed in the Bill, however, is the right to manage. In the 2019 response to the 2017 consultation, the Government said they would look at that and introduce legislation. What is the current Government thinking on giving people the right to manage, and therefore to take back control from the estate management companies?

[Michael Gove]

My hon. Friend makes a good point. I was going to say there are two other areas in particular that we should look at in Committee: the right to manage; and the abuse of forfeiture, which is sometimes used by freeholders to intimidate leaseholders. I am very open to improving the Bill in Committee; we will be improving it ourselves by bringing forward the legislation that will ban new leasehold homes in the future, so I hope we will have a chance to do that.

I mentioned earlier that we have been debating leasehold and freehold in this place for a long time. In the preparation of this Bill, one of the brilliant civil servants in the Department drew to my attention comments made by Harry Levy-Lawson, 1st Viscount Burnham and MP for St Pancras, as it happens, when the Leasehold Enfranchisement Bill 1889 was brought forward by another great reforming Conservative Government under the Marquess of Salisbury.

Leasehold and Freehold Reform Bill (First sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 16th January 2024 Public Bill Committees

[Mike Amesbury (Weaver Vale) (Lab)]

Q Hello Martin, good to see you. Are there any risks in banning new leasehold houses but not flats?

Mr Martin Boyd: Yes, there are risks. Currently, we do not have a viable commonhold system. Even if the Government were to come forward with the full Law Commission proposals, those had not reached the point where they created all the systems necessary to allow the conversion of leasehold flats to commonhold flats. I see no technical reason at the moment why we should not move quite quickly to commonhold on new build for extant stock. I think it will take longer—and, at the end of the day, conversion will be a consequence of consumer demand. People would want to do it. On my side, I would not want us to convert to commonhold, because I could not yet be sure that it would help to add to the value of the properties. It would make our management of the site a lot easier, but I could not guarantee to anyone living there that it would add to the value of their property—and that is what people want to know, before they convert.

[Richard Fuller (North East Bedfordshire) (Con)]

Q Mr Boyd, I want to pick up something you said in answer to the shadow Minster, when you were talking about the treatment of property managers or managing agents in the private sector. You enumerated a list of three options: a code of conduct, which you said existed in the social sector; legislation or regulation; and also qualification, which I took to be professional qualification. Which of those three is the preferred path, in your view?

Mr Martin Boyd: I do not think the Leasehold Advisory Service would have a specific preferred path. At least two of those are important. I will add a fourth, actually. It is illogical that we do not have a requirement for professional qualifications for those managing particularly complex buildings.

[Richard Fuller]

Q Why is it illogical? I have no qualifications to be an MP; I am supposed to look after lots of things.

Mr Martin Boyd: I will be cautious, so that I am not rude in answering that. There are a set of skills that you would expect to acquire as an MP, and a certain set of skills that you need to acquire as a property manager. Buildings are complex entities, particularly large buildings. They have a lot of plant and a lot of complex systems. There is quite a complex interaction with the people who live in those buildings. There are voluntary qualifications that we have in the sector. The Secretary of State decided recently that there should be a mandatory level of qualification in the social sector. I do not see there being a logic in saying that we need one or the other.

In terms of regulation of managing agents, there is a problem. The ex-chair of the managing agents’ trade body said that it is perfectly legal to set up a property management company in your back bedroom in the morning and be collecting a large amount of money in the afternoon, without any regulation. I think that is a problem. One of the issues not considered in the Bill—perhaps it would not be relevant, although the Government need to consider it at some point soon—is that there is still no proper control of leaseholders’ funds. It is very likely that the two largest managing agents in this country hold between them somewhere between £1 billion and £2 billion. There is no Financial Conduct Authority regulation of how that money is held.

[The Chair]

Just one more question—we have many coming up.

[Richard Fuller]

Q I notice in Mr Boyd’s resume that LEASE is

“to champion the rights of leaseholders and park homeowners.”

I have a number of park home owners in my constituency, as I am sure many colleagues do. Are there any provisions in the Bill, or is there anything that could be added to it, that would improve the lot of park home owners?

Mr Martin Boyd: Yes, there is, but again that goes on to the long list of things that could be added to the Bill. Park homes have been a difficult area for many years. It is a relatively small part of LEASE’s work, but it is work that will be expanding as we move forward. I am more than happy to talk to you about some of the provisions on park homes that could be added.

[Richard Fuller]

There is nothing that leaps out at this stage.

Mr Martin Boyd: Nothing leaps out.

[Barry Gardiner (Brent North) (Lab)]

Q Mr Boyd, you just spoke about the accounting of funds. At the moment, there is no requirement to show any separation between sinking or reserve funds and the normal service charges for managing the property. Many leaseholders have suggested that that is a problem, and that they are not clear what is happening with their sinking fund. Sometimes they believe that the moneys that were there for future capital works on the property are being raided. Would it be a good idea for the Bill to contain something that enabled leaseholders to see precisely what was happening to those reserve or sinking funds?

Mr Martin Boyd: There were proposals in sections 152 to 156 of the 2002 Act to help to improve protection for leaseholders’ funds. Currently, we are left with a set of voluntary codes. One is applied by the Association of Residential Managing Agents—the Property Institute, as it is now called—and sets out that managing agents should hold separate bank accounts for each of the sites that they manage. The Royal Institution of Chartered Surveyors’ code does not require that. I am aware from experience of my and other sites that, in the recent period of higher inflation, some managing agents used consolidation accounts, accrued the interest in the service charge funds to themselves and passed very little on to the leaseholders. So yes, I think it would be very helpful if we had greater transparency and protection.

--- Later in debate ---

[Mike Amesbury]

Q I have two brief questions. Are there any risks in terms of banning new leasehold houses but not flats? Why do you think this country is an outlier in the world and is so wedded still to this day to the feudal system of leasehold?

Katie Kendrick: You cannot just ban leasehold houses and not flats—70% of leaseholders live in flats, so you are not tackling the problem. You are cherry-picking the easy things, and banning leasehold houses is easy. It is more tricky with flats, but that does not mean it is not achievable. As you have said, it has been achieved everywhere else in the world. We do not need to continue to mask that leasehold system. It is deeply flawed and it ultimately needs to be abolished.

We do understand that there is no magic wand and this is not going to happen tomorrow, but there have been a lot of campaigners, well before us, who have highlighted the issues of leasehold, and yet here we are, still, again, trying to make it a little bit fairer. It does not need to be a little bit fairer—it needs to go. That needs to be the ultimate aim. Everybody needs to work on this. There is something better out there, despite what the other lobbying groups will tell you.

[Richard Fuller]

Q This is a question I will ask a number of witnesses. We do an impact assessment for legislative change to all Bills, sometimes done well and sometimes less so. This has an assessment of the total cost of the Bill, with the best estimate being £2.9 billion. That is quite large for a Bill. A large part of that—about two thirds—is a transfer of the value from freeholders to leaseholders. That is at £1.8 billion, or £1.9 billion. What are your thoughts about that transfer of wealth?

Jo Derbyshire: It is long overdue; bring it on.

[Richard Fuller]

Q From that, are you implying that your view is that it has been a rip-off to date, and therefore there are monies that you should have been having for all the years you have been paying and there was no value to it?

Jo Derbyshire: If I think of my estate, there was no reason whatsoever to create leasehold houses other than to make money from the people who had bought them. That is partly why, going back to an earlier question, it is taking so long to dismantle the system in this country: it is because there is so much money for nothing in it. That is why it is so hard to dismantle it.

[Richard Fuller]

Q I cannot remember whether it was you, Jo, or Kate—if I may call you by your first names—who works in a pension fund.

Jo Derbyshire: I work in a pension fund.

[Richard Fuller]

Q On the change in pension funds and investments, you may have different views about how important that is and my colleague asked you that question. However, putting yourself in the place of the people who own the freehold—some may be large overseas entities, some may be members of the peerage of the realm and there may be others—what is your view and what assessment have you made of the impact on them?

Jo Derbyshire: From my perspective, it is just about how all investment carries risk. This is no different. This is about rebalancing the scales in terms of leaseholders and freeholders. For me, it is about fairness for leaseholders. That is what the Law Commission was tasked with a few years ago, it is what we have been fighting for over the last however many years and that is what this does.

[Barry Gardiner]

Q I apologise because I came in slightly late today, Chair, so I do not know if people have declared their interest. I should say that I am a freeholder; I am not a leaseholder. I have been a leaseholder in the past, but always with a share of the freehold.

Ms Kendrick, you said that there were things that the Law Commission report had talked about that have not been included in the Bill. One of those is in relation to shared services. Often, in a mixed development, if there is a commercial element to the block of flats, with flats above, you will find that there is a common plant room or a common car park. I welcome the provisions in the Bill that say that you can go from 25% commercial to 50%; that is a good move. However, the Law Commission actually said something specific about whether you should be allowed, if there are shared services such as the car park or the plant room, to be able to take over control, because the flats—the leaseholders—would only have control over the plant room as it related to their block. Is that a provision that you think should be introduced? Otherwise, it makes a mockery, to a certain extent, of increasing from 25% to 50% if you are still going to be precluded from gaining control of your block because of the plant room or shared services.

Katie Kendrick: Yes, there are clever ways in which they exclude people from being able to do that. We welcome the increase to 50%, but they are very creative when they design these buildings, with the underground car parks and stuff, as to what they can do to exclude the leaseholders from taking back control of their blocks. It is all about trying to have control over people’s homes. We should be able to control our homes—what is spent. No one is saying that you should not have to pay service charges, but it is about being in control of who provides those services. At the moment, leaseholders have no control. They just pay the bills.

--- Later in debate ---

[Matthew Pennycook]

Q I suppose what I am getting at is that you would not need to withhold if the enforcement clause properly covers all the requirements therein.

Amanda Gourlay: It seemed to me that when I was reading through the clauses in the Bill that it was really section 25D that stood out as the measure that was not covered by clause 30. Clause 30 very clearly enumerates that we have section 21C(1) which is about the demand for a payment; 21E, which is about the reports—obviously, between C and E there is D, which is not in there—and then we also have 21E covered. You can literally trace those measures through. D was the one that stood out for me as being a necessity.

It might be said that that is because the provision of those accounts is outside the control of the landlord, because the accountant is the person who is preparing the accounts and they may—you will understand that I am trying to argue both against myself and for myself. There is that possible argument that may be proposed as a counter-argument to mine.

[Richard Fuller]

Q Ms Gourlay, I just wanted to go to part 4, which is about the regulation of estate management charges. You talked at the outset about bringing everything together in the process and we have heard a lot about people saying how it is all a bit of a David and Goliath process, so I wanted to get your views on how effective you think some of the measures in the Bill are when it comes to trying to help David in his battle against Goliath. We should always remember that David actually beats Goliath; I do not know why or whether that is a bad thing.

You talked also about the provision of information and how important it is that people have access to annual reports and so on. In clause 49, there is a provision whereby the failure to provide things such as annual reports will carry a charge, with a maximum charge of up to £5,000. Then in clause 51, which addresses other aspects of what should be provided—in this case, charge schedules; you said how important they were—there is a maximum charge of £1,000. Does that sound like a sufficiently large sling from which a shot may be fired, or is it just a cost of doing business?

Amanda Gourlay: Again, we come back to the fact that for some landlords, particularly those that might be management companies with no other assets, £1,000 would be crippling; effectively, that might put them into insolvency unless they can recover those moneys from other leaseholders. For other landlords, even £5,000 will be next to nothing. It is a shot across the bows; it is clear that such failure is regarded with disapproval.

What I would like to do is to take those figures back, because they appear in part 3 as well as in relation to the estate management charges. The way in which they are formulated is that they are damages that can be awarded to a tenant if they make an application, certainly on the leasehold side of things—

[Richard Fuller]

Q Not in this section.

Amanda Gourlay: Not in that section.

If it is effectively a civil fine, there needs to be a sliding scale. In the tenancy deposit scheme, the way that things work is that, as you may know, if the landlord has not protected the deposit, they have to pay back an amount that is between one and three times that deposit. Some form of sliding scale would seem to be appropriate. I am not the right person to ask about sums and amounts; that is a policy question, really.

[Richard Fuller]

Q However, I think you have given some view about how you think it should be assessed.

Amanda Gourlay: I think it should be assessed on a sliding scale, to take account of the differences of interest—

[The Chair]

We have four more people who want to ask questions, so we need quick answers.

[Richard Fuller]

Q The other part is that bringing a lot of this together will mean that the first-tier tribunal has a lot more work. Do you think that people may want to get justice, but that it will be denied because the first-tier tribunal is going to be overwhelmed?

Amanda Gourlay: I would not anticipate that the first-tier tribunal would be overwhelmed. At the moment, I find that my hearings go through within a reasonable period of time. That is the best I can say.

[Mike Amesbury]

Q Would commonhold being the default position make your job less complex?

Amanda Gourlay: In the first few years, it would make it more complex, because I would have to learn about it. I have read the Law Commission’s report, and any new scheme is going to involve some bedding down. From what I read and hear about commonhold, it should make matters less litigious. That is what I hear. I have no experience of commonhold directly, however.

Leasehold and Freehold Reform Bill (Second sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 16th January 2024 Public Bill Committees

[Barry Gardiner]

Well, it has been with us for a very long time, hasn’t it?

Professor Hopkins: Yes. So the system has to work, and that is what the Bill achieves in relation to leasehold.

[Richard Fuller (North East Bedfordshire) (Con)]

Q Can we talk a little about discount rates? I think there are two, but there may be more. There is the capitalisation rate and the deferment rate. Could you explain how, if at all, the Bill changes either of those discount rates and what the rationale for that change is?

Professor Hopkins: The Bill ensures that those rates will be prescribed by the Secretary of State. At the moment, on every enfranchisement claim—whether it is the lease extension or the purchase of the freehold—the rate used to capitalise a ground rent and to determine the price paid for the reversion has to be agreed for the individual transaction. That is a significant source of dispute, and it is a dispute where there is a real inequality of arms.

The leaseholder is only interested in what they have to pay for their home and the landlords have an eye not only to that particular property, but also to what it would mean for their portfolio of investments—so they agree a particular rate on one flat in a block, for example. The Bill ensures that those rates are fixed by the Secretary of State and mandated, so there is then no argument about what rate applies in an individual case. It takes away that whole dispute and ensures that the same rates are applied in all claims.

[Richard Fuller]

Q What is the merit of allowing politicians to fix the rate? Does that not that create other hazards?

Professor Hopkins: The politician will be fixing the rate through advice that they receive.

[Richard Fuller]

Q Well, we do not allow politicians to set interest rates any more, because we realise that that was subject to political whimsy and error, so we gave that to the Bank of England—which of course is always right. I am just wondering, does there not seem to be some hazard here? I understand the point about trying to get the rate fixed and the imbalance in individual discussions, but why is it not in the Bill that it would be based on market conditions or prevailing rates? Why not go for something like that, which everyone can see and is transparent—you can feed it into a calculator—rather than allowing politicians to have that role?

Professor Hopkins: In our report on valuation, we set out a number of options for reform to reduce the price payable. In relation to the fixing of rates, we identified two separate options: they could be fixed at market rate; and they could be fixed at below market rate to reduce the price leaseholders pay to a greater extent. We put the decision on how to fix the rates as a matter for the Government to consider, and now the power is given to the Secretary of State.

[Richard Fuller]

Q If I may, I have another question. We always do an impact assessment on Bills. This one has quite a large impact assessment, which is in the billions of pounds—£2.984 billion is the present value for costs. I looked in detail at that, and the vast majority is about a transfer of value from freeholders to leaseholders; it is not about benefits from more efficient systems. If I look at the first section, £2.8 billion is transfers and £400 million is benefits. Is there a particular reason why it is so heavily weighted to transfers?

Professor Hopkins: The impact assessment is not a Law Commission impact assessment. We have provided technical input to the Government in preparing that assessment. I am not sure that I can give a definitive reason why so much more was in one pot than the other. It is probably because the Bill removes marriage value from the premium, which adds a significant sum to premiums now for leaseholders who have 80 years or less, so I think a lot of that sum is the saving.

[Richard Fuller]

Q And that was the Law Commission’s objective.

Professor Hopkins: The terms of reference that we agreed with Government for the project in relation to premium were that we would provide options to reduce the price payable while providing sufficient compensation to landlords, recognising their legitimate property interests.

[Richard Fuller]

That was very helpful; thank you very much.

[The Chair]

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

--- Later in debate ---

[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.

[Richard Fuller]

Q Actually, I was trying to say that we should stop it altogether because—

Halima Ali: Oh right, sorry—

[Richard Fuller]

I was not being very clear, I am sorry—it is my job to be clear, not yours. I think what you were saying is that this is trying to fix the problem, but the root of the problem is that councils are permitting this to go ahead.

Halima Ali: Yes, absolutely.

[Richard Fuller]

Q I am sure we will have a debate about what is and is not in scope of this Bill, in terms of that very important issue, but I wanted to hear you say that that is a crucial part of what you would understand by effective regulation of estate management.

Cathy Priestley: Yes. There are other detrimental effects on estates, other than those on the homebuyers, because non-adopted areas are not built up to adoption standard, so there is a quality issue. There is also a community cohesion issue, if you have one lot of people paying for everybody else’s open space.

[Richard Fuller]

Q The whole issue of adoption may or may not be in scope, but there were some other suggestions that you had, such as that estate management charges may not include fees for areas that are open to the general public. You feel—this is on your website—that someone can walk down a grass verge or by some trees and you are paying for that twice, through your council tax and through estate management charges. Is that right?

Halima Ali: That is correct. I will make a specific point; I am sure this is the situation nationwide as well. When I purchased my property, the council tax for band C was around £1,000. Currently, it is at £2,000. If you look at that and the average family income, there is a big disparity. How are we able to afford all this? Ultimately, we are paying council tax twice. It is unfair on us. It is unfair on vulnerable people who generally do not understand all these arbitrary rules and regulations and who are coming to us for support.

Cathy Priestley: Most of the people in our group were unaware of what they were getting into. They are unaware of the unlimited liability, because this cannot be capped. It is what it is, and it costs what it costs.

[Richard Fuller]

Q I think we can look at strengthening some of the provisions at the start and at the end, in terms of the rights if someone wants to sell their property and how people are leant on if they have not paid all the fees, affecting their ability to sell their property. I know we have limited time, but another aspect is the compensation for those who suffer these charges. If we cannot look within scope at adoption and just cancelling the whole lot, what are your thoughts, since there will be a separation of charges and a new cost structure, about enabling people who have estate management fees for common areas to deduct that off their council tax? Essentially, you would not pay twice. There will be a number of those costs that generally would be seen as being covered by your council tax in other circumstances. Do you think the Bill should include a provision where you would be entitled to pay only once for those by deducting that cost from your council tax?

Cathy Priestley: I do not know what councils would think about that. About 50% of the estate charges are just administrative fees. Councils could do it much cheaper. I do not think it would be acceptable to councils, but it would be great for us, yes.

[Richard Fuller]

It would make them adopt them quicker though, wouldn’t it?

Cathy Priestley: It certainly would, yes.

[The Chair]

Finally, we have two minutes left—Marie, please.

--- Later in debate ---

[The Chair]

Apologies: I mis-spoke earlier and missed out Richard Fuller.

[Richard Fuller]

That’s all right, Dame Caroline. Let’s stick with net present values, shall we, Professor?

Professor Leunig: Go for it—I’ll get out the calculator.

[Richard Fuller]

Q You will be aware that impact assessments are required now for all legislation, very helpfully.

Professor Leunig: Indeed, yes. It’s a very long one, by the look of it.

