Leasehold Reform (Ground Rent) Bill [Lords]

Theresa Villiers Excerpts

2nd reading
Monday 29th November 2021 Commons Chamber

[Eddie Hughes]

I thank my hon. Friend, who is incredibly knowledgeable in this area. I remember discussing my ten-minute rule Bill with him at the time. I completely assure him that we will proceed with caution and seek advice from experts both across the House and outside the House. I look forward to discussing this with him again in the future. I also take this opportunity to thank the former Secretary of State, my right hon. Friend the Member for Newark (Robert Jenrick)—I am delighted to see him in his place—for all the work that he put in in driving forward this agenda. Back in January, he announced measures to make buying a freehold or extending a lease cheaper and easier for many leaseholders.

I now turn to the specifics of the Bill. Ground rent is usually paid annually by leaseholders to their freeholder or landlord, but, crucially, no tangible service is provided in return. The industry is also familiar with the term, “peppercorn rent”, to describe a token or nominal rent used as a payment in forming a contract, which typically is not actually collected in practice. Historically, ground rents were generally very low. The past two decades have seen a surge in properties sold with significant and escalating ground rent. At its worst, this practice can lead to properties becoming unsellable. These unfair practices have caused real misery for those affected and, in turn, have undermined the reputation of the leasehold system. Regardless of whether the ground rent is a nominal peppercorn or thousands of pounds, the fundamental issue is that no meaningful service is provided in return. We want to end this for new leases, and that is why we are legislating so that new residential long leases will have no financial demand for ground rent. Instead, nothing more than an actual peppercorn can be collected from the leaseholder.

[Theresa Villiers (Chipping Barnet) (Con)]

Will the Minister acknowledge that the situation is slightly different in relation to retirement housing, where the practice has been for ground rents to more or less fund the shared spaces, and ground rents have been part of making retirement housing viable? Will he take care to ensure that the Bill does not have unintended consequences for retirement housing?

[Eddie Hughes]

The reason why we extended the timeframe for the introduction of this legislation for those properties is to allow people time to adjust their business models, so that they can cope with the change in legislation. To avert the risk of possible future shortages of peppercorns, and to ensure that our meals continue to be well seasoned, I should clarify that we do not expect any landlord to require the actual payment of a physical peppercorn each year. In reality, the new genuine peppercorn rent for future leaseholders means that they will not pay the rent.

The specifics of the Bill apply to residential long leases in England and Wales of over 21 years for which a premium is paid. The inclusion of the requirement for a premium clarifies that normal and legitimate practices relating to rack rents can continue. For leases regulated under the Bill, the rent demanded will not be any more than literally one peppercorn a year.

Following much careful deliberation, we have arrived at a broad and flexible definition of “rent”, using the real-world meaning, and therefore including anything in the conventional nature of rent. The Government are clear that landlords should retain the ability to collect legitimate charges. The definition will ensure that landlords can still collect legitimate charges where the market reserves them as rent, such as charges for services, including building maintenance. The broad definition will deter freeholders or landlords from trying to circumvent the new system by disguising ground rent as a different charge. It will also enable appropriate tribunals to make sound judgments on whether a leaseholder has in fact been charged a prohibited rent.

We plan to leave no loopholes for unscrupulous individuals, so we are also banning the charging of an admin fee for collecting peppercorn rent. Where a prohibited rent or administrative charge is paid, leaseholders will have the right to apply to the first-tier tribunal in England or the leasehold valuation tribunal in Wales. Provided that the tribunal deems the payment inappropriate, the relevant authority can then order the amount to be repaid. In the case of prohibited rent, that must be within 28 days and potentially also with interest.

There are a limited number of exceptions from the provisions of the Bill. The first is leases used purely for a business purpose. The intention behind the Bill has never been to reduce business leases to a peppercorn rent, so through careful consideration, we have excepted business leases that include the use of a dwelling in any way that protects the interest of residential leaseholders and commercial landlords. For mixed-use properties, such as a flat above a shop, the exception will apply only if the residential use significantly contributes to the business purpose of the lease.

Community-led housing may have few other feasible funding schemes that they can use to continue to grow developments that benefit the community, rather than secure profits. To maintain this growth, we have excepted community-led housing schemes. Home finance plan leases are also excepted. That includes regulated home reversion plans, such as equity release and rent-to-buy agreements, where the consumer purchases the freehold at the end of the term. We will also allow shared ownership landlords to continue to collect a market rent on their share of the property. That practice is integral to the shared ownership model.

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[Theresa Villiers (Chipping Barnet) (Con)]

I refer to my declaration in the Register of Members’ Financial Interests, which includes an investment property that is a flat held on leasehold.

I join other Members in strongly condemning the abusive practices that have prompted this legislation, including the sale of new leasehold houses where there is no justification, and spiralling ground rents that double every few years. All the rip-off practices about which we have heard in the Chamber this evening are simply not acceptable. I, like others, very much welcome the investigation initiated by the Competition and Markets Authority into some of the major developers in relation to unfair contract terms and what looks like mis-selling.

