Amendment 6

Leasehold Reform (Ground Rent) Bill [HL] - Report – in the House of Lords at 3:00 pm on 20th July 2021.

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Lord Mackay of Clashfern:

Moved by Lord Mackay of Clashfern

6: After Clause 2, insert the following new Clause—“Leases with an option of redemption(1) In this Act a lease with an option of redemption means a lease which meets the following conditions—(a) it is a long lease of a dwelling,(b) it is in force on the “relevant transition date”, and(c) it is not an excepted lease.(2) The “relevant transition date” is the day on which this section and the other relevant provisions of this Act come into force in relation to leases of that kind.(3) After the relevant transition date the tenant has an option to pay a capital sum to the landlord, on payment of which the rent payable under the lease shall be a peppercorn rent.(4) The capital sum in subsection (3) shall be calculated in accordance with a formula specified by regulations made by the Secretary of State.(5) The option to pay a capital sum to the landlord set out in subsection (3) may only be exercised within two years of the relevant transition date.”

Photo of Lord Mackay of Clashfern Lord Mackay of Clashfern Conservative

My Lords, this amendment repeats one I put forward in Committee. It is obvious that the Government’s policy suggests that the ground rent arrangements that apply at the moment are unfair to many people. This Bill prevents that kind of arrangement being made for the future but does not cover many people suffering from the present disadvantage.

It has been made clear to me by the Minister—indeed, fairly clear from the start—that dealing with the existing position is quite complex. The Competition and Markets Authority has dealt with it, and we have seen some arrangements that have come out of that. I was particularly pleased to notice that one at least of these arrangements looked quite like what I had proposed in the new clause in Amendment 6—paying off what remained of the obligation according to some formula.

I move this amendment only to emphasise the need for early implementation of the next stage. I am sure that the Government wish to move quite quickly, but I think we need as a House to make sure that that is made quite clear to the Government. I know that among the other proposals is one to make it easier to move to commonhold. Long ago when I was Lord Chancellor, I was keen to promote the idea of commonhold, because I had been brought up under a system of tenement property where people owned their own property. I was keen to seek to avoid the idea of leasing all the property. Of course, commonhold was difficult, but it has come in as a reasonable proposal now, and I would be very keen to see it being easier to get there than it has been in the past.

I very much welcome what the Government are proposing in this area. I am supported very much in that by my noble friend Lord Young of Cookham who did the much more difficult task of tabling a very full amendment in Committee for dealing with the matter. I left the main difficulty with the Minister, which I think is always quite a wise thing to do.

I simply move this amendment for the purpose I have mentioned and do not propose to insist on it at all.

Photo of Lord Berkeley Lord Berkeley Labour 3:15 pm, 20th July 2021

My Lords, I support the amendments in this group and I am grateful to the Minister for finding the time to have a meeting with me. It was very helpful.

I shall come on to another amendment I have later. For this group, the noble and learned Lord, Lord Mackay, mentioned the need to speed things up. I entirely support that. We should get the rest of the Law Commission’s report on the statute book as quickly as possible. The noble and learned Lord’s amendment and that from my noble friend Lord Lennie are fundamental in trying to, shall we say, stem the tide of very unfair practices that seem to have developed in some parts of the market. I do not know how widespread it is, and I am quite surprised that the CMA has not been more helpful because its role, after all, is to look after the interests of consumers. Sometimes I feel that it possibly does not do that, but we can discuss that another time.

I have the pleasure of being on your Lordships’ Built Environment Committee that has just started one inquiry—out of two—into housing. At our meeting this morning, I was struck by three of the witnesses all saying that security of tenure was one of the biggest problems in housing. Whether it is leasehold or rental, it does not really matter very much. It is important to understand that people need to have some comfort that they can continue to live where they are living if they want to, and that the amount that they pay cannot go shooting up because of the wishes of the owners or other people involved in a way that could not have been foreseen when they took out the lease. It is not good when people are locked in—there are many press comments about it—and cannot sell. What do they do? That is before you get into the problem of cladding, which again is outside this discussion.