[Richard Fuller]

Q It is, and it seems very expensive legislation. Do you agree with that?

Professor Leunig: Yes.

[Richard Fuller]

Q The top line says that the best estimate of present value is £90 million, but then it says that the low estimate is minus £1.5 billion and the high estimate is £1.5 billion. Doesn’t that indicate that the Government don’t have a clue?

Professor Leunig: Oh, yes, absolutely. That is not necessarily reprehensible, because sometimes you just cannot have a clue.

I am often asked to forecast the future. I say, “Why did economists get the last four years wrong? Because we didn’t predict that Vladimir Putin would invade Ukraine.” Making predictions about the future as a social scientist is, by and large, a mug’s game. All you can do is stand up from first principles and say, “When do market economies work well? They work well when contracts are simple and plain and everybody understands them.” That is much truer of commonhold than of leasehold, which is why I support commonhold rather than leasehold.

[Richard Fuller]

Q What is clear, though, is that the business net present value is scored at minus £1.7 billion, so presumably we can pretty much say that the impact on business is going to be—

Professor Leunig: Does it have a range?

[Richard Fuller]

Q Not on my copy; I presume it must have, but this figure is listed at the front.

Professor Leunig: I have not seen the impact assessment.

[Richard Fuller]

Q Well, let me draw on that. The core of this is something I mentioned earlier. If you look at the benefits, there is a total of £2.8 billion of impact monetised, which is under a heading of “transfers” —so transfer of value—and there is £418 million under the heading of “benefits”. The numbers might be different because of other things later, but that is not material to the main point. What strikes you about the intention of the Bill if three quarters, 80% or 90% is about transfers and not efficiencies or benefits?

Professor Leunig: I would want to read it before giving a definitive answer, but the information that you have given me tells me that this Bill is above all a redistributive Bill. However, both of those are static estimates. The main change in property rights is usually dynamic; for example, what does it do to the incentives for people to improve their own homes? I would be surprised if that were captured in those benefits. If it is captured, I would be interested in seeing over how many years it is captured, and so on and so forth. Of course, a lot of this Bill, as I understand it—assuming that it is like every other Bill—leaves all the important stuff to secondary legislation and regulations. I imagine that those figures, in particular the figure of £2.8 billion under “transfers”, are heavily dependent on exactly how the secondary legislation is written.

[Richard Fuller]

Q So it is redistributive, primarily. It sounds that way from those numbers, but there may be some hidden benefits that have not been monetised in the report. That is helpful.

Professor Leunig: Yes.

[Richard Fuller]

Q That is helpful. What is your instinct? Most of this is about removing marriage value payments. In your understanding, what would you expect the geographic distribution of that transfer redistribution to be?

Professor Leunig: The biggest winners and losers will be in the south-east and in London, because that is where the marriage values are greatest because that is where property prices are highest. If you own a flat in Peterlee, one of the lowest value housing markets in Britain, the marriage value will be trivial at the moment, so changing the rules on marriage values will have a very small effect.

[Richard Fuller]

Q So this is a London wealth transfer.

Professor Leunig: That will be the biggest—

[Richard Fuller]

Q Is it right to say that this Bill is a wealth transfer from rich freeholders to rich leaseholders? This is primarily just moving money between rich people, isn’t it?

Professor Leunig: No. Not every leaseholder in London is rich, by any means. If you are buying a flat for £300,000 in London, that will make you rich by the standards of someone in Peterlee, but I do not think a young couple buying a flat for £300,000 would meet The Daily Telegraph’s definition of “the rich”.

[Richard Fuller]

Q So the geographic dimension—there are more leasehold properties in London—and the redistribution argument is stronger than the “all properties in London are expensive compared to everywhere else” argument.

Professor Leunig: Yes.

[Richard Fuller]

Q That is helpful to know. Therefore, does redistribution matter—it could be a social good or not—and does it matter who and how that redistribution happens? Are those things material? Should we be looking at them in detail?

Professor Leunig: Redistribution is ultimately a political issue; it is about who you think should have the money. Government engages in redistribution all the time. Sometimes it does so explicitly through the tax system— I am looking forward any day to my tax cheque coming back from HMRC for the money I overpaid last year—and in other ways it does so implicitly.

For example, as somebody who has been employed in universities for most of my academic career, my income was constrained by the fact that Government limits university fees. I teach at the London School of Economics. The fee that we charge for a master’s suggests that we could charge much higher than £9,250 to undergraduates, but the Government do not let us. That is a legitimate decision by the Government. It makes me directly poorer. That is a transfer away from someone like me—broadly speaking, on the richer end of the spectrum—to people who are currently not very well off but who later on will be rich.

That is just the right of a Government to define property rights in such a way that some people are winners and some are losers. The right to borrow Jeffrey Archer’s books from the library, for which he gets virtually no compensation, is exactly the sort of political decision that you are entitled to make by dint of having a democratic mandate. Apart from agreeing with you that there is redistribution, I do not think that there is a great deal that any of us at this straight table can say to those of you around the horseshoe. It is your right, privilege and responsibility to make that decision.

[Richard Fuller]

That is very helpful. I will stop there, but I want to come back on discount rates later if I have time.

Professor Leunig: Excellent.

[The Chair]

We have a very enthusiastic witness. I call Barry Gardiner.

--- Later in debate ---

[The Chair]

In that case, we will go to Richard and it might pop back in again.

Professor Leunig: Oh no, he is going to test me on net present value.

[Richard Fuller]

Q No: discount rates. As I understand it, there are two discount rates that are currently used in the calculations—the capitalisation rate and the deferment rate—and one is sort of fixed by a legal process. In terms of making changes to the marriage value, there is also a change in the way in which the discount rate is going to be determined; it will be done by the Minister by regulation. What are your thoughts about that?

Professor Leunig: The default rate chooses 3.5% because that is the rate in the Green Book. Again, it is fundamentally a political decision, because you put the rate one way and the value goes up. You put the rate the other way and the value goes down. It is just a political decision. I really do not think that there is a right or wrong answer to that.

The only thing to say is that I would be very cautious in using the current Bank of England base rate because it is so volatile. The idea that if we had made the calculation two years ago we would have used a discount rate of 0.25%, but today we would use 5.25%, is absurd. You need one number that you stick with through thick and thin, and the default rate, I think, is the Green Book discount rate of 3.5%. I am happy to believe that if we were in the Department and I was employed, you could sway my belief that 3.5% is the right answer, but that is where I would start.

[Richard Fuller]

Q I am interested because so many other purchase decisions—indeed the mortgage you get—will be subject to market rates at that time. Those rates can go up and down, and that will have a very material effect on the cost of your mortgage, so why take this out of traditional market principles?

Professor Leunig: Because this is a one-off decision. For example, we saw Paul Johnson mention this week that the cost of student loans has gone up dramatically because of the rise in interest rates. We do not suddenly cut the number of people who can go to university and then increase it when interest rates are low, because we accept that most people de facto get one shot at university when they are 18 or 19. Over the 25 years of your mortgage, you will re-mortgage a number of times so it averages out, whereas this is a one-shot thing. We do not really want people acting strategically on which day to do it. That is why we would prefer to have a single number over time.

It is not a stand-up case; I grant you. You have a case. It is the classic thing of marking to market, right? When you retire, if you have a defined contribution pension scheme, you are to some extent at the whim of the market on the day you retire and in the five years before, as you move out of equities and into bonds. If you are a defined benefit pension holder, de facto we use the scape rate, which is a long-run average. I argue, in effect, for something similar to the scape rate for something like this.

[Richard Fuller]

Q At the moment, we do not know what will be in the regulations in relation to how the Minister should go about determining that. Do you have any advice for how he should structure that part?

Professor Leunig: As I say, my main advice would be to make a political decision and pick an interest rate, rather than to make a political decision without realising you have made a political decision and go for Bank rate, or Bank rate plus two or minus one, and to have complete randomness over the following years.

[The Chair]

If there are no further questions from Members, I thank the witness very much. We will move on now to the final panel.

Professor Leunig: May I say well done? You have had a very long day.

Examination of Witness

Dr Douglas Maxwell gave evidence.

Leasehold and Freehold Reform Bill (Third sitting)

Richard Fuller Excerpts

Committee stage
Thursday 18th January 2024 Public Bill Committees

[The Chair]

We have just over 10 minutes left. I will bring in Richard Fuller and then we will try to get back to Barry and Andy.

[Richard Fuller (North East Bedfordshire) (Con)]

Q We have been talking a bit about regulation, which is often seen as some sort of answer to problems and frequently is not—or, at least, is different from simplification or standardisation, which each of you have mentioned at different points.

I am interested in your thoughts when it comes to property managers and managing agents, about where you think the interaction is between simplification and regulation, and whether regulation is a matter of regulating the process—“You must provide this set of information by this date”—or of regulating the people—“Thou must have this qualification in order to do x”—or whether it is about the process of redress: being able to get some compensation at the end; because we are going to be wrestling with all those things here. They all have a role to play, to a greater or lesser extent. But we run the risk of just vomiting out a whole new set of what we think is going to be the solution. As you said, Ms Higgins, we have a once-in-20-years chance. I said this to Mr Gardiner on the way in—he goes back to 1993 thinking about this, and he is an MP now.

What are your thoughts? Give us some guidance on simplification and standardisation versus regulation, and then regulation of people, regulation of process and the provision of redress.

Bob Smytherman: I would not reinvent the wheel. I don’t know whether you have had The Property Institute in yet, and Andrew Bulmer from the Association of Residential Managing Agents. They fill the gap as the main membership organisation for managing agents. Andrew will give you the figures, but I believe they represent about 50% of all property managers of leasehold property. That means that 50% of people are not members of ARMA and are not part of their regime, along with the Institute of Residential Property Management—obviously, ARMA and the IRPM have now merged to form The Property Institute.

They have done amazing work to fill the void, where there has been a lack of an independent regulator, and I think working with Andrew and with them would be a really good starting point for the Government to create a regulatory regime. Certainly we would stand ready as an organisation to help with that. I just think that giving leaseholders the confidence that there is an independent body that they can go to when they have disputes with their property manager or their landlord is really important—as people do with Ofwat or Ofgem or other regulators. Having that independent regulator is really, really important.

Ms Paula Higgins: You make a really interesting point, but there are things that I would not want to see happening. We also work in the new homes area. We have legislated for a New Homes Ombudsman—fantastic—but we have not enacted it yet, and we now have a more confusing landscape for people who are buying new homes, who are probably also leaseholders and probably also shared owners; they have another competing code. It is incredibly confusing. That is not what I want to see happening.

Regulation means enforcement. There are a lot of things that estate agents have to do now, and we know from our research that they are not doing what they should be doing. The problem is that people do not have the right of redress if something happens. We have heard about the managing agents, but it is the estate agents, the developers and the housing associations who are selling these dreams. You have seen lots of people on Tuesday who feel they have been mis-sold, and others will continue to be mis-sold. These estate agents are the first port of call for the people going into the process, and we have to remember that people are buying a home, and they have not done it before. They might have bought a couch or something like that, but this is the first time they are doing this, and they can get it so wrong. People need to be protected. The estate agent is the only part of the professional world of property that is not regulated. The estate agent is that person there who is alongside the person trying to get their dream, which could go massively wrong.

[Richard Fuller]

Q When you say “regulated”, do you mean they should have a qualification—that they can tick a box to say, “I was qualified to do this”—or redress, as in, there is a regulatory body above them?

Ms Paula Higgins: That is a really good point. I know the RoPA stuff—the regulation of property agents working group; in fact, we gave evidence to it. A tick box is probably not the right thing. Perhaps it is more about a proper single place for redress, but as I think Andrew Bulmer mentioned, that is the ambulance at the bottom, and what matters is what is at the top.

What we don’t want is people doing online qualifications and getting a tick, and then they can jump up as an estate agent and come back down again. So I appreciate the complexities and I look forward to seeing what your deliberations will be.

Sue Phillips: I do not have the expertise to speak directly to the regulation of property management, but I would like to pick up on a couple of related issues from a shared-ownership perspective. The first is that the evidence submitted to the Advertising Standards Authority’s inquiry into Black Friday marketing highlighted the fact that industry sector standards for the marketing of shared ownership are lower than other standards that are out there. For example, shared ownership is currently excluded from the New Homes Quality Board’s code of practice. That simultaneously reflects the complexity of shared ownership but also the fact that shared owners do not have access to the same level of protections as other homebuyers in relation to new build codes. That is slightly off to one side.

I also wanted to pick up on the matter of transparency of service charges. Transparency is clearly essential: people should know what they are paying for. However, shared owners and other leaseholders should not have to effectively take on an audit function where it falls upon them to scrutinise accounts. They should be able to place some degree of reliance on the accuracy and proportionality of the accounts that they receive. I cannot speak to how that will be achieved, but I think that the onus should be on the providers of services and service charge accounts to be better, rather than leaseholders and shared owners having more and more obligations to scrutinise and take whatever action is required if problems are identified in those accounts.

[Barry Gardiner]

Q Ms Higgins, do you agree that it would be appropriate to allow leaseholders to withhold service charges where there has not been compliance with the very extensive requirements in the Bill to provide accounts no later than six months after, and so on? Is that an appropriate and proportionate way for leaseholders to be permitted to respond?

Ms Paula Higgins: I fully agree with that. It is a bit like the situation where, if you are getting building work done in your home and the building work is not completed or whatever, you withhold money. That happens in all of the construction industry. The stuff in relation to the forfeiture is very disproportionate, is it not?

--- Later in debate ---

[Barry Gardiner]

Q Just to make you feel a little better about disagreeing with your Law Commission counterparts in England, of course they were constrained in what they could do by the parameters the Government set them.

Professor Hodges: Very briefly: modernise, because we are still living in the past; simplify, because we can easily do that on a comprehensive basis; and get it done so that people can plan, retrain and know what they have to do. You then get good behaviour throughout the system. I am very tempted to repeat facetiously the “Get it done” slogan, which crops up a lot.

[Richard Fuller]

Q My questions are for Professor Hodges. We have to deal with the Bill as it is—on the commonhold thing—so, “Get it done” is not particularly helpful, if I may say. It might be a good indication, but not particularly detailed, so help us on the detail of that. Often in Parliament, we regulate and think that that is the solution. I do not know whether you have had a chance to look at some of the regulatory details in the Bill, but what would be your guidance be to us about where it is pointing in the right direction, where it might be going wrong, and the pitfalls that we should look out for?

Professor Hodges: As far as the detail of the Bill is concerned, looking technically at what is in there without expressing a view as whether it is a good or a bad idea substantively, it seems to me to be fine. You asked a wider regulatory question earlier on—

[Richard Fuller]

I will come to that in a minute. But just in here, on this Bill, is there anything that we should look out for?

Professor Hodges: As far as the detail is concerned, there is nothing that stands out to me, as a regulatory expert, that says, “This is a problem”.

[Richard Fuller]

Okay, so more generally then, on regulators—Ofgem on energy prices and Ofwat on sewage and water—that approach seems not to provide the outcomes that perhaps were originally indicated when the legislation was passed. What are your thoughts about the political use of regulation? Is there anything from those general principles that you think might apply here?

Professor Hodges: I sat on Lord Best’s RoPA—regulation of property agents—working group, and there was strong consensus around the room that you need regulation of agents. Since then, how we do regulation has evolved. Regulation, in the broadest sense, is an all-encompassing idea, and looking at the problems with Ofgem, Ofwat and so on, there are two aspects that strike me. First, one historically gave specific regulatory bodies certain remits that turned out to be not wide enough, and there were not enough people involved in the conversation; they were not regulated or contributing to good behaviour.

Secondly, the traditional way within which regulation is thought of, in the way that Parliament works, is that you make a number of requirements, rules and procedures. You then identify breaches of those rules and requirements and you then enforce. You can do that through traditionally public or private ways. Public ways in the property sector would be through trading standards authorities or environmental health locally, not a national regulator, as such. The private ways would be through the courts, but that has evolved in relation to the alternative dispute resolution ombudsmen being the best model at the moment and an integration between the tribunal and ombudsman, which is on the cards and may well occur. However, that is not enough because enforcement does not affect behaviour as such. We like to think that it does, but it is a myth, and there is an enormous amount of psychology and evidence published showing that it is not enough.

Therefore, if one stands back and says, “How do we get an effective regulatory system?”, it is about how one does it. That involves getting all the stakeholders together —again, that goes back to the first point about how it is not just a regulator telling people what to do, like an Ofgem or Ofcom—and saying, “How are we going to behave and how are we going to do it?” You need the rules, but you also need codes and systems involving data and support.

[Richard Fuller]

Rules, codes, systems, data, penalties, redress, different organisations—this is your answer as a better solution to caveat emptor?

Professor Hodges: Yes, absolutely. Now, let me give you one example only—

[Richard Fuller]

In all circumstances or specifically on this Bill? Well, we ought to stick to the Bill. I just want to be clear: you have just outlined the solution—this Bill is going part of the way to that—but the old way was, “I have personal responsibility,” “I am responsible for the decision I make,” “This is a very big decision about what I buy,” and so on. I just want to make sure that we are not trying to put too much faith—one of the last witnesses made some very good points on shared ownership and the fact that people may not have the encompassing knowledge—but I just want to make sure, from your expertise on regulation, that, in this field, you cannot see any damaging consequences for the principles of caveat emptor and personal responsibility by this regulatory structure that you have outlined?

Professor Hodges: Not at all. The most striking example—

[The Chair]

Please answer briefly if you can, because I want to get some more people in.

Professor Hodges: There are various regulatory systems in this country that are now modernising. In many ways, the most outstanding example, which has been there for several decades, is aviation safety. Everyone works together, and they call it an “open and just culture”. They are actually collaborating. They have lots of rules, but you have almost no enforcement, because the Civil Aviation Authority does not need to do it—everyone is doing something.

There are various sectors where you do need public enforcement, and where I would say you need a national system regulator. But you can do a lot through ombudsmen, codes and support. That is now emerging in, say, information and data protection, food standards and various other areas. It is absolutely ideal for property and housing.

Leasehold and Freehold Reform Bill (Fourth sitting)

Richard Fuller Excerpts

Committee stage
Thursday 18th January 2024 Public Bill Committees

[Richard Fuller]

Q I want to follow on from the point made by my colleague, Mike Amesbury, about your November report. When it looked at estate management charges, there was a litany of abuses against residents who own their own home. As Mr Jones has just said, there was no information—or certainly not sufficient information—about obligations at the point of purchase. There was no transparency about the way in which information is provided. There were totally exorbitant charges for provision of basic things such as a bulb to go into a lamp post. There was an inability, or unwillingness, to provide annual reports to people, and limited to no redress for consumers.

I know that you are going to get to your final report in February. This Bill, helpfully in some ways, seeks to plug some of those gaps in the protection of people who own homes, but would it not be better for us to ban the lack of adoption right at the start? Should we not go to the source and find a solution as to why councils and housing estate developers are ripping off my constituents, and I am sure many others, who own their own homes? What can be done about that in this Bill?

George Lusty: Again, in our November working paper, we pointed to that very issue of there not being enough adoption by local authorities of those facilities. We put forward possible ways for that to be fixed, either through more mandatory adoption of those amenities or through some common adoptable standards that could be followed to inform the types of amenity that were suitable for adoption more broadly. As I say, we have not issued our final recommendations, but we have already said something about the options that might be available if there was a desire to try to tackle that now.

[Richard Fuller]

Q My concern is that you are going to finish your report, quite rightly, in the fullness of time—that will be February—and this Committee will not be sitting in February; heaven help us, I hope not. Please could you go away with a piece of homework for tonight to write to the Committee about what ideas from your report so far could be put in the Bill on the adoption matter? I think all of us would find that very helpful.