It is clearly right to legislate to stop sharp practices in the leasehold sector. It is also correct not to apply the ban on ground rents to existing leases, as that would retrospectively impact on long-standing investments, many of which are held by pension funds that support millions of people in their retirement. Instead, the Government will be helping existing leaseholders by making it easier to enfranchise or buy themselves out of ground rent obligations, and through their second-stage reforms.

As the Bill proceeds through Parliament, we need—as I said in my intervention earlier—to consider the retirement homes sector, where, as we have heard, ground rents are often being used to generate the capital to fund communal areas and shared facilities. Including retirement homes in the ban could affect future investment in this type of much-needed housing. As my right hon. Friend the Member for New Forest West (Sir Desmond Swayne) said, there is a case for considering a technical change to the Bill so that at least the retirement homes built but not sold prior to the commencement of the Act in 2023 are covered by the current rules, rather than the new ones.

A second potential alteration that should be looked at carefully is whether to allow the continued use of ground rents for some large, complex apartment blocks. This matter has been raised with me by a constituent who is worried that the exit of professional freeholders from the market, which is the expected consequence of abolishing ground rents, will leave leaseholders moving into such buildings with extensive financial and legal responsibilities. These complexities are intensified if there is mixed residential and business use.

The Housing, Communities and Local Government Committee acknowledged this issue in its 2019 report and advocated at least a temporary exemption for large, mixed-use buildings. If this carve-out were made, there would need to be a robust code of conduct to ensure that the remaining freeholders acted fairly. Violation of such a code should be subject to enforcement mechanisms. Having spoken to my constituent and his colleagues in the professional property sector, I think we need seriously to consider whether some leaseholders in some new blocks might want to have the option of leaving stewardship of their block to a professional freeholder.

[Kevin Hollinrake]

My right hon. Friend is making an important point. Would the code of conduct to which she refers—for those kinds of complex developments—include a cap on ground rents of, say, £100 or 0.1% of the value, whichever was lower, to ensure that the ground rent was always affordable?

[Theresa Villiers]

We would certainly need a cap, and the sort of levels that my hon. Friend mentions sound reasonable to me.

Let me turn to how this legislation will interact with new building safety laws. New building safety legislation will impose stringent responsibilities on freeholders, whether they are professionals or just flat owners who are banded together to manage their building. Frankly, not all leaseholders will want to take on such liabilities, yet this Bill will mean that for new flats, residents—whether they want this or not—will be jointly responsible for the safety, maintenance and upkeep of the apartment buildings in which they live, regardless of the size or complexity of those buildings. As my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) highlighted in his earlier intervention, worrying research in a 2019 report commissioned by the Royal Institution of Chartered Surveyors and Built Environment Forum Scotland indicates that the removal of professional freeholders in Scotland has contributed to buildings falling into disrepair. A key problem that has been identified is that difficulties in securing a majority agreement among leaseholders and getting all flat owners to fund the repair works needed can significantly slow down remedial work, and that pushes up costs.

[Matt Rodda]

I appreciate that the right hon. Lady wishes to make a point about the importance of shared ownership and the difficulties of managing the shared parts of a large block of flats. Has she looked into the way that this issue is managed in other countries, given that all western countries other than the UK do not have the leasehold system? Surely there are ways to manage communal areas other than by maintaining leasehold, which involves all the difficulties that we have heard about.

[Theresa Villiers]

The fact that English property law is unique does not necessarily mean that it is wrong, but I acknowledge that it is important to look at how other countries manage these issues. That is partly why it is instructive to look at what has happened north of the border. Of course, Scotland has a different legal system. Leasehold and commonhold have been a fundamental part of its system for a long time, and it seems that, in some instances, that is making it more difficult to keep buildings in a decent state of repair.

This is a very important Bill, but it needs careful scrutiny if we are to ensure that it protects leaseholders effectively from abusive and unscrupulous practices, operates fairly and avoids unintended negative consequences for the very people whom it was designed to protect.

Leasehold Reform (Ground Rent) Bill [Lords]

Theresa Villiers Excerpts

Report stage & 3rd reading
Monday 24th January 2022 Commons Chamber

[Mike Amesbury]

Let me begin by thanking all colleagues who have helped this short but important Bill through its stages so far, including our friends in the other place. In particular, I thank those who joined the Minister and me in scrutinising the Bill in Committee. Let me also begin with an apology to the Minister. I told him on the occasion of our final meeting in the Committee that that would be my last outing in respect of housing, having handed over the portfolio to my capable hon. Friend the Member for Greenwich and Woolwich (Matthew Pennycook), who is sitting behind me. I was wrong to say that, and I am very pleased that I was wrong. I stand here today ready to continue to raise an issue which matters hugely to me, to many of my constituents, and to leaseholders across the country—and, indeed, to the Minister himself.

Although the Bill is short, many important issues in it have already been covered extensively, first by our colleagues in the other place and then by Members here, in Committee. I do not wish to repeat too much of what has already been said, but the two new clauses tabled for Report are an opportunity for Members on both sides of the House to raise again two important aspects of the Bill.

