New Clause 3 - Service charges

Leasehold Reform (Ground Rent) Bill [Lords] – in a Public Bill Committee at 12:00 pm on 9th December 2021.

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“Within 2 years of the passage of this Act, the Secretary of State must publish an assessment of the impact of the Act on the level of service charges and other costs charged to holders of long residential leases.”—(Mike Amesbury.)

This new clause aims to ensure that the Government publishes a report on the impact of reducing new ground rents on other costs incurred by leaseholders.

Brought up, and read the First time.

Photo of Mike Amesbury Mike Amesbury Shadow Minister (Housing, Communities and Local Government)

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

This final new clause addresses a point made to me by a number of stakeholders and members of the Committee over the past few weeks. It would ensure that the Secretary of State published an assessment of the impact of the Act on the level of service charges and other costs charged to leaseholders.

Ground rents have been a convenient way of pushing up the costs of leasehold, and an easy way of making more money off leaseholders, but they are not the only way. As we have said, new ground rents are tapering off in number, but other charges have begun to crop up and are starting to take their place—ground rents for parking spaces, rather than residential units, is one example. We are already beginning to see a number of these charges emerge. The Leasehold Knowledge Partnership gives several examples on its website. I encourage Members to look at them.

In an earlier debate, I raised the point that service charges are increasing as freeholders exploit other income streams. Those freeholders do not seem to care about the financial pressure they are putting on leaseholders, or that these are people’s homes, where they deserve to live without being exploited by whatever organisation has bought the freehold or chosen to manage their property.

The clause would require details of charges to be published within two years of Royal Assent. That, frankly, is because we face greater reform, and so I expect that we might see these trends emerging before the Government introduce more legislation. Developers looking to explore other avenues of income will bide their time until they feel the coast is clear.

I tabled the new clause in the hope of raising with the Minister again that we risk playing Whac-a-Mole with leaseholder costs; we could ban one stream of income only to find that freeholders have discovered another. I ask the Minister to outline exactly how he expects to prevent that.

Photo of Eddie Hughes Eddie Hughes Parliamentary Under Secretary of State (Department for Levelling Up, Housing and Communities)

As we draw towards the end of the Bill Committee, I thank Members on both sides of the room for their considered input. We work best when we work collaboratively. As I have said a few times, this is an issue I started to champion as a Back Bencher, so it is an incredible privilege to be the Minister leading the discussions. I thank everyone for their time.

New clause 3 brings us back to the issue of service charges, and to concerns about freeholders using such charges to charge ground rent by another name. The Government believe that all fees and charges should be justifiable, transparent and communicated effectively. Service charges that have been artificially inflated to make up for lost ground rent income would not meet those requirements. If any landlord seeks to recoup what they consider to be lost ground rent or other funds through service charges or any other charge, the wide definition of the term “rent” in the Bill will allow a tribunal to take the charge into account when deciding if it is actually prohibited rent. That is why the Bill has been drafted as it has, and why we have adopted a flexible definition of rent. As I explained in a previous sitting on Tuesday, the definition relies on its naturally understood meaning and includes anything in the nature of rent, whatever it is called. Where a freeholder has attempted to get around these provisions, the definition allows the tribunal to consider, in each case, whether such a charge actually represents a prohibited rent, even if it is not explicitly called a ground rent.

As was discussed earlier in the week, the penalties for landlords who charge a prohibited rent are significant —a maximum of £30,000 per lease. If a landlord had a block of 10 flats, then the penalty they would be risking would reach a significant amount.

We have provided a robust system with not only a serious deterrent, but a route for challenging freeholders who act this way. That is all relevant to the new clause, which asks for an impact assessment. I understand the concerns that motivated the new clause, but hopefully the hon. Member for Weaver Vale can appreciate that the drafting of the Bill is intended to specifically guard against service charges being used in the way that he mentions.

Photo of Ian Byrne Ian Byrne Labour, Liverpool, West Derby

It is an honour to serve under your chairship, Ms Elliott. Surely the new clause would make the Minister’s job easier, because after two years we would have an assessment of how successful the legislation has been. I am at a loss for a reason why the new clause should not be accepted; it would make it easier for the Minister, his Department and the Government to tighten legislation, if that was required. It asks for an assessment of the issue that we are speaking about. Could the Minister respond to that?

Photo of Eddie Hughes Eddie Hughes Parliamentary Under Secretary of State (Department for Levelling Up, Housing and Communities)

I thank the hon. Gentleman for his intervention. It seems perceptive, given that the paragraph that I was about to move on to says: hon. Members will know that further leasehold reform will follow later in the Parliament, so the efficacy of an impact assessment of this kind, during a period of wider reform, would be questionable. It is difficult to carry out an impact assessment when many moving parts are changing simultaneously; this is not a laboratory experiment in which we can control just one element. As the hon. Gentleman is a member of the Select Committee on Levelling Up, Housing and Communities, I can say that I look forward to working with him in the future. Should any concerns arise, my door is always open.

Photo of Lilian Greenwood Lilian Greenwood Opposition Deputy Chief Whip (Commons)

I listened carefully to what the Minister said about the definition of rent in the legislation, and the way that it could be used to cover other ways in which some freeholders may act. How confident is he that leaseholders will be aware of that provision? If freeholders seek to increase other costs and charges, will leaseholders be sufficiently aware that they can exercise the rights set out in this Bill?

Photo of Eddie Hughes Eddie Hughes Parliamentary Under Secretary of State (Department for Levelling Up, Housing and Communities)

I thank the hon. Lady for that intervention. There are two sides to that story. The fact that this legislation is being enacted, and the attention that will be drawn to that, will hopefully inform a good number of leaseholders. Also, the possible financial penalty—up to £30,000—should act as a significant deterrent for the freeholders, who are much more likely to be well informed and will hopefully be severely deterred by that. As the description of rent is so wide-ranging—it includes anything in the nature of rent—they will well understand that, should they be challenged at tribunal, they would likely be found out.

Given the two sides of that equation, there is good reason for us to be confident that nobody will try to introduce rents through the back door. On that note, I once again ask the hon. Member for Weaver Vale to withdraw the new clause.

Photo of Mike Amesbury Mike Amesbury Shadow Minister (Housing, Communities and Local Government)

I thank the Minister for his detailed response, and all those Members who made powerful and informative interventions. Undoubtedly this is a live issue. I said, in relation to an earlier clause of the Bill, that any one of us could set up as a management agent and apply some interesting service charges. We have seen evidence of that weekly—daily. I urge the Minister, and certainly the Department—he spoke about keeping a serious watching brief—to respond to the problem. This Bill is the appetiser, we are told, but they should certainly respond to it in the main course. Opposition Members and, indeed, Government Back Benchers will rightly hold their feet to the fire.

In the spirit of co-operation, and given that this will be my last input today, we will withdraw the new clause. I genuinely thank everybody for giving their valuable time to consideration of the Bill so far. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

Bill, as amended, to be reported.

Committee rose.

Written evidence reported to the House

LRGRB08 Mark Hawthorn, Owner and CEO, Landmark Group

LRGRB09 Robert Bryant-Pearson FRICS, Former First-tier Tribunal Member—Property Chamber

LRGRB10 James Hayes MRICS

LRGRB11 Wallace Partnership Group, Consensus Business Group and Long Harbour