George Lusty indicated assent.

[The Chair]

Thank you. A very quick question with a very quick answer, please. Barry Gardiner.

--- Later in debate ---

[Barry Gardiner]

Thank you very much. In order to preserve both our reputations, I will not say that you agreed with me and I trust that you will not say that I agreed with you.

[Richard Fuller]

Q Let me attempt to get back on to Conservative territory, rather than Barry’s territory. There are many experts in this field, and campaigners have done some fantastic work. I am not one of them—I do not know about this—so allow me some naivety in the questions I pose. Is marriage value a real thing?

James Vitali: I think a lot of the reforms proposed in this Bill are an attempt to reflect better the fact that when the leaseholder purchases the leasehold, they are acquiring the majority value of the asset. In market terms, sure, I suppose marriage value is significant and substantive, but as it stands it seems to me that a leaseholder acquires the majority of the value of an asset when they acquire the leasehold, and that is slowly eroded. I think that is the thing that is wrong in the process.

[Richard Fuller]

Q That did not quite answer my question. My question was: is marriage value a real thing? It could be large or small. Can you describe what it is and do you perceive that it is a real thing? I read somewhere about some vases—I do not know why we have these vase analogies sometimes—and I kind of get it. There is vase A and vase B—apparently they have to be Chinese—and when you put the two together, they are more valuable than they are separately. Is that a real thing? Do you understand that as a source of value? If you do, can you explain to me the legitimacy of transferring, at a stroke, £1.9 billion of that from one group of people to another, and that not to be described as a windfall gain?

James Vitali: Tricky question. If you were to acquire some property that you have genuine rights and responsibilities for the management of, the ability to benefit from in the future and the ability to control, then that form of property would be greater than if you were subject to charges and ground rent. On the point about the £1.9 billion transfer value from freeholders to leaseholders, I did take a cursory look at the impact assessment. I do think that is a legitimate decision for you as parliamentarians to make about 10-year property rights in the UK. I think it is justified.

[Richard Fuller]

Q I have one final question, if I may. I know it is not quite at a stroke, because I think it is when they come up, but is there any way of mitigating? It seems to me that when you take something away from one person incompletely and you cannot actually say, “Well, the value wasn’t there”—I understand fee-for-service but marriage value is different from that—there is no other mitigation for the loss of that party, and there is not in the Bill. We can agree that marriage value needs to go; we are finally going from class A of people to class B of people. We could, however, then put in some mitigation for those who are having a loss, which would be usual if they had not done something materially wrong. What do you think about that?

James Vitali: I think that is where the dividing line lies between you and Mr Gardiner, and perhaps you and I and Mr Gardiner.

[Richard Fuller]

Oh, it is much wider than that.

James Vitali: Indeed. I think a balancing act needs to be struck in this Bill between spreading genuine property rights more widely and compensating those existing freeholders. If you seek to diffuse property ownership, but in the process undermine or dilute property rights, you are undermining the thing that you are trying to spread more evenly. That is a technical question for the way that you finesse this Bill, but I do not think it is a substantive issue with the desire to give leaseholders greater control and rights over their property.

[Richard Fuller]

Exactly.

[Barry Gardiner]

Q On the point of marriage value, Mr Vitali, let us go back to free market principles. You and I would agree that a free market is one in which properties are sold between a willing seller and a willing buyer—would you not?

James Vitali indicated assent.

--- Later in debate ---

[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.

[Richard Fuller]

You are a lawyer.

Philip Rainey: Yes, and one tends to avoid the philosophical points. Clearly, from a legal perspective the Bill interferes in an extremely significant way with property rights. Whether that is the right thing to do is a value judgment.

One thing that is sometimes overlooked—I am not defending the leasehold system; I am on record as being in favour of commonhold, which is inherently a more satisfactory system for holding flats—is that a lot of people will be disappointed when commonhold comes in. They will still find that they are not allowed to remove the supporting walls in their flat or to have a noisy party on a Friday night, because their neighbours do not want that. A lot of the things you find in leases and the restrictions when living in flats are because, if you live communally in a block of flats, you owe duties to your neighbours. There are responsibilities, in communal living, that do not apply if you live in a small house in a field, 500 yards from your neighbours. The restrictions in the leasehold system are not as unique to leasehold as you might think; I would suggest otherwise. To go back to your basic point, clearly the Bill alters property rights. It is a value judgment as to whether that is the right thing to do.

Philip Freedman: I have heard a number of cases where the property industry is concerned about the transfer of value that will be effected by capping ground rents, removing marriage value and so on, in relation not just to the benefit to leaseholders but to the burden on those landlords that are pension funds and other organisations that will find that they are deprived of rental income that they have banked on and have thought will be reliable income over many years. They bought leases that were perfectly lawful, were not, so far as one can tell, entered into under any mis-selling, and the provisions for the ground rent are not necessarily unconscionable; the ground rents were invested in in good faith.

We must not lose sight of the fact that if there are winners, there are always losers. Some provisions of the Bill, which are fine, are to say that if the tenants are enfranchising, they do not have to buy the commercial bits of the building. Those can be left with the landlord under a leaseback, and therefore the value remains with the landlord. Both parties win: the landlord keeps the value and the tenants do not have to pay as much money. But where you are transferring value, there is always a loser, and there are lots of investors who appear to have bought in good faith and were not expecting retrospective legislation. Lawyers always do not like retrospective legislation. It is up to Parliament to decide whether the social benefit is sufficient to outweigh the concern about pension funds, and so on, that have invested in ground rents. The Law Society does not take sides between landlords and tenants, or different types of clients. We just want to make sure that Parliament focuses on the issue and makes the decision in the public interest.

[Barry Gardiner]

Q Mr Rainey, first, thank you for what you said about the preferability of commonhold to leasehold. Is it your view, therefore, that it would be good if the Bill were to make all new flats that are constructed leasehold with a share of freehold, as a staging post, in effect?

Philip Rainey: Yes. In a sense, that is the downside. It is possible to create what you might call commonhold-lite. It is a leasehold system—it is so encrusted with restrictions and requirements, although you own the freehold, that it is very similar. It would be only a staging post, because one of the problems with the current system is that it creates a “them and us” situation. You see it even when tenants own the freehold. Somehow they still think, “Well, it’s ‘my’ lease and it’s ‘them’”, which is them under another hat as the freeholder. Commonhold should eliminate that.

--- Later in debate ---

[Barry Gardiner]

Q Mr Spearman, since we have limited time, let me turn to what you are saying to the members of the public. You have engaged in a number of polling operations. You have told people that only 1 in 4 people in a block would be able to agree with each other about how to manage that block. The implication is that many leaseholders do not want to take on the burden of management and, actually, some of them are incapable of taking on that burden of management—almost as if you are providing them with this wonderful service that they would not want to get rid of. But the figure of 1 in 4 people that you quoted in your survey was 1 in 4 people in the United Kingdom, and not leaseholders at all, was it not? It included people in Scotland who are not involved in the provisions of leasehold in England and Wales. So you went out to people who had no connection as leaseholders and surveyed them, and then claimed that was an argument.

[Richard Fuller]

On a point of order, Dame Caroline. I am wondering whether my colleague, Mr Gardiner, is getting to a question rather than just expressing a view.

[Barry Gardiner]

I just did, but you interrupted.

--- Later in debate ---

[The Chair]

Order. We have time for only one more question, Barry. Can I move on to Richard Fuller, please?

[Richard Fuller]

Q Perhaps Mr Gardiner will call a point of order on me. I have been talking about this transfer of value. There are non-monetised here, but there is £1.9 billion of transfer. I think we have accepted from previous witnesses of all types that it is a political decision, but it is essentially taking from group A to group B. You just, I think, said there were ground rents that are not enumerated here, and I think you said they were not £1.9 billion, but £29 billion or £30 billion. Could you elaborate on that?

Jack Spearman: This is a bit of an issue we have with the way the impact assessments have worked, because the impact assessment for the leasehold and freehold Bill did not take consideration of the consultation impact assessment that came out on ground rent. They are not working together. That is part of the issue of you not being able to scrutinise the impact assessment within the ground rent consultation, where the Secretary of State is on record as saying he wants a peppercorn ground rent; in that it says the impact would be £27.7 billion. If you add that to the £3.2 billion in the Leasehold and Freehold Reform Bill impact assessment, that is where you get to.

[Richard Fuller]

Q So just to be clear, as the Committee considers this Bill, including what may come from subsequent secondary legislation, it is not £1.9 billion of transfer, but £1.9 billion plus £28 billion. Is that fair? So we need to bring it all in, not just—

Jack Spearman: I think it is a bit more, actually. Is it not £3.17 billion in this one?

[Richard Fuller]

Exactly—you have added them all up. I just did the first section.

Jack Spearman: Indeed.

[Richard Fuller]

But a bit like an iceberg, the transfer of wealth from group A to group B is somewhere else; it is not here in the impact assessment.

Jack Spearman: Agreed. Also, in terms of the people it is being transferred to and from, remember that while a lot of leaseholders are homeowners, there are also a lot of buy-to-let investors in that group—over 50% in our membership, of leaseholders are buy-to-let investors. That is a transfer from business to business being overseen by this Bill.

[Richard Fuller]

Very good. Does anyone else want to come in? I had another question, unless we have no more time.

[The Chair]

We have until half-past three.

[Richard Fuller]

Q Can I ask you about the discount rates that are used? We have the deferment rate and the capitalisation rate. Those will be determined in secondary legislation as well. Do you have any thoughts about what guidance should be given to the Minister about how those should be set?

Jack Spearman: Yes. It is very important that, at the very least, the primary legislation sets out what reference the Minister should look to—something dynamic would be helpful, so that you don’t have these ridiculously long periods of time where one party is out or in. I think people have talked about looking at some long-term ideas, whether that is the National Loans Fund rate or the longest Treasury gilt. You obviously don’t want to make it too dynamic, so that it is always shifting around, but I think it should clearly reflect market value. It should be done on a no-act principle. It should be enabled to be dynamic so that, as I said, you do not have this problem of the Secretary of State having to arbitrarily change it—it should be able to move with the market. It should be something that is available for reference.

[The Chair]

Thank you. That brings us to the end of that session. I thank our witness on behalf of the Committee.

Examination of Witness

Giles Grover gave evidence.

Leasehold and Freehold Reform Bill (Fifth sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 23rd January 2024 Public Bill Committees

[Richard Fuller (North East Bedfordshire) (Con)]

I want to speak briefly in support of the third point made by the shadow Minister, the hon. Member for Greenwich and Woolwich, in which he addressed the interaction of the Bill with the Government’s ground rent consultation. If I heard him correctly, he was asking the Government at least to be clear as to how those recommendations will affect the Bill. He was asking the Government to be clear on their position; I will not go as far as that, because I think the Government have the discretion to decide when they want to announce that or not.

However, there is another issue that the Minister could perhaps consider: the impact assessment on the valuation, which we, as Members of Parliament, are being asked to address in this Bill. As we heard in the evidence sessions, the current impact assessment may potentially omit a significant amount of value that will be taken into account as part of the ground rent reform. If it is the Government’s intention to introduce amendments on that, as the shadow spokesman was asking, it would be useful to have clarity from the Minister on that, but we should also ask the Minister whether an updated impact assessment can be presented to incorporate what the value of those recommendations would be.

[Rachel Maclean]

I rise briefly to add my support for some of the comments and, most importantly, for the ability of leaseholders to extend their leases. As we know, this is one of the most egregious features of the current system: people buy properties that they then find have short leases, after which they are whacked with massive charges coming out of the blue; they do not understand how those charges are calculated, and they end up having to pay them because they have no choice. They are completely over a barrel. I know that leaseholders will massively welcome this change, which is one of the most important parts of the whole Bill.

Having said that, it is vital that we understand when we will see the Government’s response on the ground rent consultation, as my hon. Friend the Member for North East Bedfordshire and the shadow spokesperson, the hon. Member for Greenwich and Woolwich, have said. It will, of course, affect the calculations.

I also want to raise with the Committee the number of people who have sat in front of me and asked, “When will you bring this forward? I don’t know whether to extend my lease now or wait another year or for another consultation”. It is a huge number of people. I want to make this point to everybody: if we get this right, it will affect a lot of people very beneficially.

[Lee Rowley]

I thank hon. Members for their questions and comments, which I will try to address. There is obviously a desire to understand the interaction of the two clauses with the outcome of the consultation that closed last week. We saw to some extent in our deliberations last week, on the first two days in Committee, when we took evidence, that this is a contested area. As a result and notwithstanding the fact that by convention in this place we have the ability to speak freely, I hope the Committee will understand that I will limit my remarks.

I understand the eagerness, enthusiasm and legitimate desire of the Committee to understand the position that we will seek to provide. We will provide that to the Committee, and publicly, as soon as possible. It will not be possible for me to answer all the questions that were asked today. I accept the point made by my hon. Friend the Member for North East Bedfordshire that there is a difference between process and decision, but some elements of the process could be impacted by the decision and it will therefore be difficult to engage in hypotheticals at this stage. However, we will respond to the legitimate points that the Committee has made as soon as we are able to do so.

I agree with the points made by the hon. Member for Greenwich and Woolwich and by my hon. Friend the Member for Redditch about the importance of clarifying how quickly the provisions will come into force. Again, that is a difficult one to answer because we need to get through this process. We have no idea what the other place might or might not do or how quickly the process will go. Although we are all grateful for the confirmation from my Labour colleagues that we are seeking to move this as quickly as possible, it is difficult to be able to answer the question at this stage, but I hope to say more in due course.

On the fourth question posed by the hon. Member for Greenwich and Woolwich, about the competent landlord, my understanding is that we are not changing the law in that regard.

[Richard Fuller]

I am listening carefully to the Minister and sort of accept what he says, but may I make a couple of points? First, he has talked about how the Bill has to go through the House of Lords, but we are the democratically elected Chamber. The interaction of the two provisions represents substantial transfers in value between different parts of our community—rightly or wrongly. Decisions should correctly be made with the full information by this House. We should not go through a procedure when information is presented in the unelected House, which then comes back to the Commons. With our remit as Back-Bench Members of Parliament, we are very restricted in what we can do to amend that.

Secondly, the Minister talked about how the points about value are hypothetical. That is the case only because the Government have not made a decision. Once they make a decision, those points of value can be forecast. They are no longer hypothetical but judgmental, so it really is within the Minister’s remit to be able to move from hypothetical to his own forecast. Having said that, I fully accept what the Minister has said so far.

[Lee Rowley]

I am grateful to my hon. Friend for his legitimate points. He is absolutely right that it is important that right hon. and hon. Members have an opportunity to debate at the earliest possible opportunity the complex interaction of what we may or may not choose to do with the consultation. I take his point about hypotheticals. My point was simply that there are a number of different options in the Bill. Some of them are substantially different, as my hon. Friend indicated in some of his questions last week. To go through all the elements of the potential outcomes in all of those different options would be a substantial amount of work and potentially not necessary on the basis that we are likely to choose some rather than all of them. None the less, where I have missed anything out, I will—

Leasehold and Freehold Reform Bill (Sixth sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 23rd January 2024 Public Bill Committees

[The Minister for Housing, Planning and Building Safety (Lee Rowley)]

This Bill reforms the valuation process for leaseholders when they buy their freehold or extend their lease. It does this by repealing parts of existing legislation and setting out a new valuation scheme that leaseholders and landlords must follow. We are debating a large group of measures, so I am afraid—and I apologise to the Committee in advance—that my comments may be slightly longer than normal, in order to cover all of those.

Clause 9 amends the Leasehold Reform Act 1967, which deals with lease extensions and freehold acquisitions of houses. Subsections (1) to (3) make necessary changes to sections 8 and 9 of the 1967 Act in relation to freehold acquisitions. It mandates the use of clause 11, which sets out the new valuation scheme for calculating the price payable. Subsection (4) applies that to lease extensions for houses. I will shortly come on to that new valuation scheme covered in clause 11, the detail of which is contained in schedule 2. However, these changes introduce the valuation reforms contained in the Bill. I commend clause 9 to the Committee.

Clause 10 makes the necessary changes to the Leasehold Reform, Housing and Urban Development Act 1993, which deals with flats. The clause amends sections 32 and 56, and repeals schedules 6 and 13 of the 1993 Act, which deal with the freehold acquisition of a block of flats and lease extensions of a flat. In a similar way to clause 9, clause 10 mandates the use of clause 11 in determining the price payable for enfranchisement transactions—in relation to flats, rather than houses—and sets out the new valuation scheme for calculating the price payable. I commend clause 10 to the Committee.

Clause 11 provides the basis of the new valuation scheme that must be used to determine the price payable when exercising any of the four enfranchisement rights, which are acquiring the freehold of a house, extending the lease of a house, acquiring the freehold of a block of flats and extending the lease of a flat. The clause sets out that the premium is comprised of two elements: first, the market value, which is to be calculated in accordance with schedule 2; and, secondly, any other compensation, which is to be calculated in accordance with schedule 3.

Schedule 2 details the steps for calculating the price payable for lease extensions and freehold acquisitions. It also contains key reforms to the valuation process, including the removal of marriage value and hope value, capping ground rent at 0.1% of the freehold value in the valuation calculation, and providing the Secretary of State with a power to prescribe two rates used to calculate the premium.

[Richard Fuller (North East Bedfordshire) (Con)]

The Minister just mentioned that schedule 2 eliminates marriage value. He will be aware, from the impact assessment, that there is a financial value associated with marriage value. Can the Minister tell me whether the Government think that marriage value is a real value—that it has intrinsic value—or is it just a number that has no material value at all? Is there something behind what marriage value is, and what is the rationale for eliminating it?

[Lee Rowley]

That is an interesting philosophical question to debate straight after lunch. The Government recognise that marriage value is utilised in a number of transactions. Therefore, some people in the market—some individuals, some economic actors—must deem that there is some form of additional value by marrying the lease and the freehold up within a shorter period of time. How that works, what exactly that is, and how expansive it is, is for others and for the market to determine, in a traditional and—something that I think we both would support—a wholly capitalist way. However, there does seem to be something to it, hence why we are making some of the reforms that we are making, given the feedback that we have been given.

[Richard Fuller]

I am grateful to the Minister for his summary, which I think is very accurate. Given that the Government have assessed that there is something real there, and decided that they want to eliminate the marriage value—obviously, a lot of work has gone into the preparation for that—what representations has he received about the legal underpinnings of this particular aspect of the legislation for those from whom that value is being taken?

[Lee Rowley]

The Government remain confident that the proposals being put forward are compliant with their responsibilities. I have only been in post for a short period of time, and my hon. Friend the Member for Redditch may wish to comment on this. The conversations I have had with the people who—I say this without breaking their confidence, given that some of them might be in camera—have come to me to represent their position have not focused on that as the main issue.

Schedule 2 also sets out how to divide the premium into shares, where multiple landlords are entitled to receive a share—for example, where there are intermediate landlords. We will go through that in further detail when we consider schedules 2 and 3. I commend clause 11 to the Committee.

I now turn to amendment 59, which is in my name. This amendment exempts business tenancies which qualify for enfranchisement rights under the Leasehold Reform Act 1967 from the standard valuation method. It is not our intention for the standard valuation method—especially the rent cap—to apply to any business rent, and this amendment closes off that possibility for a relatively rare type of lease where it might otherwise have existed. I commend this amendment to the Committee.