I am not sure whether my noble friend’s amendment or that of the noble and learned Lord is the best one. They both try to find some way of providing financial comfort to those who have been caught in this sudden upsurge—to me anyway—of increasing ground rents or other similar charges.

When we do these stages, it is funny that the Minister answers before the amendment has actually been proposed—but that is another thing we will get to. I look forward to my noble friend speaking on this matter, as he is much more knowledgeable than I am on it. I shall also be very interested to hear what the Minister has to say. It is really important that something like this is done very quickly, long before the next stage of the Law Commission’s report becomes a Bill.

Photo of The Earl of Lytton The Earl of Lytton Crossbench

My Lords, I am largely supportive of this group of amendments, particularly the one moved by the noble and learned Lord, Lord Mackay of Clashfern. It always seemed to me that some of these clauses, particularly relating to escalating ground rents, were unfair, with hidden implications that were not apparent to purchasers at the time when they were entered into. The CMA intervention is welcome but the ongoing blight continues. This is certainly an evil that causes me to support this amendment very much.

I also support Amendment 9. This seems to be a logical provision against pre-emption and creates, as I see it, greater transparency, which really should be the hallmark of landlord/tenant relationships in this area.

It is unfortunate perhaps that I am speaking before Amendment 26 has been spoken to. I see it as potentially retroactive, and think it might remove the value of an asset without fair compensation. In its specific scope, it would not distinguish between a fair and reasonable ground rent and one that was flagrantly unfair. I do not in any way defend leasehold interests as such, but if we go down this road it has much wider public interest and property law implications.

Again with Amendment 30, I would have liked to have spoken after the noble Lord, Lord Stunell, whom I believe will speak to it, but, from a technical standpoint, the question of rent is a payment that in this instance the tenant makes to the landlord for the bits of the property which exist but which are not within the tenant’s specific demise under their leasehold. It is not a service charge. Are we at risk of getting rent and services provided for rent confused—in other words, the use of property as opposed to a tangible benefit in terms of the service charge? In general, however, subject to those points, I support this group of amendments.

Photo of Lord Stunell Lord Stunell Liberal Democrat

My Lords, I will speak to Amendments 7, 8, 9 and 30. I will focus most of my remarks on Amendment 9, but I cannot speak without first saying that the amendment tabled by the noble and learned Lord, Lord Mackay of Clashfern, which I see as essentially introducing an early buy-out option for existing leaseholders, is the next necessary step and should have been endorsed by the Minister and incorporated in this legislation. It is yet another of the unfinished bits of business dogging our debates on the Bill. Like others, I am looking forward to Amendment 26 being presented by the noble Lord, Lord Lennie, which, as far as I understand its meaning and intention, has essentially the same purpose of moving forward the implementation of leasehold reform for that cohort of existing leaseholders who will be left out of this legislation. As such, in principle, we support that strongly.

Amendments 7, 8, 9 and 30, tabled by my noble friend Lady Grender and myself, are various alternative approaches to ensure that if the limited circumstances of this Bill are as far as the Minister is prepared to go, it is at least not a cause of exploitation of existing leaseholders who may be very close to agreeing an informal lease extension. The process of informal lease extensions is a well-accepted norm in the leasehold industry and, as was discussed extensively at previous stages of this legislation, one which comes into play when the existing lease is within sight of its end. That may be some distance away but nevertheless the value of the lease is declining rapidly, and perhaps its mortgageability on resale is compromised because there is not a sufficient existing term of the lease. If a completely new lease is not to be entered into, an informal lease extension may be negotiated between the leaseholder and the proprietor.