New clause 1 would require the Government to produce draft legislation within 30 days to reduce ground rents to a peppercorn in existing long residential leases. The antiquated feudal system of leasehold is unjust for the many and not just the new. People in England and Wales have been trapped in that relic from the past for far too long. I urge the Minister to set them free, level up their life chances and support the new clause.

New clause 1 proposes that the narrow scope of the Bill be simply widened to improve the lives of leaseholders—the 4.5 million people trapped in this feudal system. Some 1.4 million of them are in houses, many in the north, the north-west and Wales, and may be experiencing high ground rents on top of other exploitative terms built into their leasehold contracts.

[Theresa Villiers (Chipping Barnet) (Con)]

We are all united in wanting to stamp out abusive practices with ground rents, but is the defect of the hon. Gentleman’s amendment not that it amounts effectively to a confiscation of existing property rights? That in itself has fairness issues, but it also deters future investment in our building stock. That future investment is needed, for example, if we are going to insulate against climate change and turn our buildings into more carbon neutral ones for the future.

[Mike Amesbury]

A feudal system of kings and barons needs to be kicked into touch. It is unjust and it is unfair. I am sure the right hon. Member will make an informed decision when it comes to the Division Lobby, but I know whose side I am on.

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[Theresa Villiers]

I shall begin by highlighting the investment property in my entry in the Register of Members’ Financial Interests, which is a flat held on a long leasehold basis. Like everyone else in the House, I recognise the need to deal with abusive practices in relation to leasehold and ground rents, but I fear that the blanket abolition of ground rents for every single new building could have significant negative unintended consequences.

Measures specifically targeted at unfair practices such as a code of conduct, a potential cap on ground rents and a ban on selling houses on a leasehold basis could be effective in stamping out wrongdoing, but without the negative potential consequences of the Bill’s widely drawn approach. As drafted, the Bill will see professional freeholders exit the market. It is disappointing that the Government have not responded to the calls on Second Reading to consider an exception in the Bill to enable ground rents to continue to be an option for large, complex apartment blocks. If we remove the choice to use ground rents for buildings of that kind, all the responsibility for ensuring the safety and long-term viability of the block will fall on leaseholders. That will inevitably lead to higher costs, since individual residents groups will not have access to the kind of specialist expertise and collective buying power that professional freeholders have when they buy in services to repair, maintain and enhance buildings.

There is evidence that after the removal of professional freeholders in Scotland, the lack of professional oversight and accountability has meant many more buildings falling into disrepair. A 2019 report for the Royal Institution of Chartered Surveyors highlighted that many residents in Scotland had great difficulty in securing agreement from fellow flat owners to fund essential work on the fabric of their building. That can slow down remedial work, greatly adding to costs. Even identifying and contacting fellow flat owners may be difficult, for example if they are buy-to-let investors living overseas, and that is even before we get to the point of trying to secure agreement on the work that needs to be done, how much it will cost and persuading everyone to pay up. Disputes have left some leaseholders in Scotland having to threaten their neighbours with legal proceedings, generating even more fees to pay.

Without professional freeholders, flat owners in large blocks will have to take on myriad financial and legal responsibilities and keep up to speed with a rapidly changing and complex regulatory environment. These onerous obligations are an extra burden to be shouldered by ordinary people on top of busy lives holding down jobs and looking after their families. Some leaseholders might prefer to pay a modest regulated ground rent so as not to have the hassle and risk of taking on these responsibilities, but the Bill denies them that choice for new buildings.

Buildings that involve business as well as residential use will be especially difficult for residents to manage. Even the Levelling Up, Housing and Communities Committee recognised that exceptions to the ground rents ban should be considered in such circumstances.

I find it hard to comprehend a Bill whose main effect will be to reduce professional oversight and responsibility for residential buildings at a time when we have a building safety crisis. This is also an era where we urgently need investment in our building stock to make the changes to insulation and heating systems needed to meet climate change commitments. That is another reason surely to try to retain professional freeholders, not shut them down. It is worth remembering that the investors behind most of these professional freeholders are generally the pension funds that are so essential to providing us all with security in old age.

I close by asking the Minister to pause, reflect on this legislation and consider whether an exemption can be allowed for large, complex apartment blocks. The system of freehold interests and ground rents has come under sustained criticism, including this evening. It has even been described as “feudal”, but England’s laws on real property have successfully underpinned economic activity for centuries, providing a crucial foundation for economic prosperity and development. That was made possible by adaptability and inventiveness, including the capacity to slice up different rights over land in a way that maximised the incentive to use the property constructively and efficiently.

Put simply, there is a reason why English land law has deployed the concept of a freehold interest for the past 900 years. It makes sense for someone to have stewardship of the long-term future of a building, and it makes sense for their economic interests to be aligned with maintaining the building and investing in it for the long term. Yes, we need to crack down on the unscrupulous activities of morally suspect developers abusing the ground rent system, but I fear that the approach in this Bill is too blunt an instrument. We would be better off with the regulation of professional freeholders, not the de facto abolition of professional freeholders. I hope that the Minister and the Secretary of State will give that the most serious consideration.

Question put and agreed to.

Bill accordingly read the Third time and passed.