Turning to amendments 62, 63 and 64, which are in my name. Amendment 62 makes minor technical changes to assumption 1 in schedule 2 so that the clause operates as intended. The change to sub-paragraph 15(2)(a) makes the phrasing clear that the clause is about freehold acquisitions. The change to sub-paragraph 15(2)(b) is a minor and technical correction so that where a lease extension is granted by someone other than the freeholder, such as a head lessee, the assumption of merger with the interest of the person granting the extended lease still takes place for the purposes of the valuation methodology for intermediate leases. Amendments 63 and 64 fix typographical errors, by changing the word “property” to “premises”, as the latter is defined.

Turning to amendments 65, 67 and 68 in my name, these make small changes in schedule 2 so that the provision works as it was intended. Amendment 65 clarifies the valuation of the market value of a flat as it is to be used for the purposes of identifying the ground rent cap in the calculation of the term value. Amendment 67 makes a change to ensure that the definition of what is being valued is clear. Amendment 68 clarifies the valuation of the market value of a flat as it is to be used for calculating the reversion.

These amendments are intended to avoid any mis-interpretation of the standard valuation method. Some may mistakenly interpret the schedule as requiring a valuation of a flat as if it were a flying freehold which could cause it to be undervalued. Amendment 68 clarifies the meaning so that what is being valued is the share of the value of the freehold of the whole building and appurtenant property that is attributable to the flat. The amended text will make sure that the standard valuation method is interpreted as we intend it to be. I commend these amendments to the Committee.

Schedule 2 sets out how to apply the new standard methodology when calculating the premium that leaseholders of houses and flats need to pay to extend their lease or acquire their freehold. This includes fundamental reforms to the valuation process, including the removal of marriage value—which we have just discussed—and the capping of ground rent at 0.1% in the valuation calculation. These changes help to fulfil the Government’s aim to make it cheaper and easier for leaseholders to extend their lease or buy their freehold. The schedule is extensive and broken into seven parts.

Part 1 introduces schedule 2 and requires that this schedule must be followed when calculating the market value of the premium for lease extensions and freehold acquisitions for houses and flats. It also sets out how to divide the premium into shares where loss is suffered by multiple landlords. Part 1 also makes clear three definitions for the purposes of this schedule: that of “collective enfranchisement”, “freehold enfranchisement” and “lease extension”.

Part 2 of 7 sets out the basis of the market value for freehold acquisitions and lease extensions. Paragraph 2 does this for freehold acquisitions. It sets out that the market value of the freehold used in calculating the premium is the value of the freehold as if sold on the open market by a willing seller. Paragraph 3 does this for lease extensions. It sets out that the market value of the lease extension used in calculating the premium is the value of the 990-year extended lease, at peppercorn ground rent, as if sold on the open market by a willing seller. Paragraph 4 states that the premium for both acquisitions and extensions is to be determined in accordance with part 3 and on the basis of the assumptions set out in part 4.

Part 3 of schedule 2 sets out that while in general the standard valuation method must be used to determine the value of acquiring a freehold or extending a lease, there are some exceptions. The specific exceptions are set out in paragraphs 6 to 8 and include where the lease has five years or less remaining, where the property is subject to a home finance plan lease and where the lease is a market rack rent lease. For these purposes, a market rack rent lease is where the leaseholder has either paid no premium or a very low price for the lease in return for paying a high rent.

Paragraphs 9 to 11 set out some further detailed exceptions, including where there has been a pre-commencement lease extension of a house for 50 years at a modern ground rent. These paragraphs also explain that the standard valuation method only applies to a relevant flat in collective enfranchisements, where relevant flat excludes, for example, flats with shared ownership leases. Paragraph 12 provides that the standard valuation method can still be used to determine the value of the relevant freehold acquisition or lease extension, even when it is not compulsory to do so. Paragraph 13 makes it clear that the standard valuation method is to be used if either part 3 requires it to be used or where it is used on a voluntary basis in relation to the property being valued.

Part 4 of schedule 2 sets out the assumptions on which the valuation of freehold acquisitions or lease extensions are to be based, whether or not the standard valuation method is being used. Assumption 1 is that intermediate leases and freehold interests are treated as merged for the purposes of valuation where they are acquired in a freehold acquisition or where they are affected by the lease extension claim. The effect of assumption 1 is to simplify the process and lead to savings in process costs and premiums in some cases. This does not apply to intermediate leases that are not acquired. Assumption 2 is that the leaseholder is not, and never will be, in the enfranchisement market, nor will the leasehold and freehold interests by other means be married. The effect of assumption 2 is that no marriage or hope value is payable for either a lease extension or freehold acquisition. This will reduce premiums where leases have 80 years or fewer remaining and remove the cliff edge that leaseholders currently face.

Assumption 3 is that the relevant property is assumed to be in good repair and has not been improved under the current lease. The effect of assumption 3 is to prevent the premium being either decreased in favour of the leaseholder, due to the property being held in disrepair, or increased in favour of the landlord, due to the leaseholder having made improvements. The latter case would result in the leaseholders having paid for the improvements twice. In the case of a freehold house acquisition, assumption 3 will only apply to the current lease, removing the ability to chain together multiple long leases.

Assumption 4 is that where leasebacks are taken, their value is deducted from the freehold value, reducing the premium. Other assumptions can still be made when determining the market value, as long as they are consistent with assumptions 3 and 4 as well as the other provisions of schedule 2. The remaining paragraphs cover circumstances where the premium may have to vary, including to account for burdens or benefits on the title, differing terms in extended leases, leases with five years or fewer remaining, and where leaseholders own their immediately superior intermediate lease.

Part 5 sets out the standard valuation method, which is made up of three steps for lease extensions and freehold acquisitions. Combined with the assumptions set out in part 4, the resulting premium for many leaseholders will be lower than it otherwise would have been where they have leases with 80 years or fewer remaining, or high or escalating ground rents. The first step is to determine the term value, which is the capitalised value of the ground rent payable over the term of the lease. In other words, the landlord is compensated with a lump sum, instead of continuing to receive future ground rent for the remainder of the lease term. Part 7 must be used to determine the capitalised value.

In calculating the term value, a ground rent cap will now apply so that the valuation calculation will cap the ground rent at 0.1% of the freehold value. There are two exceptions. The first is where the leaseholder has paid no premium for the lease. The second is where the lease was purchased for a low premium in exchange for a high rent. In step two, the reversion value is determined. The reversion value compensates the landlord for the loss of the reversion at the expiry of the lease in the case of freehold acquisition and for the delayed reversion in the case of a lease extension.

For freehold acquisitions, the reversion value is the market value of the freehold at the expiry of the lease, discounted at the deferment rate. In a collective enfranchisement, this is calculated for each qualifying leaseholder’s lease. For lease extensions, the reversion value is the market value of a 990-year lease at peppercorn ground rent on the same terms as the new, extended lease and beginning at the end of the term of the current lease, discounted by the deferment rate.

Step 3 requires that the market value of the property determined by the standard evaluation method is found by adding the term and the reversion values in steps 1 and 2, and in collective acquisitions all the relevant term reversion values subject to any adjustments, as provided for in other parts. Part 5 gives powers to the Secretary of State to specify the deferment rate used to calculate the reversion value and includes a requirement to review the rate every 10 years.

[Richard Fuller]

Will the Minister explain why it is right to give the decision on those rates to the Secretary of State?

[Lee Rowley]

It is ultimately a balance, as we discussed this morning when talking about the fundamentals in clause 3, I think. We believe that it is proportionate to allow the Secretary of State to make a decision here, but I will be clear now and as we go through the Bill that that should be done only on an occasional basis, hence the reference to the 10-year review period.

[Richard Fuller]

Does the Minister accept that the absence of knowing what will be in the Secretary of State’s mind about what rate he or she may set affects the analysis of what is being done economically with the Bill quite significantly? What thought has he given to the legal challenge risks of holding back what is in the Secretary of State’s mind about what the rates would be?

[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.

[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.

[Richard Fuller]

It is a good to see you in the Chair, Dame Caroline. We are blessed on this Committee to have three people who have been Housing Ministers, the great experience and expertise of the hon. Member for Brent North, and the good graces of the shadow Minister, the hon. Member for Greenwich and Woolwich. I was recently speaking about the Bill to my right hon. Friend the Member for Ashford (Damian Green), who pointed out that there were discussions about some of the measures in the Bill when he was the adviser to Sir John Major in No. 10 in the 1990s.

I have none of the expertise or experience of any of the people I have just mentioned, so it is with humility that I rise to make some observations. My first observation, which is not specific to the Bill, is that whenever there is a clear consensus between Government and Opposition, problems usually arise subsequently. We have just spoken about 29 pages of schedules and two pages of clauses —31 pages of a 130-page Bill—and I heard one or two sentences from the shadow Minister. [Interruption.] Oh, the shadow Minister is coming back in later; good. I am encouraged. I was called to speak straight after my hon. Friend the Member for Redditch, rather than us bouncing between Government and Opposition Members, so I was worried. My first concern was that we were going through a very large proportion of the Bill very quickly. Grouping so much of the Bill together is a choice. It is perfectly within the ambit of the Opposition to say, in the Programming Sub-Committee, “We will do clause 9 stand part, then clauses 10 and clause 11, and then schedule 2 separately,” but in the planning done by the Government and Opposition Whips, we decided to put all the provisions together, so that we brush past them very quickly, hoping that no one will notice. I notice a twinkle in the eye of the hon. Member for Brent North.

[Barry Gardiner (Brent North) (Lab)]

Does the hon. Gentleman suspect that the reason why my hon. Friend the Member for Greenwich and Woolwich allowed such a grouping is that we hope that after the next general election, Parliament will be presented with a new Bill that does away with this nonsense altogether?

[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.

--- Later in debate ---

[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.

[Eddie Hughes (Walsall North) (Con)]

Or the cup and saucer?

[Richard Fuller]

I am just so glad it was not me. The Minister and shadow Minister are far more experienced than I am on this matter, so I am drawing on a much more limited data set than they are. But, to date, I have not heard loud and clear that there is no such thing as marriage value. I have heard that there are questions about how it is calculated and that we do not think it should apply, which is a political point of view. If the shadow Minister is trying to say that there is something else he wants, between the issues of calculation and of making a political decision to transfer it, that is interesting to me. I do not think that he has been trying to make that point, and I certainly do not think we have heard that evidenced.

It is a crucial point. The idea that we are expunging values that relate to something real, which is under contract, is a material point in trying to make this legislation bulletproof or, as the Minister rightly says, to ensure that, in a hotly contested area, the Government get it right. In circumstances where there are real values —although perhaps massively overemphasised—where performance has been exemplary or to contract, where there has been no question of the performance required under contract, and, finally, where there has not been price gouging, or this automatic doubling every two years, and the rents have remained the same, what is the reason to apply legislation retrospectively?

[Rachel Maclean]

Does my hon. Friend not agree that the concept of ground rent itself is “gouging”, to use his word, because it is a payment for nothing? Clearly, the freeholders are receiving payment through service charges and the price of buying and selling a lease. The ground rent is a payment for nothing. Whether it is, in his words, a reasonable one and not gouging but is kept low and so on, still, in my mind and certainly that of many leaseholders, the Competition and Markets Authority, the Government and the analysis, it is a payment for nothing and so, fundamentally, it is wrong and unfair. I wonder what my hon. Friend thinks about that.

[Richard Fuller]

The former Minister makes an excellent point. She knows much more about this than I do and therefore I am very wary about falling into the trap of answering her question directly. What I will say is that, for the purposes of my speech today, what I think is not important. What is important is this: what will the courts find, and how have we ensured that the Bill is robust in those circumstances? I will say, without answering my hon. Friend’s question, that people sometimes sign contracts for things that they do not use or that have no value, but there is an argument that they signed a contract and it had these line items in it. People may sign a contract that gives them access to a swimming pool or gym and they may not use it. I do not mean to be pejorative, because these are very important issues. I am just saying that the principle is that, whether ground rent is real or not, it is still subject to the fact that it was part of a contract that was signed, and that will have weight in any legal challenge to the Bill.

[Barry Gardiner]

rose—

[Richard Fuller]

I do not know whether the hon. Member for Brent North wants to intervene and give me some more knowledge.

[Barry Gardiner]

The hon. Member’s colleague, the hon. Member for Redditch, made a pertinent intervention in relation to ground rent, but I wanted to try to address what philosophical issues he is having with marriage value. Marriage value is an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values. That is why the cup and saucer and the vase analogies are apposite. He seems to me to be seeking to say, “Well, if this exists, if people are actually paying this, it’s real; it’s not a fiction.” Let me set out my understanding of what the Government are trying to do and, indeed, what Parliament has tried to do on many occasions, going back to 1967, after we passed the legislation to right what had happened in the Custins v. Hearts of Oak case, where marriage value had been introduced against the will of Parliament. The point is this. If someone is the leaseholder, the person who owns that lease to the home, it is much more important to them than to anybody else in the world that they get the freehold together with it. That is the other vase; that is the saucer that goes with the cup. To them, that is important and it has a value that it does not have for the rest of the world. That is why they are constrained, and that is the constraint that Parliament has repeatedly tried to free people from, because they are not simply a willing seller in a free market with a willing buyer in a free market. This person, as the leaseholder, is a buyer under special measures.

[Barry Gardiner]

I am happy to be guided by you, Dame Caroline. I think I have made the point and I hope that the hon. Member for North East Bedfordshire will be able to take it on board, because it does go to what I think he would recognise from a free market point of view as the essence of why this is important.

[Richard Fuller]

Dame Caroline, you were not in Committee when I made a point of order on the hon. Member for Brent North, perhaps inadvisably, but this time I thought his intervention was very helpful, so I would like to commend him. That point is very helpful to my understanding, and I appreciate his building my understanding further. We will have to see.

My purpose in making these points is to look at the possibilities of legal challenge. I am not a lawyer so I am probably one of the first to do that anyway, but the principles behind schedule 2 relate to existing contracts and make a political decision to redistribute value to full or some extent. In Committee, however, we are doing this where we do not have complete financial information about the extent to which we open ourselves to the charge that our decision will have unintended consequences. We are putting a lot of faith in the Government to get that right.

We are dealing with different situations: where, in a relationship between a freeholder and a leaseholder, freeholders are providing poor service or have been price gouging; or where other freeholders have entered into contracts, done all the right things under that contract and behaved in a very excellent way, but we are now retrospectively going to change all their contracts. I want to put on the record some of my concerns about doing so. I understand that the intention of the House as a whole is to move forward, but I am interested in whether the Minister has any comment on that—he does not need to—or has something interesting to add.

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[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.

[Richard Fuller]

On a point of clarification, Dame Caroline, are we discussing the other amendments in this group?

[The Chair]

No, we are just speaking to amendments 60, 61, 66, 69, 70 and 74.

Amendment 60 agreed to.

Amendments made: 61, in schedule 2, page 91, line 21, leave out “38(1)” and insert “101(1)”.

This amendment is consequential on Amendment 74.

Amendment 62, in schedule 2, page 92, line 15, leave out sub-paragraph (2) and insert—

“(2) Assumption 1: it must be assumed that—

(a) in the case of a freehold enfranchisement, any lease which the claimant is acquiring as part of the enfranchisement is merged with the freehold;

(b) in the case of a lease extension, any lease which is deemed to be surrendered and regranted as part of the lease extension is merged with the interest of the person granting the lease extension.”

This amendment would ensure that where an intermediate leaseholder grants a lease extension, the lease which is deemed to be surrendered and regranted as part of that extension is assumed to be merged with the intermediate leaseholder’s lease for the purposes of valuation.

Amendment 63, in schedule 2, page 94, line 22, leave out “property” and insert “premises”.

This amendment would amend the sub-paragraph to use the correct defined term.

Amendment 64, in schedule 2, page 94, line 24, leave out “that property” and insert “those premises”.

This amendment would amend the sub-paragraph to use the correct defined term.

Amendment 65, in schedule 2, page 97, line 14, leave out from second “of” to end of line 21 and insert “the premises being valued.

(4A) The “premises being valued” are the premises that—

(a) are demised by the lease being valued, and

(b) are subject to the standard valuation method.

(4B) The “market value” of the premises being valued is—

(a) in the case of a freehold enfranchisement, or lease extension, under the LRA 1967, the amount which the freehold of the premises being valued could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date;

(b) in the case of a collective enfranchisement or lease extension under the LRHUDA 1993, the share of the relevant freehold market value which is attributable to the premises being valued.

(4C) The “relevant freehold market value” is —

(a) in the case of a collective enfranchisement, the amount which the freehold to be acquired on the collective enfranchisement could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date;

(b) in the case of a lease extension under the LRHUDA 1993, the amount which the freehold of the building and any other land which contain the premises being valued could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date.”

This amendment would clarify that where the term value of a lease of a flat and any other property is being valued under Schedule 2, the market value is a share of the freehold value of the premises which contain the flat and other property.

Amendment 66, in schedule 2, page 97, line 33, at end insert—

“(9) If the lease being valued is a shared ownership lease—

(a) the rent that is to be used for the purposes of sub-paragraph (1) and (2) is the rent that is payable under the lease in respect of the tenant’s share in the property demised by the lease;

(b) where the lease does not reserve separate rents in respect of the tenant’s share in the demised premises and the landlord’s share in the property demised by the lease, any rent reserved is to be treated as reserved in respect of the landlord’s share.”

This provides that, where there is a shared ownership lease, the rent payable in respect of the share owned by the tenant is to be taken into account when determining the term value; and deals with the case where no rent is specifically reserved in respect of the share owned by the tenant.

Amendment 67, in schedule 2, page 97, line 39, leave out “the freehold of”.

This amendment is consequential on Amendment 68.

Amendment 68, in schedule 2, page 98, line 7, leave out from first “of” to end of line 10 and insert “the premises being valued is—

(a) in the case of the transfer of a freehold house under the LRA 1967, the amount which the freehold of the premises being valued could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date;

(b) in the case of a collective enfranchisement, the share of the relevant freehold market value which is attributable to the premises being valued.

(3A) The “relevant freehold market value” is the amount which the freehold to be acquired on the collective enfranchisement could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date.”—(Lee Rowley.)

This amendment would clarify that where the reversion value of a lease of a flat is being valued under Schedule 2 for the purposes of enfranchisement, the market value is a share of the value of the freehold being acquired on the collective enfranchisement.

--- Later in debate ---

[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.

Leasehold and Freehold Reform Bill (Seventh sitting)

Richard Fuller Excerpts

Committee stage
Thursday 25th January 2024 Public Bill Committees

[Richard Fuller (North East Bedfordshire) (Con)]

I want to take up the point the hon. Gentleman made about the timing of the ground rent review and the implications for subsequent change in the Bill. Has the Opposition looked at what the potential legal liability might be if we move forward with this Bill without clarity on what happens on ground rent, particularly as this is retrospective legislation, and whether there is a potential liability for the taxpayer if that co-ordination does not work effectively?

[Matthew Pennycook]

We have had access to the advice and opinion of a number of organisations and individuals, which have probably been sent to the whole Committee. We have also sought to engage the opinions of many relevant experts in this area. The honest answer is that we do not know. I think the Minister himself would say openly that there is a sliding scale of risk with each of those options. I fully expect any of those options, if they are introduced, to result in litigation against the Government that seeks to take the matter to Strasbourg under the relevant rules. That has to be factored in. The Secretary of State and the Minister will be getting the relevant advice. That is why I encourage the Minister to be courageous in the option they ultimately choose. We want to strike the right balance by addressing the problem as it exists for leaseholders—that is very clear—but ensuring that whatever option comes forward can stick and is defensible. That is a conversation we will have over the coming weeks and months, because this issue is going to rumble on for some time to come.