The noble Earl, Lord Lytton, described Amendment 9 as an anti pre-emption provision. Perhaps his three-word soundbite says it all. The risk at the moment is that an owner—or, should we say, one of the less-scrupulous landlords—may see this as an opportunity to preserve the value of his asset by offering an informal leasehold extension on terms which would be applicable under the current legislation now to pre-empt the possibility of that extension value declining to nil once the new legislation comes into force.

The Government have set their face against either of the approaches set out by the noble and learned Lord, Lord Mackay of Clashfern, at least at this stage, and I suspect that they will strongly resist the amendment proposed by the noble Lord, Lord Lennie. That is a pity and comes despite the evidence that has been put on the table by the Leasehold Knowledge Partnership and the examples given by my noble friend Lady Grender in Committee, which were referred to extensively at Second Reading. That leaves precisely the problem that I have outlined. An informal leasehold extension may very well be useful to both parties when the leaseholder is shortly to sell or is making arrangements prior to disposal, but clearly it is dangerous if the leaseholder simply wants to continue their lease.

It is also dangerous if the condition for entering negotiations is that the lawyers will be appointed by the owner, and it is dangerous if the new terms which are inserted into that leasehold extension are not drawn properly to the attention of the leaseholder. The evidence shows that it is not unusual for escalator clauses to be built into those leasehold extensions, which are not transparent and not brought clearly to the notice of the leaseholder who is going to sign. The risk is that unscrupulous landlords can see very clearly that, after Royal Assent, their golden goose will be stuffed. If I can mix my metaphors, they have an incentive to offer new lamps for old when it comes to extensions. To offer informal leasehold extensions to unsuspecting leaseholders locks them into a new, unfavourable set of terms when, if they had waited, under the full enactment of the Bill they would have been eligible for its new provisions limiting the ground rent to a peppercorn.

We have tried to fix this statutorily. Amendments 7 and 8 set this out in different ways, but Ministers resisted our efforts strenuously. We have had discussions with the Minister, which I have very much welcomed. He has been very generous with his time and with his officials’ time in working on this problem. Amendment 9 is therefore really quite modest in its intent and its impact. It simply proposes that landlords should have an obligation to alert their leaseholders in advance of these changes coming into force of informal leasehold extension terms being altered by this new legislation. It is a proportionate safeguard which is not onerous on landlords but gives leaseholders a clear sight of the forthcoming changes before they commit to less favourable terms under the existing law. It does not prevent those to whom the balance of advantage still lies with a speedy signature on the existing terms for an informal leasehold extension from choosing to do so, but it seeks to protect the unwary from making a costly mistake which ultimately, as in one or two of the examples which my noble friend Lady Grender brought to the House in Committee, may lead to them losing that property entirely.

I intend to test the opinion of the House on Amendment 9 when the appropriate moment arises.

Photo of Lord Lennie Lord Lennie Opposition Whip (Lords), Shadow Spokesperson (Business, Energy and Industrial Strategy and International Trade) 3:30 pm, 20th July 2021

My Lords, I will speak primarily to Amendment 26 in my name, which would ensure that the Government bring forward legislation to end ground rent for existing leaseholders. I also add my thanks to the Minister for making himself and his officials available and for seeking to explore whether there is any chance of a solution to this. There was not, although he described this problem as “a top priority for the Government”. That is something that the noble Lord, Lord Young, heard when, in the other House, he was trying to deal with the question of hereditary Peers in this place. He was persuaded not to move an amendment by the then Government and was promised that legislation would be forthcoming. That was 20 years ago.

Millions of people are trapped in these contracts and the Government must end the feudal system for them as well as for new leaseholders. That is the whole purpose of this amendment—to make life equal for all leaseholders. Almost 5 million properties in England are leasehold dwellings—around one in five of all homes —and the House will be aware that many of them, if not all, are seeing their ground rent increase at incredible rates. The noble Lord, Lord Blencathra, memorably described this in Committee as a legal racket. That is what it is: it leaves a loophole available which sees rents increasing without any explanation, for no service whatever to leaseholders. It is creating immense misery and financial difficulties and there is no reason for the Government to maintain the system when they have already acknowledged how outdated ground rent is.

