Leasehold and Freehold Reform Bill

Viscount Hanworth Excerpts

2nd reading
Wednesday 27th March 2024 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, rent is income derived from the ownership of land or other property. It is an income derived without effort on the part of the owner. The owner would have acquired a title to the property at some time in the past. This may have been achieved by means of their labours or by inheritance, or the title may have been acquired by nefarious means that are nominally legitimate. The British economy is in decline; it offers diminishing opportunities for gainful employment. Therefore, there is, nowadays, a heightened incentive to acquire an income through rent. However, since such acquisitions are often at the expense of another party, rent-seeking requires to be restrained if it is not to damage the social fabric.

In recent years, the market for residential property and accommodation in the UK has been severely affected by the activities of rent seekers. The Bill seeks to place some restraint on these activities. It is appropriate briefly to describe what has been happening in recent times. The problems arising have two aspects. They affect both newly built and pre-existing properties. Newly built properties have been sold to new occupiers under leasehold clauses that allow the housebuilder to retain the ultimate ownership. They are often built in estates and the housebuilders will propose that payments are due for the upkeep of the estate.

There has been nothing to prevent the housebuilders which retain the freehold increasing these so-called service charges to an exorbitant level that far exceeds the cost of maintaining the estate—an income derived without effort on the part of the recipient. It is remarkable that many housebuilders have managed to sell the properties under leasehold clauses without the new occupants realising that they are not the full owners of the houses. The Bill addresses this abuse by partially banning the sale of new houses under leasehold clauses. However, it also contains provisions for a category of permitted leases in respect of new houses.

It is notable that the provisions of the Bill that restrain the sale of new houses under leasehold relate only to future ownership. They do nothing to redress the abuses of the past. Admittedly, freeholders and their agents must now guard their behaviour for fear of a legal redress that the leaseholders will be empowered to seek, but this seems to alter the balance of power between the two parties in only a minor way. Hitherto, the powers of the freeholder have been exorbitant. They have been able to set the service charges and insurance fees at whatever levels they choose. They have also been able to impose upon the tenants any legal costs that might arise out of their defence of a case brought against them in a tribunal or a court, regardless of the outcome. They still have unlimited powers of repossession in cases where tenants have refused or have been unable to pay the service charges.

The second major concern is that leasehold arrangements are to the disadvantage of the inhabitants of flats. It should be recorded at the outset that of the dwellings in England, 70% are flats and 30% are houses. Flats may be located in tower blocks or in small terraced houses. Other speakers have described how tenants in tower blocks have been affected by shoddy workmanship and inflammable cladding. Many have had no legal redress and are facing financial ruin. I shall concentrate on flats in modest houses and, for an illustration, I shall consider a small estuarine town on the mouth of the River Thames at a commuting distance from London.

The attractive terraced houses are at increasing elevations as one moves away from the water’s edge towards the high street at the centre of the town. Most of the houses are divided into two or three flats, typically occupied by elderly people or impecunious families. Like many seaside towns, this one has not been prospering of late, but there are clear signs that this is changing through the influx of wealthier Londoners. A prescient property company has been buying up the freeholds of these properties, which have remained mainly in the hands of previous owners who have moved away. They may have sold the leaseholds in respect of two or three of the flats that the houses now comprise.

The property company is a conglomerate—or, at least, a federation of agencies. A search of the companies register reveals that the constituent parts have directors in common. They comprise a property company, a managing and letting agency, a firm of solicitors and an insurance broker. There is also a shadowy affiliated company, Capital Recoveries. The property company has purchased the freeholds at what might seem to their owners to be attractive prices, but they are unlikely to have recognised in full the prospective values of their properties.

Some of the existing freehold owners acquired their titles in an era of low interest rates that encouraged them to buy to let. The current high interest rates, and, in the case of leasehold purchasers, the additional burden of increasing service charges, are encouraging many of them to sell up. The remaining problem for the property company is how to expel the tenants from the properties that are now in their control. This is not difficult to do in an era of no-fault evictions. In the meantime, it might be prepared to bide its time by deriving rents from the tenants.

The only anxiety of the property companies is that they may have to face an incoming Government intent on providing greater protection to tenants. The present Bill will require the property companies to smarten up some of their practices. After the Covid pandemic, the lists of service charges both for small houses divided into flats and for blocks of many flats contained an item described as “charges for the deep cleaning of communal areas”. There were no such communal areas in the small houses, and the testimony of the tenants was that no one from the management and letting agencies had ever paid a visit. Such spurious charges may no longer be sustainable under the prospective legislation, but it will continue to permit many other abuses.