Question put, That the amendment be made.

Leasehold and Freehold Reform Bill (Eighth sitting)

Richard Fuller Excerpts

Committee stage
Thursday 25th January 2024 Public Bill Committees

[Lee Rowley]

I am going to include that in my written response, too, because I know that the specifics of the definition of audit are quite different from other aspects of this question. My understanding is that we will prescribe in secondary legislation what needs to be provided. Given that an accountant will be a part of that, they will have to ensure that the audit conforms to their usual codes of practice. I will write on the specifics to ensure that I have given sufficient information.

[Richard Fuller]

As the Minister is contemplating what he will put in his letter, including a response to the hon. Member for Brent North, could I gently remind him that auditing is an expensive procedure? There will be a number of instances where these accounts might fall short of what would be required under existing Companies House legislation. There are some metrics and things out there that the Government could use, but he should bear in the mind the cost of auditing.

[Lee Rowley]

My hon. Friend is absolutely right. One of the reasons why I want to write is that I want to ensure that the specific elements and substantive parts of the concept of audit are represented to the Committee in the most accurate way. We have to strike a balance by ensuring that sufficient information is made available for decisions to be made, but equally we cannot create a process that is so involved, for what I am sure are very good reasons, that it would be disproportionate, and then create a whole heap of new consequences on the other side, which is what we are trying to avoid.

To conclude, new section 21E places an obligation on landlords to provide an annual report. For service charges, that report must be provided within one month of starting a 12-month accounting period, although it can be provided earlier if it is expedient to do so. Both new sections allow the Secretary of State, as we have already discussed, and Welsh Ministers to prescribe the detailed content in secondary legislation. We will work closely with interested parties when we come to do that. Subsections (3) and (4) make consequential changes to the definition of “qualified accountant” under sections 28 and 39 of the 1985 Act to reflect these new sections. I commend the clause to the Committee.

Question put and agreed to.

Clause 28 accordingly ordered to stand part of the Bill.

Clause 29

Right to obtain information on request

--- Later in debate ---

[Lee Rowley]

I thank the hon. Gentleman for amendments 19 to 25, with which, as he indicated, he seeks to adds clarity that any sums paid to the leaseholder where there is a failure to comply are a punishment rather than a recompense for loss. As the Committee is aware, clause 30 will replace the existing and ineffective enforcement measures for failure to provide information with new, more effective and more proportionate measures. That includes allowing the leaseholder to make an application to the appropriate tribunal in cases where landlords have failed to provide the necessary service charge information.

It is the Government’s view that the tribunal is the appropriate body to handle such disputes and to determine whether the landlord has failed in their duties, and whether subsequently they are required to pay damages to the leaseholder. In reaching its decision and ordering that damages be paid, the tribunal need only be satisfied on the balance of probabilities that the landlord breached the relevant section. If a financial penalty were applied, the appropriate tribunal would need to be satisfied beyond reasonable doubt that the landlord had breached the relevant section.

While I understand the hon. Gentleman’s point on the use of the term “damages”, I am advised that its use does not mean that evidence of financial loss is required. Therefore, in aggregate, we consider that financially recompensing the affected leaseholder by way of the payment of damages is both a suitable incentive for the leaseholder to bring the application and a suitable deterrent for landlords, while aligning with the tribunal’s powers.

[Richard Fuller]

The Minister speaks quickly and is knowledgeable about this matter; I just want to put it into everyday speak that the rest of us can understand. I think that the intention behind the Opposition’s amendment is to be clear that there is a difference between penalties and damages. They do not want the burden of proof to be on leaseholders, in this case, and there is tremendous merit to that. Whatever we put into law has to be accessible to people. I think the Minister said that if we change the word from “damages” to “penalties”, that would raise the hurdle. Can he assure us of his objection to the proposed amendment in everyday speak,? As the Bill is drafted, the hurdle will be lower, and there will be no burden of proof on the leaseholder for the penalties/damages to take effect.

[Lee Rowley]

As best as I understand it, the situation is exactly as my hon. Friend describes. The threshold is lower, and therefore the provisions are more proportionate, and evidence of financial loss is not required. On that basis, I hope that the hon. Member for Greenwich and Woolwich will withdraw the amendment. I will come to amendment 134 in due course.

--- Later in debate ---

[Matthew Pennycook]

Amendments 17 and 18 address our remaining main two concerns about the clause. The first concern, to which we will return when we consider penalties in relation to part 4 of the Bill, is that we are not convinced that a penalty cap of £5,000 is a sufficient deterrent against non-compliance with the requirements in question. For many—not all, but many—landlords, a penalty of £5,000 will be very easily absorbed. The degree to which the sanctions in proposed new section 25A to the Landlord and Tenant Act 1985 bite would obviously be improved if the penalty cap of £5,000 applied to all leaseholders partaking in any given application, rather than them having to share an amount up to £5,000 between them. My reading of proposed new section 25A(5) is that the fine would apply to each person making an application on grounds that the landlord has failed to comply with a relevant requirement, but I would be grateful if the Minister would clarify that point. Is it a single fine, or is it a fine that would apply to each leaseholder involved?

However, even if a fine of up to £5,000 could be awarded to multiple leaseholders, we still question whether it is sufficient—I think that is a point that is worthy of debate. Labour is minded to believe a more appropriate threshold for penalties paid under proposed new section 25A—I remind the Committee that penalties are awarded at the discretion of the tribunal, so they are not automatic—would be £30,000, thereby aligning penalties in the Bill with other leasehold law, such as financial penalties for breach of section 3(1) of the Leasehold Reform (Ground Rent) Act 2022. Amendment 17 proposes such a cap, although we would certainly consider an even higher limit, such as the £50,000 proposed by the hon. Member for North East Bedfordshire.

Secondly, Labour thinks that the functioning of the new enforcement regime would be improved by specifying a floor on penalties in the Bill. In making clear that non-compliance with the relevant requirements will always elicit a fine, landlords will be incentivised to comply. Amendment 18 proposes that penalties under this section must be at least £1,000, with the implication that the tribunal would determine what award to make between the range of £1,000 and £30,000 for each breach. I look forward to the Minister’s response to each amendment.

[Richard Fuller]

I am tempted to frame page 25 of today’s amendment paper, because it includes the shadow Minister’s amendment 17, which would increase the penalties from £5,000 to £30,000, and my amendment 142, which would increase them from £5,000 to £50,000. I thought it was usually the Conservative party that is pro-business and tries to keep costs on business low, but then I recalled that these penalties apply to people doing something wrong, and of course the Labour party is always soft on criminals.

Seriously, though, the shadow Minister and I have a clear intent, which I am sure is shared by the Minister. A lot of the measures in this part of the Bill are trying desperately to unpick complicated things and rebalance them in favour of people who own their own home but do not run a large business, or people with small financial interests, where there are 30 or 40 of them against one person with a significant financial interest that covers all those people. In trying to rebalance things here, we all want to ensure that these measures are as effective as possible and that there is enough encouragement to ensure that the good practice the Government want to see can be done effectively.

The concern that I share with the shadow Minister is that the current levels of penalties just look like a cost of doing business. [Interruption.] Indeed! The hon. Member for Brent North has just slapped himself on the wrist, which is probably how many businesses will see it.

Can I gird the Minister’s loins and encourage him to take up his shield and his sword of righteousness in defence of individual leaseholders and say, “This amount is too low. We shall change the legislation. This party and this Government stand to make the intent of what we will do to truly bite on those who are doing wrong”?

[Lee Rowley]

I am grateful to my hon. Friend the Member for North East Bedfordshire and the hon. Member for Greenwich and Woolwich for tabling their amendments. I share their basic conceptual desire, and that of other Committee members, for people or organisations that have done the wrong things to be held to account. There should be penalties that recognise that they have done the wrong thing. The challenge is always going to be where we draw the line.

I recognise that there are multiple parts of the menu on offer. Notwithstanding the very valid points that have been made, it is important not to lose sight of the fact that the Government are doubling the number from £2,500 to £5,000. Individual right hon. and hon. Members will take different views throughout this process and beyond on whether that is proportionate or whether it should be higher or lower. We think we have struck a proportionate balance.

I will add to the record, for consideration, the importance of the potential for unintended consequences. The response will quite rightly be that it will ultimately be for the tribunal to determine how much to apportion and how to use any changed option. There is a scenario in which the potential penalty on the freeholder, or the party being taken to the tribunal, becomes so great and the hazard becomes so visible that the freeholder starts to oppose it with even more objections, difficulties and the like.

I am making quite a nuanced argument, and Members may feel that I am overthinking this, but we have to be cautious not inadvertently to create a process that emboldens freeholders to fight even harder because of the potential hazard and because they feel that they may be exposed to a fine larger than would be reasonable and proportionate. However, I take the point about the challenge of setting the penalty in the right place. The Government’s view is that the increase from £2,500 to £5,000 is a step forward. That is what we are proposing to this Committee. As a result, we will resist the amendments.

--- Later in debate ---

[Lee Rowley]

I apologise for not covering that point; I intended to do so. It is £5,000 per challenge. There is the ability to bring forward multiple challenges. Should that be the case, similar amounts of damages may be awarded.

[Richard Fuller]

Sorry, I am such a pedant, but “per challenge” could relate to person A making the challenge that report x was not done on time, and then person B making the challenge that report x was not done on time. Do those two challenges count as two separate challenges because they are brought by two different people, although they are for the same objection, or as one challenge because they are for the same objection, although they are presented by two different people?

[Lee Rowley]

They are two separate challenges. If a challenge goes to the tribunal and it is deemed that a penalty should apply, for whatever reason or whatever poor behaviour, and a penalty of up to £5,000 is apportioned, and then another person makes the same claim about exactly the same instance, one would logically expect the tribunal to allocate the same penalty. Multiple challenges get multiple fines.

--- Later in debate ---

[Matthew Pennycook]

The Minister’s response was quite disappointing. I think he has made it clear that it is per challenge per group, so what is the incentive for a large group of leaseholders to press the dispute if the potential amount of the share that they are going to get is £100, or even £50? It might be a low amount. [Interruption.] No, it could be. It is a share of the challenge; if there are 100 leaseholders in the challenge, they get a maximum of £5,000 to share between them unless they make multiple challenges. That is my reading of what the Minister has just said.

[Richard Fuller]

Bearing in mind that this is an intervention—

[The Chair]

It is, so let it be short.

[Richard Fuller]

I think the shadow Minister is mixing two things up when he says that people get a share. The issue here is about changing the behaviour of the person who is doing wrong, not “I’m going to get this much money out of it.” The incentive is for the person who is doing wrong. Does the shadow Minister agree with the point made by the hon. Member for Brent North about clogging up the system: why would 150 people put one challenge in when they could put 150 challenges in?

[Matthew Pennycook]

I take the point, and I understand what the hon. Gentleman is driving at: there is the very real risk of clogging up the system with multiple challenges if leaseholders are sophisticated enough to understand the provisions of the clause and work out that the best thing they can do is submit multiple challenges. I do not think that most will. There is therefore a detrimental impact on the incentives for leaseholders to try to dispute these matters.

Coming back to the fundamental point of whether this will change the behaviour of landlords when it comes to compliance, though, I think the hon. Gentleman is right: the figure of £5,000 is too low. I have had this debate so many times with Government Ministers. We had it on the Renters (Reform) Bill: the maximum that local authorities can charge for certain breaches of that Bill is £5,000. Most landlords will take that as a risk of doing business.

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[Lee Rowley]

Clause 40 sets out general limitations with regard to estate management charges. Subsection (1) states:

“A charge demanded as an estate management charge is payable…only to the extent that the amount of the charge reflects relevant costs”—

in other words, purely the costs associated with estate management—and cannot be used to fund wider activities. This means that not every cost incurred by an estate manager is chargeable; an example would be if costs arose from the award of damages against the estate manager or an activity outside the estate by the estate manager that is not regulated. Those costs cannot be passed on.

Subsection (2) goes on to set out more detailed circumstances in which costs that are relevant costs may cease to become relevant costs and hence not payable or only partially payable.

[Richard Fuller]

I want to probe a bit more, because of the speed with which we shot through clause 39—with your leave, Chair, I am sure you will find this in order, because clause 40 also relates to relevant costs. Clause 39(10) says that relevant costs,

“in relation to a dwelling, means costs which are incurred by an estate manager in carrying out estate management for the benefit of the dwelling or for the benefit of the dwelling and other dwellings.”

As the Government were considering clauses 39 and 40, the general limitations on what might be a relevant cost, what consideration did the Minister or the Government give to the fact that there are some costs that might be covered within that general limitation that, for some people, are covered by payments they make through their council tax? Therefore, in certain circumstances it may be the case that people are paying twice for the same services covered by what are defined as estate management running costs.

[Lee Rowley]

I am grateful to my hon. Friend for his point. He tempts me, at this relatively late hour, to get into an extremely important conversation that we will come to in the coming days. With his leave, I will limit my response to acknowledging his broader point, which is potentially broader than simply the discussions here on this Bill. Having listened to the evidence given to the Committee last week, I recognise that this is a key area that those impacted by estate management charges would like to debate further. I know that we will come to this in due course. I am putting that down as a marker for further discussion—I am not sure if I can satisfy him with the discussion, but I will put down a marker for it none the less.

To conclude on clause 40, specifically, subsection (2) refers to the provisions in clauses 41 to 43, which cover the requirement for the reasonableness of estate management costs and broader consultation requirements. Clause 40 provides clarity that not all costs incurred by estate managers may be passed on and sets out circumstances when even chargeable costs are not payable. I commend the clause to the Committee.

Question put and agreed to.

Clause 40 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Mr Mohindra.)

Leasehold and Freehold Reform Bill (Ninth sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 30th January 2024 Public Bill Committees

Limitation of estate management charges: reasonableness

[Richard Fuller (North East Bedfordshire) (Con)]

I beg to move amendment 145, in clause 41, page 66, line 28, at end insert—

“(c) only where they are incurred in the provision of services or the carrying out of works that would not ordinarily be provided by local authorities.”

This amendment would mean that services or works that would ordinarily be provided by local authorities are not relevant costs for the purposes of estate management charges.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 150, in clause 41, page 66, line 28, at end insert—

“(c) where they are incurred in the provision of services or the carrying out of works, only where the requirement for those services or works is not the result of defects in the original construction.”

This amendment would ensure that services or works on private or mixed-use estate that are required as a result of defects in its construction are not relevant costs for the purposes of estate management charges.

Clause stand part.

[Richard Fuller]

It is a pleasure to serve under your chairmanship, Sir Mark. I remind colleagues that we have moved from the clauses that relate to what was termed the “feudal” system of leasehold to the rather more modern problem of estate management charges, which in large part, although not exclusively, are incurred by those who own their homes. Essentially, the charges have arisen because of issues to do with adoption by local authorities. They are charges for a range of services in what might be termed, but are not necessarily, public areas, and for what might be, but are not necessarily, services or provisions that would normally be provided by a local authority.

It is worth bearing in mind how rapidly the issue of estate management charges has grown. From being essentially non-existent, or at least very rare, I think the charges now cover at least 1 million or 1.5 million homeowners—perhaps the Minister will tell us it is an even higher number. One issue is that we are essentially creating a two-tier society of council tax payers: people who pay council tax once to cover a range of public services, and residents in parts of our country who pay for those services twice—once through their council tax and again through their estate management charges.

The provisions in part 4 deal with a number of changes that seek to improve the rights of those subject to estate management charges and to improve access to redress. I commend a number of my local residents and councillors, most importantly Councillor Jim Weir of Great Denham, as well as 30 of my Conservative colleagues who wrote with me to the Prime Minister and Secretary of State to ask them to include the provisions in the Bill. I am grateful to them for doing so. Most particularly, I thank the former Minister—my hon. Friend the Member for Redditch—and the current Minister for their help and guidance on these matters. The provisions will enable us to make a great amount of progress. However, it is clear—and it was clear from the evidence the Committee received—that there is another path, or at least it is clear that the public also desire to abolish or reduce the current system of estate management charges, rather than improving it and the rights that people have. That is what the amendment seeks to achieve.

At issue is the matter of adoption. In the summary on page 4, paragraph 2 of the Competition and Market Authority report that looks into estate management charges and other issues, it states that

“evidence gathered in our market study to date has shown that, over the last five years or so, amenities on new housing estates that are available for wider public use (ie not for the exclusive use of households on the estate), are increasingly not being adopted by the relevant authority. This appears to be driven by the discretionary nature of adoption, housebuilders’ incentives not to pursue adoption and by local authority concerns about the future ongoing costs of maintaining amenities”.

That gets to the crux of the issue. The decision process for creating estate management charges takes place in a cosy discussion between the developers of new estates and the local authorities, both of which have an interest in ensuring that they are not the ones to carry the cost for a range of communal services. Guess who ends up paying the bill? It is homeowners up and down the country, who have no role in that cosy discussion. I wish to influence that cosy discussion through my amendment.

It is tricky to change the process of adoption, and I think you would consider it out of scope, Sir Mark, if we sought to do so in the Bill. In the evidence session, I heard colleagues talk about some of the risks involved in leaving councils with unadoptable roads and poor-standard infrastructure that the council tax payer has to pay to bring up to standard. No one on the Committee wishes to see that happen. My amendment would not force adoption, then, but essentially take the payer—the householder or homeowner—out of the equation for paying for those costs. It would exclude services or works that would ordinarily be provided by local authorities so that they would not count as costs that could be incurred by estate management charges.

My hope is that the amendment would pour a dose of reality on to developers by saying that they could no longer pass the buck for the costs of poor-standard infrastructure used by the public to homeowners on their estates. They would have to bring them up to standard, and then councils could adopt them.

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

It is a pleasure to continue our line-by-line consideration of the Bill with you in the Chair, Sir Mark. I rise to speak to amendment 150, tabled in my name and that of my hon. Friend the Member for Weaver Vale. As we have heard, part 4 of the Bill deals with the regulation of estate management. The hon. Member for North East Bedfordshire provided an extremely comprehensive overview of the problem and its prevalence.

The distinct set of problems faced by residential freeholders on private or mixed-tenure estates that part 4 seeks to address is well known and well understood. Those problems include: excessive or inappropriate charges levied for minimal or even non-existent services; charges imposed for services that should by right be covered by council tax; charges that include costly and arbitrary administration fees; charges hiked without adequate justification; and charges levied when residential freeholders are in the process of selling their property.

In addition to a general lack of clarity and transparency about how estate management charges and fees are arrived at and how they break down—these problems are not dissimilar to those experienced by long leaseholders in respect of service charges—residential freeholders on privately owned and managed estates clearly suffer from inadequate transparency in other unique respects. For example, as I have said in past debates on the subject in the House, it would appear to be fairly common for residential freeholders not to be notified of their future liability for charges early in the conveyancing process; many learn of their exposure only at the point of completion. Even in instances in which residential freeholders are notified about their future liability in good time, many have to confront the fact that their contracts do not specify limits or caps on charges and fees.

There is clearly a distinct problem with management fragmentation on many privately owned estates that have been constructed throughout the country in recent years, with residential freeholders even on relatively new estates frequently having to navigate scores of management companies, each levying fees for services in a way that further exacerbates the general lack of transparency and potential for abuse that they face in respect of charges and fees. Underpinning all those issues of concern is a fundamental absence of adequate regulation or oversight of the practices of estate management companies and the fact that residential freeholders currently do not enjoy statutory rights equivalent to those held by leaseholders.