That is why the amendment would ensure that the Government bring forward early legislation within 30 days to end the practice once and for all. The amendment of the noble and learned Lord, Lord Mackay, identifies the same issue and tries to deal with it, but I am afraid I do not believe it goes far enough. Ground rent must be ended for leaseholders, including those in existing arrangements, and for that reason I will be testing the opinion of the House on Amendment 26 at the appropriate time.

I confirm the support of these Benches for Amendment 9 in the name of the noble Lord, Lord Stunell, and I also welcome other amendments he has tabled to probe aspects of these provisions. Amendment 9 raises the crucial point that leaseholders must always be informed of arrangements, and I hope the Minister will accept that point. With that, however, I will leave it to the Minister to respond.

Photo of Lord Greenhalgh Lord Greenhalgh Minister of State (Housing, Communities and Local Government), The Minister of State, Home Department

My Lords, several issues have been raised in relation to existing leaseholders in previous debates and engagements, and I thank noble Lords for their close examination and engagement with the Government on these issues. However, as I have stated previously, this Bill is deliberately focused tightly on only new residential long leases.

As noble Lords will know well by now, the Government are approaching their leasehold reform programme in two stages. First, the ground rent Bill before us today is intended to look ahead and transform the economic relationship between leaseholders, freeholders and developers. A comprehensive leasehold reform Bill will follow during the course of this Parliament to end unfair practices in the leasehold market, ensure that consumers are protected from abuse and poor service, and reinvigorate commonhold.

Noble Lords are understandably keen to know precisely when this second and more comprehensive leasehold reform Bill will be introduced. They will of course understand that scheduling of legislation is a complex process, and that consideration must be given to the Government’s wider legislative agenda. It is therefore simply not possible to make such concrete commitments at this stage. However, your Lordships should rest assured that the Government have no intention of going slowly when it comes to leasehold reform, which is one of the Secretary of State’s top priorities.

Amendments 6, 7, 8, 26, and 30 ultimately seek to widen the scope of the Bill so that it applies to existing leaseholders. Amendment 6, moved by my noble and learned friend, Lord Mackay of Clashfern, would allow existing leaseholders to pay a capital sum to reduce their ground rent to a peppercorn. As I have laid out in previous debates on the Bill, while we are sympathetic to the aims of this amendment, the Government do not believe that it is necessary. Existing legislation already allows leaseholders of flats to reduce their ground rent to a peppercorn on extending their lease through the statutory route. Meanwhile, leaseholders of houses can buy the freehold of their property and so eliminate ground rent altogether.

In January of this year, the Government committed to allowing existing leaseholders to buy out their ground rent without the need to extend the term of their lease: for example, where their lease is already long. For the purposes of calculating the premium payable for this, the ground rent will be capped at 0.1% of the property value, making it significantly cheaper for leaseholders with onerous ground rents. We will also introduce an online calculator to simplify the process of enfranchisement and ensure standardisation and fairness. We believe that these measures will achieve broadly the same effect as my noble and learned friend’s amendment, so I cannot accept it today.

Amendment 7, in the name of the noble Baroness, Lady Grender, and the noble Lord, Lord Stunell, would restrict ground rent for existing leaseholders who enter into non-statutory lease extensions to 0.1% of the value of the landlord’s interest in the dwelling. It is important to state for the record that the peppercorn requirement will apply to the newly extended portion of the lease once an extension has been granted under the voluntary route. In addition, for the period of the lease that reflects the term that remained on the original lease, the ground rent cannot be higher than in that lease. There will be no opportunity for a landlord to use the point of lease extension to increase ground rent.