There has been a broad consensus across the House for some time that residential freeholders on new build private and mixed-tenure estates require greater rights and protections, and the Government have recognised publicly—for at least six years, by my count—that they need to act to address the range of problems that freeholders face. Labour therefore welcomes the Government’s decision to use the Bill to create an entirely new statutory regime for residential freeholders based on leaseholders’ rights and is fully supportive of the intent behind the provisions in this part of the Bill.

Although part 4 sets the broad framework for regulating estate management, much of the detail necessary to bring that framework into force will come via regulations. We take no issue with that, and do not intend to pre-empt the regulations by attempting to prescribe a series of requirements on the face of the Bill. However, we believe that, where possible, we should seek to use part 4 not only to provide greater protection to residential freeholders who live on the estates, but to contribute to a reduction in the prevalence of such arrangements—a point that the hon. Member for North East Bedfordshire was driving at.

Although additional protections of the kind introduced under part 4 will almost certainly still be required, in its “Private management of public amenities on housing estates” working paper, published on 3 November last year, the Competition and Markets Authority stated that

“we consider that reducing the prevalence of private management arrangements would be the most direct route to address the root cause of our emerging concerns”.

The CMA made it clear in that working paper that reducing the prevalence of private management arrangements would require a mix of legislative and policy changes more fundamental than the introduction of regulatory protection, and drew attention to the fact that it would result in a wider set of consequential changes, not least the potential for

“significant impact on local authority finances and resources at a time when local authority funding is already stretched.”

That is why, while we very much sympathise with its intent of ensuring that residential freeholders on private or mixed-tenure estates are not charged for services that should by right be covered by council tax, we have reservations about amendment 145. We are concerned that it will, in effect, force local authorities to adopt public amenities on new housing estates, irrespective of circumstance, or—if compulsion is not the intent of the hon. Member for North East Bedfordshire—would see those amenities degrade and deteriorate as a result of not being maintained by either the private management company or the local authority.

[Richard Fuller]

I am grateful to the shadow Minister for his detailed look at my amendment. First, will he explain to the Committee where he sees compulsion on local authorities in the amendment? I cannot see it. Secondly, will he explain why his more material concern about the possibility of items degrading and estate management not doing anything would not be addressed by the strengthening provisions that the Government are putting in the Bill on behalf of homeowners?

[Matthew Pennycook]

Under my reading of the hon. Gentleman’s amendment, if it is ensured that services or works that would ordinarily be provided by local authorities are not relevant costs for the purposes of charges in this part, who will pick up the bill? If the local authority is not compelled to adopt the amenities, our concern is that no one will maintain them. To address his point directly, I worry that his amendment would not ensure that the private estate management company picks up the charge. I will come to why I think our amendment is a superior way of addressing this very real problem.

[Matthew Pennycook]

We are all driving at the same point. I was very much taken by the CMA’s conclusion that reducing the prevalence of these arrangements requires a combination of the mandatory adoption of amenities and putting in place corresponding common adoptable standards. If we do one without the other, we risk some unintended consequences.

My concern about the amendment tabled by the hon. Member for North East Bedfordshire is that we cannot simply remove from estate charges costs that should in an ideal circumstance be borne by local authorities and then expect the private management company to simply pick them up. I fear that the more likely scenario will be that the amenities are not properly maintained. That is a real concern, and should be for residential freeholders on the estates. As the hon. Member for North East Bedfordshire outlined, there are some good reasons why local authorities are reluctant to adopt public amenities on private or mixed-tenure estates.

[Richard Fuller]

I would hate to detain the Committee because we have a lot to go through, but let us understand the economic process here. Initially, the local authority and the developer will work out whether to adopt roads. The developer will then have to decide whether to set up an estate management company, which may or may not deliver facilities and services that would normally be covered by council tax. If the amendment is part of legislation, no property manager in their right mind will accept taking on the responsibility because they will not wish to be liable. Here is the flow of responsibility: one cannot lumber home owners with the cost, the property manager will not be lumbered with the cost for the reasons outlined—it may go bust—so the developer will then have to recognise that there is nowhere for it to turn.

[Matthew Pennycook]

We fundamentally disagree on where the logic chain leads. I do not think that, on the basis of the amendment, the developer will be forced to pick up the costs. It is far more likely that they would build below what would be considered a common adoptable standard and then leave residential freeholders to live with substandard amenities. We could debate this further, but that is my take on the hon. Gentleman’s amendment: it would not force the management companies to do that. That is a real concern.

As I said, there are a variety of reasons why local authorities often do not take on responsibility. The most common one is that the public amenities on new housing estates are not built to a determined, adoptable standard. In those circumstances, one can hardly blame the local authority in question for a reluctance to adopt roads and common services that it will have to repair and maintain a great cost. My central argument is that if we are to reduce the prevalence of these arrangements, we must ensure that we introduce a common adoptable standard for public amenities on estates at the same time as we require mandatory adoption, as the CMA advises.

--- Later in debate ---

[Richard Fuller]

I have listened with interest to hon. Members’ contributions, particularly in respect of my amendment 145. I strongly believe that we need to close down the trend to create two tiers of council tax payers —those who pay once and those who have to pay twice—and ensure that we all pay only once. My amendment would directly address that issue. I would therefore like to put it to a vote.

Question put, That the amendment be made.

--- Later in debate ---

[Richard Fuller]

I beg to move amendment 139, in clause 44, page 68, line 31, at end insert—

“(3A) Where the appropriate tribunal has made a determination on an application under subsection (1) or (3) that an estate management charge is not payable because the costs incurred by an estate manager are not relevant costs under section 41(1)(b) (services or works to be of a reasonable standard), the tribunal may impose a penalty on the estate manager which is payable to the residents of affected managed dwellings; and the tribunal may determine how much of the penalty is to be paid to the residents of each affected managed dwelling.”

This amendment would enable the tribunal to impose a financial penalty, payable to residents of affected managed dwellings, where estate management work has not been completed to a reasonable standard.

The clause is an excellent step forward in ensuring that freeholders will have rights to access a tribunal when there are errors and poor provision of services on their estate, so I very much welcome it. Through the amendment, I seek to probe the Minister about whether we have got the balance right to enable effective use of the tribunal. The amendment essentially says that in addition to requiring that poor-standard, poorly provided services are brought up to standard, the tribunal could impose a financial penalty on the management company.

It requires a tremendous effort for people to take cases to a tribunal: they often have to make a collective effort and gather evidence about what has gone wrong, and they may have to go through weeks, months or potentially years to get to the point where they can take a case successfully to tribunal. If the only remedy at the end of that is that those services have to be brought up to standard, where is the incentive not to provide defective services in the first place? By enabling the tribunal to impose financial penalties, the amendment would redress the balance, with the bias more towards those suffering from poor service in the first place.

[Lee Rowley]

I am grateful to my hon. Friend for tabling this probing amendment. I agree that where works and services are provided and charged for on freehold estates, their costs should be charged to residents only if they are of a reasonable standard. As he indicated, clause 41 makes progress in that regard. Clause 44 allows for the appropriate tribunal to determine whether an estate management charge is payable. Should the tribunal find that services or works charged for have not been carried out to a reasonable standard, it will determine the amount that the homeowner is liable to pay. That is equivalent to the leasehold regime, and I do think that tribunals are the best placed to make that decision.

On whether additionality is required, the appropriate tribunal is not an enforcement body; it is not a weights and measures authority or a district council. If a financial penalty were applied for works not completed to a reasonable standard, the appropriate tribunal would need to be satisfied beyond reasonable doubt that that was the case. My hon. Friend may say—I have some sympathy with the point—that people would probably not go to tribunal, given its complexity. In addition, if people want to sue for defective works and such things, they can do so through other parts of the legal system; that form of redress is available if necessary.

If we were to introduce penalties for works or services not completed to a reasonable standard on freehold estates, the challenge would be in the implications for the tribunal and the equivalent leasehold regime. Therefore, while I have a lot of sympathy with my hon. Friend’s point, I hope that he will consider withdrawing the amendment it on the basis that it would probably move the tribunal too much in one direction and create a whole heap of other consequences that we would need to think carefully about, and which I do not think we can accept at the current time.

[Richard Fuller]

I am grateful for the Minister’s comments. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Richard Fuller]

I beg to move amendment 140, in clause 44, page 69, line 6, at end insert—

“(7) The Secretary of State must by regulations provide—

(a) that an estate manager’s litigation costs incurred as a consequence of an application under this section may not be recouped through the estate management charge, except where the tribunal considers it just and equitable for such costs to be so recouped;

(b) for the right of an applicant under this section to claim litigation costs incurred as a consequence of an application under this section from the estate manager, where the tribunal considers it just and equitable in the circumstances.

(8) Regulations under subsection (7) may amend primary legislation.”

This amendment would require the Secretary of State to make regulations preventing estate managers from passing their litigation costs on to residents through the estate management charge, and providing for residents to be able to reclaim their litigation costs from an estate manager.

The amendment, which is in a similar vein to the previous one, is designed to probe the Minister on whether we have got the balance right in the clause to enable effective use of the tribunal by those who would wish to bring a case against estate managers. As we heard when we discussed the clauses on leasehold, one of the biggest concerns that people have is that they will face open-ended litigation costs. In this case, the litigation costs will essentially be cycled back through the estate management charges, and therefore effectively end up being paid by homeowners on the affected estates.

Amendment 140 is designed to prevent that passing on of litigation costs. It also recognises that many homeowners may wish to take action but not have the wherewithal to pay the litigation costs. Paragraph (b) of the amendment therefore enables residents to claim the litigation costs arising from their application. I am interested in the Minister’s view on the balance of litigation in such circumstances—we have spoken about it in relation to other circumstances. I think we all want the tribunal to work, but for that to happen, people must not be put off by the fear that they may face significant direct or indirect litigation costs.

[Matthew Pennycook]

I rise to support the amendment. We discussed litigation costs in relation to clause 34; we strongly argued for a general prohibition with very limited exceptions. The hon. Gentleman is right to draw attention to the fact, which applies to part 4 as a whole, that we should not replicate the flaws of the leasehold system in the newer system of estate management charges. Our arguments in relation to the leasehold regime therefore apply equally here, and the hon. Gentleman is right to raise the point.

[Lee Rowley]

I will try directly to address the point made by my hon. Friend the Member for North East Bedfordshire, to which we are sympathetic. It is important that litigation costs are not passed on. On the leasehold side, there is clear evidence that that is happening, but the question is whether there is clear evidence of it happening in the area of estate management. From speaking to officials, we do not see that clear evidence at the moment. However, if any members of the Committee or others have such evidence, I would welcome it. If it is happening, I am sure that we would be happy to consider the issue as the Bill progresses.

[Richard Fuller]

With the Minister’s assurance that he will keep a watching brief on the issue, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

[Lee Rowley]

Clause 44 grants homeowners a new right to apply to the appropriate tribunal for a determination on whether their estate management charge is payable, and if it is, how it should be paid, by whom and to whom it should be paid, and the date by which the payment should be made. Under this provision, the tribunal will enforce the newly established reasonableness principle set out by clause 41, which requires estate management services to be reasonable, and any works or services to be of a reasonable standard.

The clause requires estate management companies to charge the correct fees from the outset, thereby reducing the number of homeowners being overcharged for works and services on their estate or being at risk of legal action. The clause also sets out the circumstances in which an application cannot be made, including when the homeowner has already agreed to, but not paid, the charge, or in which the issue has already been subject to a decision by a court. That will prevent homeowners from bringing unjustified or vexatious claims, which can lead to delays in the payment of valid estate management charges and negatively impact the upkeep and good management of the estate. The clause delivers on a Government commitment to increase protections for existing homeowners, and I commend it to the Committee.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clause 45

Demands for payment

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Richard Fuller]

I beg to move amendment 141, in clause 49, page 72, line 26, leave out “£5,000” and insert “£50,000”.

This amendment would increase from £5,000 to £50,000 the maximum amount of damages which may be awarded for a failure on the part of an estate manager to comply with the obligations imposed by clauses 45 to 48 (rights relating to estate management charges).

[The Chair]

With this it will be convenient to discuss clause stand part.

[Richard Fuller]

The Minister or shadow Minister will correct me if I am wrong, but I believe we covered issues to do with penalties earlier. The intent of this proposal is to ensure that damages in the leasehold and freehold system are the same. I therefore think I ought to ask leave to withdraw my amendment.

[Matthew Pennycook]

Without rehashing the debate on clause 30, I rise briefly to put on record that the Opposition think that the point the amendment is driving at is well made. We need equivalence between the two regimes, but we were concerned, notwithstanding damages versus penalties and all the rest, that the proposed financial penalty is too low to act as a serious deterrent to the type of behaviour that we are trying to do away with.

--- Later in debate ---

[Richard Fuller]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 49 ordered to stand part of the Bill.

Clause 50

Meaning of “administration charge”

Question proposed, That the clause stand part of the Bill.

[Lee Rowley]

Currently, freehold homeowners on managed estates have very few protections relating to the cost of administration charges they may be liable to pay. This can leave homeowners paying excessively high administration charges that they are unable to challenge. We will address this issue and give homeowners greater protection. We intend to do that by mirroring the existing framework in place to protect leaseholders.

Clause 50 provides a definition of an administration charge. It is

“an amount payable…by an owner of a dwelling”.

That amount must be in connection with applications or approvals in connection with a relevant obligation, the provision of documents, the sale or transfer of land, a failure to make a payment by the owner, or a breach of a relevant obligation. Subsections (2) and (3) allow the Secretary of State and Welsh Ministers to amend the definition of an administration charge by regulations, which must be done using the affirmative procedure. I commend the clause to the Committee.

Question put and agreed to.

Clause 50 accordingly ordered to stand part of the Bill.

Clause 51

Duty of estate managers to publish administration charge schedules

Question proposed, That the clause stand part of the Bill.

[Lee Rowley]

Homeowners on managed estates can be subject to high and unreasonable administration charges, as I indicated. Part of the problem is the lack of clarity or transparency surrounding them. Clause 51 introduces a duty for an estate manager to publish an administration charge schedule if they expect to impose an administration charge.

Subsection (2) requires that the schedule should include the detail of administration charges that the estate manager considers to be payable and their associated costs. Where the cost cannot be confirmed before a charge is payable, the method of determining the cost should be included. Subsection (3) requires a revised schedule to be published if an estate manger revises the administration charges. Subsection (5) allows the Secretary of State and Welsh Ministers to prescribe in regulations the form and content of the administration charge schedule and how it is to be provided to homeowners. We will work with all relevant partners to ensure that we obtain the right level of detail in regulations.

I thank my hon. Friend the Member for North East Bedfordshire for his amendment 143, which would increase the maximum amount of damages from £1,000 to £10,000. I hope that, potentially, our discussion on the previous clause would apply here, and I repeat that the Government intend to write to all Committee members about this issue in the days ahead.

Amendment 144 seeks to ensure that any damages that the tribunal orders payable under Clause 52 (2)(b) cannot be recouped from residents through subsequent charges. I agree with my hon. Friend that residents should be protected from future charges. An estate manager can only recover costs incurred in estate management. A tribunal order to pay damages would not be regarded as falling within the definition of costs of estate management.

The transparency measures included in clauses 46 and 47, in the form of the annual report and the right to obtain information upon request, would also deter estate managers from attempting to recoup these costs. That is because it would become obviously visible and it would be clear that it was not related to estate management. I note, however, my hon. Friend’s concerns and I am listening carefully on this matter. I hope that he might see fit to withdraw his amendment, having heard the Government’s response.

Finally, clause 52 sets out the enforcement provisions that reinforce the new duty in clause 51 to publish a schedule. A freehold homeowner on a managed estate may make an application to the appropriate tribunal if an estate manager has not published a schedule, or has done so but contrary to any provisions determined by the relevant Ministers.

The appropriate tribunal may order that the estate manager provides a correct schedule within 14 days of the order being made, and it may also order that the estate manager pays damages not exceeding £1,000 to the homeowner. We believe that this is a proportionate and effective enforcement mechanism where an estate manager fails to comply with its obligations. I commend the clause to the Committee.

[Richard Fuller]

Many thanks to the Minister, again, for proposing further changes to help homeowners who are affected by estate management charges. I am pleased to hear him reiterate that he will consider the issues raised in my amendment 143 about the appropriateness of charges. The shadow Minister raised similar concerns about those being set at an effective level.

On amendment 144, will the Minister consider writing to the Committee about how, in practice, not passing on damages, fees or charges to residents will work? Great Denham is a new part of my constituency, and in an estate of a few thousand houses, there may be 50, 60, 70 or more property management companies. All of them are discrete limited companies and all were set up as subsidiaries of one or more parent company. We need to be sure, from the Government’s point of view—given that some of these limited companies could go bust—about where the trail leads to. Under corporate law, as I understand it, there is no requirement for a parent company to be liable for the losses of a subsidiary that goes bust, and we want to ensure that liabilities flow upwards to the ultimate holding company.

Presumably, the payment of administration fees or dividends may go from subsidiary companies to the very large companies that are the ultimate parents. Is the Minister able to explain how he sees that working in practice? If not, or if it is too detailed to talk about now, perhaps he could agree to write to give some examples to the Committee in due course.

[Lee Rowley]

My hon. Friend highlights an important point. I think it is better that I write, but in principle, the transparency we seek to bring and the requirement to clearly articulate the charges that have been made, either in the annual report or elsewhere, aim to provide the sunlight that means that it is clear who is paying for what, and, if it is not a reasonable charge, there is a process that can be followed. But I will write to him with more on that, if that is helpful, because we all want to get this right.

--- Later in debate ---

[Lee Rowley]

Turning first to new clause 15, some leaseholders and homeowners on freehold estates do not currently have access to redress outside of the tribunal or the courts. I should note that part 4 of the Bill will give comprehensive rights and protections to homeowners on freehold estates, including access to the relevant tribunal. Though property managing agents are required by law to join a Government-approved redress scheme, there is no such requirement for leasehold landlords and freehold estate managers who manage their property or estate themselves. This means that for issues that fall outside the court or tribunal’s jurisdiction, such as poor communication or behavioural issues, those leaseholders and homeowners on freehold estates can make a complaint only through their landlord or estate manager’s own complaints process. If there is no complaints procedure, or once the leaseholder or homeowner has exhausted it, their access to redress is exhausted.

New clause 15 will fill this gap by providing that leasehold landlords and freehold estate managing agents who manage their property or estate can be required to join a redress scheme. The redress scheme will independently investigate and determine complaints made by a current or former owner. A redress scheme will need to be approved by, and administered by or on behalf of, the “lead enforcement authority”—the Secretary of State or other designated body. The Government have taken powers that will allow us to make exemptions to the requirement in specific circumstances and also a power to amend the definitions in this section. New clause 15 will fill gaps that leaseholders and homeowners on freehold estates currently experience in access to redress. I commend the clause to the Committee.

New clause 16 makes it clear that the redress scheme provided for under this part may act under a voluntary jurisdiction. That means they may allow for members to join the scheme who are not required to join under new clause 15. The scheme may also investigate and determine complaints outside their jurisdiction at their discretion, including complaints by people who are not current or former owners of a relevant dwelling. The scheme may offer voluntary mediation services and allow for certain complaints or circumstances to be excluded from their remit. The voluntary jurisdiction may be subject to the approval conditions that the redress scheme must comply with under new clause 18, which I will come to in a moment.

New clause 17 gives the Secretary of State the power to make payments, including loans, or give financial assistance to establish or maintain a redress scheme. The Government expect the costs of the redress scheme to be funded by the scheme themselves—for example, through charging membership fees. However, there may be some circumstances where the provision of funding is needed. The clause offers flexibility in that instance.

New clause 18 makes provision for the approval and designation of redress schemes. The approval conditions will apply to the future redress scheme and must be satisfied before the redress scheme is approved or designated. The approval conditions will be set out in regulations made by the Secretary of State and will include, but are not limited to, those conditions set out in subsection (3). In addition, new clause 18 allows the Secretary of State to make regulations to provide for the process for making applications for the approval of a redress scheme, the time the approval or designation remains valid, and the process for approval or designation to be withdrawn or revoked. It also allows for a scheme to set membership fees to cover the cost of providing the service.

I will now turn to new clauses 19, 20 and 9, and new schedule 1. To ensure compliance from landlords and freehold estate managers who are required to join a redress scheme, we need to ensure that robust enforcement mechanisms are in place. New clause 19 does that by allowing an enforcement authority to impose financial penalties where breaches of regulations by not joining a redress scheme occur. It also allows for the Secretary of State to make regulations to allow for the investigation of suspected breaches, and for co-operation and information sharing between enforcement authorities for the purposes of investigation.

New clause 20 sets out the amounts of the financial penalty that enforcement authorities may impose on landlords and freehold estate managers who do not comply with the requirement to join a redress scheme. An initial penalty for breaching the requirement may be up to £5,000. However, repeated breaches could lead to a penalty of up to £30,000. The new clause also allows the Secretary of State to amend the amount of financial penalty in regulations to reflect changes in the value of money.

New clause 9 provides a route for leaseholders to apply to the tribunal for an order to appoint a manager in place of their landlord if their landlord has failed to join the redress scheme. As with other “reasons”, leaseholders can apply for an order that a manager be appointed, and the tribunal will make one if

“it is just and convenient to make the order in all the circumstances of the case”.

[Richard Fuller]

The Minister will be aware of concerns about the practical application of this provision when it is put into practice, and the pressures on the tribunal. Under new clause 9, as I best understand it, homeowners will have the right to go to the first-tier tribunal to ask to change from company A to company B as their estate manager. If that is the case, why does it have to go through a tribunal? Why is it not feasible for people to determine that themselves without referring to a tribunal?

[Lee Rowley]

My hon. Friend raises an important point. I recognise the significant body of views in this place and elsewhere about the ability to appoint a right to manage company or a representative directly, and I have certainly heard those concerns. In this case, working within the framework of the proposed legislation, we wanted to ensure that there is a route to allow a manager to be appointed if a landlord refuses to comply. Of course, we would hope that a landlord would not refuse in the first instance.

The Government have also provided in new clause 13 that homeowners on freehold estates can apply to the tribunal for an order to appoint a new manager for the estate if a relevant estate manager has breached the requirement to join a redress scheme. New schedule 1 sets out further provisions relating to the penalties set out in new clause 19. It will require an enforcement authority to give a landlord or freehold estate manager whom they suspect of breaching the requirement to join a scheme a notice of its intention to issue a financial penalty before issuing a final notice. Those who are given a notice by the enforcement authority may make representations. The schedule sets out that where an enforcement authority imposes a financial penalty, it may apply the proceeds towards meeting the costs and expenses incurred in carrying out its functions. Any proceeds that are not so applied will be paid to the Secretary of State.

New clause 21 gives the Secretary of State the power to provide that a future redress scheme provider may apply to a court or tribunal for an order that a decision made under the scheme be enforced as if it were an order of the court. That may be necessary if there is an issue with landlords or freehold estate managers not complying with the redress scheme’s decisions.

New clause 22 makes the necessary provisions for the role of the lead enforcement authority. That is defined by new clause 15 as the Secretary of State, or another person designated by the Secretary of State. New clause 22 provides that the lead enforcement authority will have necessary oversight of the scheme. It also provides that if the Secretary of State decides to designate the role of the lead enforcement authority to another person, the Secretary of State will still have the appropriate power to direct the lead enforcement authority. That includes provisions to make payments and to bring the arrangement to an end.

New clause 23 provides for the Secretary of State to issue or approve guidance for enforcement authorities and the administrator of the future redress scheme about co-operation. It makes clear that the Secretary of State will exercise powers under new clause 18 to ensure that the administrator of the redress scheme has regard to guidance issued or approved under the section. Importantly, the amendment also requires the enforcement authority to have regard to the same guidance. New clause 24 makes necessary provision for the interpretation of this part of the Bill, including the definitions used. I commend the clauses to the Committee.

Leasehold and Freehold Reform Bill (Tenth sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 30th January 2024 Public Bill Committees

[Matthew Pennycook]

I thank the hon. Gentleman for that helpful intervention. I hope that I do have that effect, and that he can use his good offices to persuade the Minister of the merits of adopting new clause 1.

[Richard Fuller (North East Bedfordshire) (Con)]

The shadow Minister is making a good point, but to play the cynic on this issue, there is a difference between things that could take place and things that are taking place. What is the evidence? We should probably get rid of this latent power in any case, but how often is the power being used in practice? Is this a real thing that is happening?

[Matthew Pennycook]

I thank the hon. Gentleman. If he allows me to develop my case, I will address that very point, which was well made.

Not only is the potential penalty for a breach incredibly draconian in the circumstances in which it is used, but even in instances in which a lease is not terminated, with the landlord gaining the financial benefit of any capital loans attached to it, the laws of forfeiture can lead to a significant financial loss for leaseholders. Take the following scenario. For whatever reason, a leaseholder accumulates a small arrears—perhaps a demand has not been received—and the freeholder or managing agent issues reminders, which add to the initial debt. That debt is then handed over to a debt collector, whose means of remuneration incentivise them to pursue it aggressively. The leaseholder might then attempt to pay, but they also have to find the money to cover large legal costs. If there is a mortgage, the bank is often drawn in to secure its interest, so a compulsory loan is added to the leaseholder’s account. In our view, it is the lack of any proportionate relationship between a breach of a lease and its consequences that makes forfeiture so unjust.

Since 1925, this House has regularly taken steps to make it more difficult for a freeholder to successfully forfeit a lease. For example, the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002 introduced prohibitions on the serving of a section 146 notice under the Law of Property Act 1925 in relation to service charges and breach of a covenant, respectively, in instances in which the amount payable has not been determined. Those were not the first attempts to constrain the laws of forfeiture. History shows that Parliament has returned to the matter every few decades in an attempt to mitigate forfeiture’s manifest injustices. Despite the laws of forfeiture being made stricter, a great many freeholders and managing agents still routinely use forfeiture powers as a first resort when seeking to recover alleged arrears of payments from leaseholders, and they rely—this is in some ways the more important point—on the mere threat of forfeiture, and the financial risks it presents, to deter leaseholders from disputing any unreasonable costs and defending claims.

Those who advocate retaining forfeiture often argue that it is a minor issue that does not affect many leaseholders. However, although termination of a lease under forfeiture may be relatively rare—I deliberately use the word “may”, because His Majesty’s Courts and Tribunals Service does not track the number of cases—evidence from across the country shows hundreds of cases and scores of outright forfeitures on average each year. As I said, the threat is as damaging as the use of the power, because it puts landlords in a nearly unassailable position of strength in disputes vis-à-vis leaseholders, which is why forfeiture is routinely threatened in money disputes.

Because the law of forfeiture remains so manifestly unjust, despite successive attempts to render it more palatable, there have been many calls over recent decades for more wholesale reform. For example, hon. Members may know that in 2006 the Law Commission proposed abolishing the current law of forfeiture and replacing it with a statutory scheme for the termination of tenancies. It even drafted legislation, the Termination of Tenancies Bill, to implement that proposal. Yet nothing has been done. Indeed, the relevant section of the Law Commission’s website states—this amused me—that, 18 years on,

“We are awaiting the Government’s response to our recommendations”—

eighteen years and counting.

There is, of course, a need to carefully balance the rights and responsibilities of landlords and leaseholders, and there must be effective means of ensuring compliance with a lease agreement, but those means must be appropriate and proportionate to the breach in question. We can debate precisely what alternative arrangements are needed to deal with breaches of the covenant or unpaid arrears, whether orders of some kind are necessary to sell a property when a debt is not paid, and what kind of measured method is appropriate to removing problem tenants from a building—we heard about that in our oral evidence sessions. The starting point, however, must be that we finally grasp the nettle and abolish forfeiture, and the windfall it provides, once and for all. It operates to the prejudice of leaseholders and it cannot be justified.

The Secretary of State made clear on Second Reading that he was open to this Committee looking at how we end the abuse of forfeiture. I believe there is a broad consensus across the House—indeed across this Committee —that we should consign it to history, even if there is a debate about precisely what replace it with. Following the point made by the hon. Member for Walsall North, I sincerely hope that the Minister will not disappoint us and the many thousands of leaseholders who support the abolition of forfeiture by resisting this new clause out of hand. I very much look forward to his response.

--- Later in debate ---

[Lee Rowley]

I am grateful to the hon. Gentleman for tabling the new clause.

Let me separate my remarks into two parts. First, am I relatively sympathetic to the hon. Gentleman’s point? The answer is yes: there is a strong case for the measure. It has not been brought forward to date, and we will have to see whether it is possible to do so in the future. I cannot guarantee that, but we are looking at it and listening carefully. I understand the hon. Gentleman’s point, and he made a strong case for it. We will not be able to do everything that we have said throughout this process, in the end, but I assure him that we are interested in this potential area.

However, we will resist the new clause, not because it is the convention to do so but because we genuinely think that it is not the right measure, even if we did agree with the principle. To go back to the Henry VIII powers discussion, this is probably an area in respect of which, if we were to do something—again, there are no guarantees—we would do it on the face of the Bill.

[Richard Fuller]

I am listening carefully to the Minister, as I did to the shadow Minister. The current Minister says he is sympathetic to the intentions, but I take his point that it is the wrong new clause, so I will oppose it if it is pressed to a vote. However, the shadow Minister said that the Minister’s predecessor, my hon. Friend the Member for Redditch, said on the Floor of the House that she was sympathetic to the measure. That is two up. Will the Minister outline what the impediments might be? Will he give some reassurance that by the time we get to Report the Government may have turned sympathy into action? By the way, I think it is empathy, not sympathy.

[Lee Rowley]

My hon. Friend makes a number of salient points—

--- Later in debate ---

[Richard Fuller]

I beg to move, That the clause be read a Second time.

New clause 35 seeks further to improve the rights of those who will be liable for estate management charges. We know from written and oral evidence that people do not know what they are getting into right at the start of the purchase of a property. My clause asks the Government to make it clear by regulations that purchasers of properties who will get management charges are notified about them. It would ensure that people have access to the latest set of accounts, enabling them not only to understand what charges may be due, but to see what liabilities there were in the past.

[Lee Rowley]

I am grateful to my hon. Friend the Member for North East Bedfordshire for moving new clause 35. I share his concern that purchasers should know about estate management charges; we talked a little about that issue in our sitting this morning.

There is nothing worse than facing a bill that we know nothing about at a time when we can do nothing about it. That is why the Government have been working with the national trading standards estate and letting agency team to develop guidance for property agents on what constitutes material information. The information must be included in property listings to meet the obligations under the Consumer Protection from Unfair Trading Regulations 2008. Estate management charges are considered material if they will have an impact on a decision to purchase. That should mean that purchasers get information on the expected level of estate management charges when they see the property particulars before they even view the property, let alone make an offer.

In addition to the measures that we discussed this morning, we are seeking to include in the Bill a requirement that freehold estate management information be provided to potential sellers, meaning that conveyancers acting on behalf of those sellers can quickly get the detailed information that they need to provide to potential purchasers. That could include accounts, if the estate manager is a resident-owned company, as well as any previous or future charges. With that reassurance in mind, I hope that my hon. Friend will consider withdrawing his new clause.

[Richard Fuller]

I think that that reassurance has been provided. The particular issue is that when people buy these homes, the solicitors are usually appointed by the people selling them. It is important that the Minister thinks carefully about that, and it sounds very much as if he is doing so. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 36

Asbestos remediation

“(1) The Leasehold Reform, Housing and Urban Development Act 1993 is amended as follows.

(2) After section 37B, insert—

‘37C Asbestos remediation

(1) This section applies where a claim to exercise the right to collective enfranchisement in respect of any premises is made by tenants of flats contained in the premises and the claim is effective.

(2) The landlord must cause a survey of the premises to be undertaken by an accredited professional to ascertain whether asbestos is, or is liable to be, present in those parts of the premises which the landlord is responsible for maintaining.

(3) Where the survey required by subsection (2) reveals the presence of asbestos, the landlord must, at the landlord’s cost, arrange for its safe removal.

(4) If the removal of asbestos required by subsection (3) is not carried out before the responsibility for maintaining the affected parts transfers to another person under the claim to exercise the right of collective enfranchisement, the landlord is liable for the costs of its removal.’”—(Barry Gardiner.)

Brought up, and read the First time.

[Barry Gardiner]

I beg to move, That the clause be read a Second time.

The Minister will be relieved to know that this is genuinely a probing new clause, which I am pleased to move on behalf of my right hon. Friend the Member for East Ham (Sir Stephen Timms). He is not a member of the Committee, but he certainly wishes to raise the issue on Report.

New clause 36 would address the problems relating to enfranchisement when asbestos has been found, or is liable to be found, in the structure of a building. It requires that a survey be done prior to any enfranchisement process, and sets out that the landlord would be responsible for the remediation if asbestos should need to be cleared from the building. I am laying out the new clause before the Committee so that the Minister can set out his thinking about such problems in buildings, in the full knowledge that my right hon. Friend the Member for East Ham will speak to it on Report.

--- Later in debate ---

[Barry Gardiner]

I am grateful to the Minister for recognising the need to do something in this area and accepting that there is a problem here that it would be best to resolve. I simply point out that leasehold reform Bills tend to come infrequently before Parliament, and I urge him to come back at a later stage with his best endeavours to resolve the problem. On that basis, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 50

Control of boards of estate managers

“(1) Within six months of the passage of this Act, the Secretary of State must by regulations provide for—

(a) every estate manager (see section 39(3)) to be constituted such that a controlling majority on its board is held by an owner or lessor of a managed dwelling (see section 39(5));

(b) the requirement stipulated in paragraph (a) to be in place within two years of the sale or lease of the first managed dwelling.

(2) Regulations under subsection (1) may amend primary legislation.”—(Richard Fuller.)

This new clause would provide for the Secretary of State by regulations to oblige every estate management company to have a majority of residents on its board within two years of the sale or let of the first house or flat on the managed estate.

Brought up, and read the First time.

[Richard Fuller]

I beg to move, That the clause be read a Second time.

I am receiving some interesting guidance from the Government Whip that I should seek to speak at length on the new clause, which is contrary to all his earlier exhortations, which were rather of the flavour that I should shut up entirely. I am not getting any further guidance from the Whip, so I will go at my own pace.

New clause 50 is a suggestion to the Minister. We have discussed the general hope that people subject to estate management charges should have much greater control over their estate management companies. They potentially should have the right to self-manage and it should be much easier for them to change from one estate manager to another. At the moment it can take a considerable time for estate management companies essentially to be set up and/or for them to go through what is essentially a transfer to resident control. I think all members of the Committee know this, but I will just inform them that we have had a number of representations from people who have talked about how long they have had to wait, including someone who said that a family had to wait up to 13 years for the right to manage their own estate management company and endured poor service over that entire period.

As the Minister thinks about his options to bring forward on Report or in further deliberations improvements to the rights of people, the new clause suggests that, by law, within two years of the sale or lease of the first building a majority of the directors of the estate management companies should be residents of their community.

[Lee Rowley]

This is an interesting new clause that bears a few moments’ consideration, and I am grateful to my hon. Friend for tabling it. Obviously, the first challenge is the matter of Henry VIII powers. I will put that aside for the moment, but we have genuine concerns about whether the new clause would get past the Delegated Powers and Regulatory Reform Committee on the basis of whether it is proportionate.

--- Later in debate ---

It is also the case that the Competition and Markets Authority study of housebuilding, which will include the private management of public amenities on housing estates, is due to report by 27 February. I do not know what is in the report, but it may be that we return to this matter in later stages once we know the CMA’s thoughts about estate management. I hope that I have convinced my hon. Friend to withdraw the new clause.

[Richard Fuller]

That was a very helpful and thoughtful response from the Minister, so I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 51

Ability to change estate management company

“(1) Within three months of the passing of this Act, the Secretary of State must consider and report to Parliament on the situation of homeowners who have been told that they cannot change their estate management company because they are named on a TP1.

(2) The report required by subsection (1) must include proposals for legislative change to enable such homeowners to change their estate management company where appropriate.”—(Richard Fuller.)

Brought up, and read the First time.

[Richard Fuller]

I beg to move, That the clause be read a Second time.

Again, this new clause originates from some of the inbound traffic that we have received as we have considered the Bill. I seek clarification from the Minister about the extent of these changes. The Committee was advised by a number of citizens about the status of estate management companies that are written into the deeds or other legal documents that are signed upon purchase. One such citizen wrote:

“Our management company…is named in the TP1, so we have no rights to do this”—

that is, to essentially appoint their own managers.

This is a probing new clause: I just want the Minister to be clear about the impact of the Bill on individuals such as the person whom I just quoted. As a consequence of the Bill’s provisions, will they be able to change their estate management company, or is there some legal trick about the original documents that were signed on purchase that would mean they are not brought into the ambit of those new rights?

[Lee Rowley]

As my hon. Friend outlined, the new clause would introduce a requirement for the Government to assess the situation of homeowners with estate management companies explicitly named on their deeds within a three-month timeframe.

I am sympathetic to the concerns that my hon. Friend raised. I know that he recognises that this is a complex area and that there are detailed issues to be worked through. As well as being clear about the nature of the problem, there could be issues about defining the scope of estate management functions and what criteria need to be met. The Law Commission carried out a review of the right to manage for flats, but that is not always directly transferable to freehold estates. It will take some time to carry out a review, and we need to engage with people across the sector. Then, the CMA report is coming. None the less, I recognise my hon. Friend’s concerns that the comprehensive measures in the Bill do not go far enough, and I acknowledge his desire for the Government to go further. I am listening carefully to his concerns on this matter. On that basis, I hope that he might withdraw his new clause.

[Richard Fuller]

It is not actually clear that the Minister was addressing new clause 51 as I was expecting; that may be the fault of my hearing. I was seeking clarification about the TP1—transfer of part of registered title—form, which is used by developers when selling a house to explicitly name an estate management company that will be in situ. That may be the norm; I do not know. However, can the Minister clarify, if the way that it is originally set up is not the norm and it is a legal device, whether it has greater legal standing, and whether the rights of people for whom the estate management company is defined in form TP1 will be included in the rights that we are trying to establish with the rest of the Bill? If we introduce changes that increase the right to manage and so on, will they be covered? I may well have missed it, because the Minister is much more knowledgeable about the Bill than I am, even after all our deliberations. However, just to the specific point about the legal forms, will he consider bringing that in as part of this?

[Lee Rowley]

I want to double-check the valid points made by my hon. Friend. I will commit to writing to him on that specific point to make sure that we are covering in the way that he expects.

[Richard Fuller]

That is very kind of the Minister. With that assurance, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Schedule 1

Redress schemes: financial penalties

“Notice of intent

(1) Before imposing a financial penalty on a person under section (Financial penalties), an enforcement authority must give the person notice of its proposal to do so (a ‘notice of intent’).

(2) The notice of intent must be given before the end of the period of 6 months beginning with the first day on which the enforcement authority has sufficient evidence of the conduct to which the financial penalty relates.

(3) But if the person is continuing to engage in the conduct on that day, and the conduct continues beyond the end of that day, the notice of intent may be given—

(a) at any time when the conduct is continuing, or

(b) within the period of 6 months beginning with the last day on which the conduct occurs.