I have discussed Amendment 8 with the noble Baroness, Lady Grender, and the noble Lord, Lord Stunell, and we are of course all of the view that we do not wish to see exploitation of this legislation. However, it cannot be right that we take away the option of a non-statutory lease extension which would enable the leaseholder to pay a lower premium in return for continuing to pay some ground rent on the remaining term of their lease, with limitations as set out in the Bill. Where a leaseholder wishes to follow this route, Clause 6 allows for a monetary ground rent to continue to be paid on the remaining part of a lease—that is, the “pre-commencement lease”. This can be common where the leaseholder wishes to agree this approach with their landlord in return for a reduced premium payment.

The “voluntary” or non-statutory process is a more flexible route to lease extension and can in some cases actually be more cost effective and quicker for both the leaseholder and the freeholder. Naturally, therefore, as I am sure we would all agree, we do not want to remove that option from the Bill. I can reassure the House that as part of taking forward the Law Commission’s recommendations on leasehold enfranchisement we will be considering the matter of non-statutory extensions further, and when the time comes we will again seek input from noble Lords on this important issue.

Amendment 9 is also in the name of the noble Lord, Lord Stunell, and the noble Baroness, Lady Grender. Attempting to amend the Bill as proposed in the amendment will not guarantee the outcome that the noble Baroness, Lady Grender, wishes to see, and the Government continue to consider this issue a matter of implementation detail rather than something to change on the face of the Bill. Amendment 9 would require all landlords to inform leaseholders of the changes introduced by the Bill before entering a formal or informal renegotiation or extension of an existing lease. Where a landlord failed to do so, they would face a penalty of between £500 and £30,000. However, the drafting of this amendment means that it would cover only the period from Royal Assent to the commencement date.

I appreciate that consumer rights and awareness is of particular concern to the noble Baroness, Lady Grender, and indeed the noble Lord, Lord Stunell, and I would be very keen to work with them and others on the issue of implementation. We have concerns that, while we recognise the need to ensure that leaseholders are aware of their rights and are not rushed into a lease extension before this Bill can take effect, we also need to ensure that any penalties are fair, justified and as far as possible are not incurred accidentally. Were the fines set out in the amendment to apply immediately upon Royal Assent, there is limited time to ensure that landlords are aware of the requirements and could end up receiving a fine for extending a lease in line with a request from a leaseholder.

We agree with the principle of this amendment, and I have discussed with the noble Baroness that we would like to work with her on the implementation of the Bill. This will include, for example, provision of comprehensive information to conveyancers, landlord representatives and leaseholder groups to ensure awareness of the new ground rent limits.

I have had constructive conversations with the noble Lord, Lord Stunell, and the noble Baroness, Lady Grender, about how we might get the word out about these upcoming changes. Several solutions were proposed and I was particularly taken by the noble Lord’s suggestion about engagement with the legal profession to ensure that it can best advise its leaseholder clients. I have asked my officials to consider how we might take forward these proposals. This is important not just so that leaseholders are aware of their rights but so that landlords know what is required of them and do not inadvertently receive a large fine. However, we do not believe that financial penalties should apply as proposed by the noble Lord’s amendment, and I hope that he will not move it.

Amendment 30, again in the names of the noble Lord, Lord Stunell, and the noble Baroness, Lady Grender, would put a requirement on landlords to write to their leaseholders to justify the payments by reference to the expenses to be met from the ground rent, or else to confirm that the ground rent is not used to pay any expenses. We agree that transparency is vital in the leasehold sector. However, we do not believe that this is the appropriate way to ensure that existing leaseholders are better informed about ground rents. As noble Lords know, ground rents are charges paid with no clear service in return. Most leaseholders will be aware of this and it is unclear what benefit they would get from receiving a letter from their freeholder or managing agent to that effect.

However, we are working to prepare the sector and leaseholders alike, assessing where better advice and support can be provided through ongoing regular engagement with the sector and our delivery partners. However, I acknowledge the broader concerns raised by the noble Baroness, Lady Grender, and the noble Lord, Lord Stunell, in their Amendments 7, 8, 9 and 30 about pre-commencement leases and the consumer awareness challenges in the run-up to this legislation coming into force. It is a noble intention, and we are agreed that leaseholders should have the right information to hand when making important decisions about whether to extend or vary their lease.