(4) The notice of intent must set out—

(a) the date on which the notice of intent is given,

(b) the amount of the proposed financial penalty,

(c) the reasons for proposing to impose the penalty, and

(d) information about the right to make representations under paragraph 2.

Right to make representations

2 (1) A person who is given a notice of intent may make written representations to the enforcement authority about the proposal to impose a financial penalty.

(2) Any representations must be made within the period of 28 days beginning with the day after the day on which the notice of intent was given to the person (‘the period for representations’).

Final notice

3 (1) After the end of the period for representations the enforcement authority must—

(a) decide whether to impose a financial penalty on the person, and

(b) if it decides to do so, decide the amount of the penalty.

(2) If the enforcement authority decides to impose a financial penalty on the person, it must give a notice to the person (a ‘final notice’) imposing that penalty.

(3) The final notice must require the penalty to be paid within the period of 28 days beginning with the day after the day on which the notice was given.

(4) The final notice must set out—

(a) the date on which the final notice is given,

(b) the amount of the financial penalty,

(c) the reasons for imposing the penalty,

(d) information about how to pay the penalty,

(e) the period for payment of the penalty,

(f) information about rights of appeal, and

(g) the consequences of failure to comply with the notice.

Withdrawal or amendment of notice

4 (1) An enforcement authority that gives a notice of intent or final notice may at any time—

(a) withdraw the notice of intent or final notice, or

(b) reduce an amount specified in the notice of intent or final notice.

(2) The power in sub-paragraph (1) is to be exercised by giving notice in writing to the person to whom the notice was given.

Appeals

5 (1) A person to whom a final notice is given may appeal to the First-tier Tribunal against—

(a) the decision to impose the penalty, or

(b) the amount of the penalty.

(2) An appeal under this paragraph must be brought within the period of 28 days beginning with the day after the day on which the final notice is given to the person.

(3) If a person appeals under this paragraph, the final notice is suspended until the appeal is finally determined, withdrawn or abandoned.

(4) An appeal under this paragraph—

(a) is to be a re-hearing of the enforcement authority’s decision, but

(b) may be determined having regard to matters of which the enforcement authority was unaware.

(5) On an appeal under this paragraph the First-tier Tribunal may quash, confirm or vary the final notice.

(6) The final notice may not be varied under sub-paragraph (5) so as to impose a financial penalty of more than the enforcement authority could have imposed.

Recovery of financial penalty

6 (1) This paragraph applies if a person fails to pay the whole or any part of a financial penalty which, in accordance with this Schedule, the person is liable to pay.

(2) The enforcement authority which imposed the financial penalty may recover the penalty or part on the order of the county court as if it were payable under an order of that court.

Proceeds of financial penalties

(1) Where an enforcement authority imposes a financial penalty under section (Financial penalties), it may apply the proceeds towards meeting the costs and expenses (whether administrative or legal) incurred in, or associated with, carrying out any of its functions under this Part of this Act.

(2) Any proceeds of a financial penalty imposed under section (Financial penalties) by an enforcement authority other than the Secretary of State which are not applied in accordance with sub-paragraph (1) must be paid to the Secretary of State.”—(Lee Rowley.)

This new Schedule, to be inserted after Schedule 8, would make further provision about the imposition of financial penalties under NC19.

Brought up, read the First and Second time, and added to the Bill.

Title

[Lee Rowley]

I beg to move amendment 28, in title, line 5, leave out “charges and costs payable by residential”

and insert

“the relationship between residential landlords and”.

This amendment is consequential on amendments to Part 3.

This is a consequential amendment to remove the reference to part 3 in the long title of the Bill. It ensures that it provides an accurate description of the Bill’s contents to reflect the impact of the measures the Committee has brought forward. That includes the amendments to enable the first-tier tribunal to vary or discharge an order to appoint a manager of a premises without an application.

Amendment 28 agreed to.

Leasehold and Freehold Reform Bill

Richard Fuller Excerpts

Report stage
Tuesday 27th February 2024 Commons Chamber

[Lee Rowley]

The right hon. Gentleman makes an important point about the need to ensure that this regime works. We recognise that there are challenges, which is why we are bringing forward a number of measures.

[Richard Fuller (North East Bedfordshire) (Con)]

On the point about existing contracts that have been signed by people purchasing a leasehold property, is it the Government’s view that those were legitimate contracts and that there is therefore a risk in trying retrospectively to reverse the conditions of those contracts? Or is it the Government’s view that those were abusive contracts and that there is therefore a public policy interest in retrospectively eliminating the leasehold element of them?

[Lee Rowley]

I hope that I will be able to answer my hon. Friends’ questions in a moment when I run quickly through our amendments. We are banning the sale of leasehold houses in all but unusual circumstances, but for those that are out there at the moment, there must be an ability to ensure that they can buy the freehold and move from the leasehold challenges to a freehold. Let me deal with some specifics that I hope will answer some of the questions that have been raised.

--- Later in debate ---

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

I start by declaring an interest: my wife is the joint chief executive of the Law Commission, whose work in this area I intend to reference in my remarks.

I rise to speak to the amendments and new clauses that stand in my name. Before doing so, I would like to put on record my thanks to all those hon. Members who served on the Public Bill Committee for so ably scrutinising the many technical and complex provisions that the Bill contains. There were, as one would expect, differences of opinion and emphasis, but it was also evident that there is a shared recognition that the Bill can and should be improved further, and an unusual degree of cross-party agreement as to some of the ways that might be achieved.

Despite reams of Government amendments tabled in Committee and for our consideration today, this Bill remains a distinctly unambitious piece of legislation. That is a matter of deep regret to those on the Labour Benches, not only because the Government’s paucity of ambition will see exploited leaseholders wait even longer for the current iniquitous leasehold system to be ended, but because it is also manifestly clear that there is widespread support across the House to go much further than this limited Bill does. Responsibility for the fact that the Bill does not contain so many of the commitments that successive Conservative Secretaries of State have made over recent years, not least in relation to the promised widespread introduction of the commonhold tenure, ultimately lies with Ministers. They had the opportunity to bring forward bold leasehold and commonhold reform legislation, and they made a political decision not to do so.

Although the Opposition appreciate the understandable desire of many leaseholders to see this Bill completely revamped so that it lives up to the many weighty promises made by the Government since 2017, we made clear at the outset in Committee that we did not intend to try to persuade Ministers to radically overhaul it by means of the many hundreds of amendments that would be required to implement all the Law Commission’s recommendations on enfranchisement, right to manage and commonhold. That remains our position. Whether this Bill receives Royal Assent or not before this Parliament is dissolved, a Labour Government will have to finish the job of finally bringing the leasehold system to an end by overhauling it to the lasting benefit of leaseholders and reinvigorating commonhold to such an extent that it will ultimately become the default and render leasehold obsolete. I reassure leaseholders across the country that we are absolutely determined to do so.

We recognise, however, that this limited Bill will provide a degree of relief to leasehold and freehold homeowners in England and Wales by giving them some greater rights, powers and protections over their homes. For that reason, we are extremely pleased it will complete its passage today, but we are determined to send to the other place the most robust piece of legislation that we can. That means rectifying the Bill’s remaining flaws and incorporating into it a select number of measures to further empower leaseholders and improve their rights. With that objective in mind, we have tabled a series of amendments and new clauses for consideration today. That they are almost identical to a number of those we discussed at length in Committee is a deliberate choice that reflects not only the importance we place on the changes they seek to secure, but the distinct lack of convincing responses from the Minister in Committee as to why the Government felt they needed to resist them.

Part 1 of the Bill concerns leasehold enfranchisement and extension. In seeking to implement the small subset of reasonable and proportionate Law Commission recommendations, it is almost entirely uncontentious. However, we believe that several provisions in this part are defective. We sought to remedy their deficiencies in Committee and we have tabled a number of amendments in an attempt to do so again.

Amendments 4 and 5 concern arguably the most significant provisions in this part when it comes to ensuring that the process of extending a lease or acquiring a freehold is as cheap as possible for existing leaseholders—namely the proposed new valuation process as provided for in clauses 9 to 11 and schedules 2 and 3. The current valuation method has a number of manifest flaws, and we fully support the new method as proposed in the Bill. However, with the applicable deferment rate becoming the primary driver of price to be paid in enfranchisement or extension claims under the new method, as a result of the abolition of marriage and hope value and the peppercorning of ground rents in the valuation calculation, we believe it is essential that it is set in a way that is fair to leaseholders. While the Government ostensibly agree, there is nothing on the face of the Bill to ensure that that will be the case and we therefore remain convinced that this Government, or a future one, could be lobbied by vested interests to set a deferment rate that will be punitive to leaseholders.

In resisting our efforts to amend the Bill in Committee to guard against such an outcome, the Minister argued that the Secretary of State must have flexibility to make decisions on the rate or rates. We agree; we are not suggesting that we bind the hands of Ministers by prescribing the rate or rates on the face of the Bill, but we do believe that the legislation should be amended to place a clear obligation on the Secretary of State to set a rate or rates with the overriding objective of encouraging leaseholders to acquire their freehold at the lowest possible cost.

[Richard Fuller]

The shadow Minister is right that there was a lot of consensus in Committee, so I hope he will not mind me probing him on some of the language he just used about the issue of setting rates. We all want to see what the Government do on deferment and capitalisation rates, but the shadow Minister used the term “punitive to leaseholders”. Does he accept that already embedded in the issues about ground rents and the changes here is a substantial transfer of value from freeholders to leaseholders, that the people who are more likely to suffer from punitive behaviour are those who entered into contracts historically from the freeholder side expecting that those values would be considered, and that it is a public policy decision that will change the value in those contracts?

[Matthew Pennycook]

I understand the hon. Gentleman’s point, which he made in Committee as well, if I am not mistaken. We very much think the risk is on the other side of the scale—that is, that a Government would be tempted to set a rate that is damaging to leaseholders as a result of being lobbied by vested interests. While there is a balance to be struck, we think it is right that we put on the face of the Bill that the objective in setting the deferment rate as part of the premium calculation must be to ensure that leaseholders acquire their freehold at the lowest possible cost. Amendments 4 and 5 would ensure that that is the case and I commend them to the House.

Part 2 of the Bill makes changes to other rights of long leaseholders. It contains the four clauses in the Bill that implement Law Commission recommendations on the right to manage, several of which we have sought to improve, as well as clause 21, which makes provision for a new enfranchisement right to extinguish a ground rent without having to extend a lease. We still have absolutely no idea how this clause—or clauses 7 and 8, for that matter—will interact with any proposals that might emerge from the recently closed consultation on restricting ground rents for all existing leases. The Minister must provide further clarification on that; it cannot be right that we could be dealing with such a significant issue when we get to ping-pong stage, in due course.

We very much welcome the intent of clause 21 and schedule 7, which it gives effect to. Even if unamended, they will ensure that some leaseholders can enjoy reduced premiums and secure nominal ground rent ownership of their properties without the need to go through the challenge and expense of repeated lease extensions. However, we remain unconvinced by the Government’s proposed conferral of this new right only on those leaseholders with leases with an unexpired term of more than 150 years. In resisting our attempt to remove the 150-year threshold from the Bill in Committee, the Minister essentially made two arguments. The first was that there is a need to

“put a finger on the scale”

somewhere. In other words, the Government take the view that the new right must be restricted based on lease length. The second argument was that in determining the threshold for restriction, the primary consideration should be which leaseholders are

“unlikely to be interested in, or do not need, a lease extension.”––[Official Report, Leasehold and Freehold Reform Public Bill Committee, 25 January 2024; c. 271.]

We do not believe that either argument is particularly strong.

First, any long lease threshold for the new right is ultimately entirely arbitrary, as evidenced by the fact that the Government chose a different threshold from the one recommended by the Law Commission.

Secondly, there is a principled argument that we should trust leaseholders to make decisions based on what is right for them and their individual circumstances, rather than denying a broad category of leaseholders a new statutory right on the basis that Ministers know best what is in their interest—a viewpoint that we would have assumed those on the Conservative Benches would support.

As I put it to the Minister in Committee, there could be all sorts of reasons why someone with a lease shorter than 150 years might want to buy out only their ground rent, including simply that they are unable to afford the premium required to secure a 990-year lease under clauses 7 and 8. Denying them that right on the grounds that other leaseholders might advertently or inadvertently disadvantage themselves by using the new right to extinguish only their ground rent strikes us as overly paternalistic and misguided.

We remain of the view that there is a strong case for simply deleting the 150-year threshold entirely given that the “remaining years” test that applies is arbitrary and that the most common forms of lease are 90, 99 and 125 years. Amendment 8 would do so, thereby making the new right to replace rent with peppercorn rent available to all existing leaseholders. I commend it to the House.

Part 3 of the Bill contains a wide range of measures relating to the regulation of leasehold. We have tabled several amendments designed to strengthen the provisions in it. Arguably, the most important are amendment 10 and new clause 3, concerning litigation costs. Although we support the aim of scrapping the presumption that leaseholders will pay their freeholders’ legal costs when they have challenged poor practice, we believe that, in merely limiting the ability of landlords to do so, the Government are creating an incentive for freeholders to litigate in a way that is likely to erode the general presumption they are seeking to implement.

As we argued in Committee, a far more sensible approach would be to legislate for a general prohibition on claiming litigation costs from leaseholders, and then to provide for a limited number of defined exceptions to that general rule by means of regulations—for example, in cases in which the landlord is a leasehold-owned company, or in which the costs are, in the opinion of the tribunal, reasonably incurred for the benefit of the leaseholders or the proper management of the building. Taken together, amendment 10 and new clause 3 would provide for that approach by leaving out clause 35 and replacing it with a new clause that provides for a general prohibition on claiming legal costs from tenants, and for a power to specify classes of landlord who will be exempted from it. I commend them to the House.

Mr Deputy Speaker, we want to see a number of other changes made to the Bill to provide leaseholders with better protection in law and to pave the way for a commonhold future. To that end, we have tabled amendments and new clauses to, among other things: abolish the draconian rent charge remedies provided for by section 121 of the Law of Property Act 1925; provide for mandatory residents’ management companies in new blocks of flats; establish a right to manage regime for residential freeholders on private or mixed-use estates; bring forward legislative options to facilitate leaseholders in new blocks of flats being granted an automatic share of freehold; and regulate managing agents.

Of particular importance to us is the need to ensure that the Bill abolishes forfeiture and the windfall it provides to freeholders. As we argued in Committee, forfeiture is a wholly disproportionate and horrifically draconian mechanism for ensuring compliance with a lease agreement. Over the course of nearly a century, this House has taken intermittent steps to tighten the laws of forfeiture, yet its continued use and the chilling effect that results from its mere existence continues to put landlords in a nearly unassailable position of strength in disputes with leaseholders.

The Opposition are not suggesting for a moment that this House abolishes the right of forfeiture in relation to residential long leases and replaces it with nothing. There must be effective means of ensuring compliance with a lease agreement, and we are more than willing to work constructively with the Government to determine what alternative arrangements are needed to deal with breaches of covenant or unpaid arrears. But forfeiture operates to the prejudice of leaseholders; it cannot be justified, and we must use the Bill finally to do away with it. We believe there is broad consensus across the House for grasping the nettle and abolishing forfeiture, and new clause 5 would do so, and—notwithstanding the very positive noises that we heard from the Minister—I urge hon. Members from across the House to support it.

Finally, let me turn to the 100 Government amendments to the Bill that were tabled last week, 29 of which were submitted just before the deadline on Thursday. In doing so, I feel I must put on record once again the Opposition’s intense frustration at this Government’s continued practice of significantly amending legislation as it progresses through the House. The sheer volume and complexity of amendments that this Government now routinely table to their own legislation represents a departure from established practice and one that acts as a serious impediment to hon. Members effectively scrutinising legislation, and increases the risk that Acts of Parliament contain errors that subsequently need to be remedied.

The Government amendments that have been tabled for consideration today fall into three broad categories—namely, shared ownership, building safety and new leasehold houses. I will take each in turn, starting with shared ownership. Although I am increasingly personally of the view that there is a growing case—one that is reinforced by the treatment of shared ownership in the Bill—for primary legislation to address various issues arising from shared ownership as a tenure, Government amendments 24 and 29, which relate to it, are not contentious and we support them.

--- Later in debate ---

[David Simmonds (Ruislip, Northwood and Pinner) (Con)]

I very much welcome the Bill, which addresses the frustrations expressed by a great many leaseholders in my constituency. I thank Suzy Killip from the Pembroke Park Residents Association and Jo Tapper at The Sigers, both of whom have faced significant challenges while representing their communities and taking forward issues arising from the management and lack of services often provided to them under their lease arrangements.

I would particularly like to thank Ministers, because this legislation takes into account the way that the market has changed. Many years ago I started my career as a financial adviser, dealing with people taking out mortgages. One stark change is the extent to which leaseholds are seen as an opportunity to extract money from people as investments to be traded by freeholders, on the basis of extracting the maximum possible amount rather than ensuring good quality of services. I was involved in cases as a local authority councillor, where part of the planning agreement was that roads, parks and open spaces would be brought up to an appropriate standard to be adopted by the local authority. Once the development was completed, an opportunity was spotted by the developer and, therefore, people who had moved in on the understanding that the local authority would take over—because the roads were built to adoptable standard, for example—found that it did not happen because it was seen as an investment opportunity. That is very much in line with the rip-offs referred to by Members across the House.

I commend Ministers on taking a balanced approach on the need to recognise a link between the arrangements in the Bill and our housing supply. The UK has the oldest housing stock in Europe. The ability of freeholders of larger developments to regenerate sites where properties that have been rented are falling vacant over a period of time could be inhibited if there is a proliferation of small freeholds on those types of sites. If we are to ensure that the quality of our housing, in particular energy efficiency, is brought up to a good standard, it must still be possible for larger sites to be regenerated. We must not inhibit that completely while addressing a different concern about the rights and freedoms of leaseholders.

I mentioned some constituents earlier; the situation in particular at Pembroke Park is a good example of why the reforms in this legislation are so important. The development was constructed on a former military site by Taylor Wimpey, and handed over to be managed by A2Dominion housing association, with a mix of social housing tenants and private leaseholders. There are umpteen issues still more than a decade after the completion of that site, and issues simply getting A2Dominion to respond to problems including insulation that was never installed in buildings to the building regulations standard, a complete failure to ensure that proper ventilation was installed in the buildings, and drains that are completely inadequate. There has been progress, but I would add A2Dominion to the list of companies raised by other Members.

I commend A2Dominion’s relatively new chief executive, Ian Wardle, on the progress that he is making, but it remains a huge challenge to my constituents, and a huge frustration, that as opaque charges rise and rise, the actions of that organisation make it incredibly difficult even to understand whether the basic legal protections that they enjoy under existing legislation are being observed, including how insurance costs are apportioned across a very large property portfolio.

I strongly support the points made around forfeiture provisions. A number of constituents have come to me with significant challenges and justifiable concerns about the rising service charges on their properties. It is completely unacceptable that they would forfeit a significant amount of value that they have paid for and earned—potentially to fall to the developer. That is another opportunity for the shamelessly greedy to rip off our constituents. I am very glad that this legislation and the comments made by Members across the House today will represent a significant step towards ending that practice.

[Richard Fuller]

Thousands of homeowners in my constituency and millions across the country who face estate management charges will have their rights substantially increased thanks to the provisions in this Bill. I am extremely grateful to the Prime Minister, the Secretary of State, the Minister and his predecessor, my hon. Friend the Member for Redditch (Rachel Maclean), for including estate management charges in this Bill.