I am grateful to noble Lords for raising their concerns about the implementation of this Bill. I understand that it is noble Lords’ desire, as it is mine, to improve the Bill and see it delivered as smoothly as possible. That is why my officials are working carefully to craft an implementation plan that takes account of these concerns, as outlined by the noble Lord, Lord Stunell, and the noble Baroness, Lady Grender, to do what we can to ensure that leaseholders are aware that this change in the law is coming and that they are equipped with the information they need to make the decision that is right for them.

This is a good opportunity to inform your Lordships that I can today commit to the House that the commencement date for this legislation will be within six months of Royal Assent, an issue which my noble friend Lord Young raised on numerous occasions. This issue was raised multiple times at previous stages and, while writing the date into the Bill would be inappropriate for reasons that I hope noble Lords will understand, I am pleased to make that commitment today.

More broadly on consumer awareness, the Government are pleased to hear the recent update published by the CMA on 23 June, whereby settlements secured with a leading housing developer and an investor in the leasehold sector have committed them to changes that will benefit thousands of leaseholders by refunding homeowners who saw their ground rents double, and allow leaseholders to buy the freehold of their properties at a discount. One of those companies has also committed to extending the timeframe that prospective buyers are given to exchange contracts after reserving a property, and to providing people with more up-front information about the annual costs of buying a home.

I am sure that noble Lords will also be pleased to hear that that includes ensuring that all marketing materials provided to consumers before the signing of a reservation agreement clearly and prominently state a greater level of information of benefit to the leaseholder—for example, the tenure of the property, the ground rent payable and any circumstances that may potentially lead to an increase in service charges. These landmark commitments will ensure greater transparency for leaseholders, thereby helping future buyers to make informed decisions without feeling pressured by time constraints. The CMA has made excellent progress, and that is just the start. We support the ongoing investigation and believe it will send a clear signal to others in this sector to follow this lead or face legal action.

Finally, Amendment 26, tabled by the noble Lord, Lord Lennie, would require the Government to produce draft legislation within 30 days to reduce ground rents to a peppercorn in existing long residential leases. I have listened carefully and appreciate the noble Lord’s sense of urgency in wanting to address issues faced by existing leaseholders. I can reassure the House that the Government are working at pace to bring these reforms forward. However, I must once again state that arbitrary deadlines are not useful in this context. It is, frankly, not possible to publish a Bill to the timescale proposed by that amendment. The reforms we are planning are a once-in-a-generation shake-up of the leasehold system, with the effects being felt for years to come.

I have outlined some of the changes, including on enfranchisement, transparency, a commitment on commencement and the ongoing work of the Competition and Markets Authority. I hope that the information I have given satisfies noble Lords that we take the issues facing existing leaseholders very seriously and that we are working at pace to deliver the improvements that all noble Lords here today want to see. As they will no doubt appreciate, this ambitious reform programme is complex and has many interdependencies. Therefore, while being mindful of the need for progress, it is important to take the time required to get it right. It is for these reasons that the Government cannot accept these amendments and I urge that they be withdrawn or not moved.

Photo of Lord Mackay of Clashfern Lord Mackay of Clashfern Conservative

My Lords, I am greatly obliged to the Minister for his answers and, so far as I am concerned, the commitment to bring the legislation into effect is an important one that we were given some time ago. So far as my amendment is concerned, I am keen that the new proposals come forward quickly but their nature is such that it would be impossible to formulate them in a clear timescale of the kind suggested. However, that is for others say. I beg leave to withdraw my amendment.

Amendment 6 withdrawn.

Clause 6: Permitted rent: leases replacing pre-commencement leases

Amendments 7 and 8 not moved.