Clause 30 - Enforcement of duties relating to service charges

Leasehold and Freehold Reform Bill – in a Public Bill Committee at 3:00 pm on 25 January 2024.

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Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government) 3:00, 25 January 2024

I beg to move amendment 19, in clause 30, page 49, line 15, leave out “damages” and insert “penalties”.

This amendment, together with Amendments 20 to 25, would make clear that the sum to be paid to the tenant in circumstances where a landlord failed to comply with duties relating to service charges is a punishment rather than a recompense for loss to the leaseholder thus ensuring it is not necessary to provide proof of financial loss. See also Amendments 17 and 18.

Photo of Clive Efford Clive Efford Labour, Eltham

With this it will be convenient to discuss the following:

Amendment 20, in clause 30, page 49, line 27, leave out “damages” and insert “penalties”.

See explanatory statement to Amendment 19.

Amendment 21, in clause 30, page 49, line 30, leave out “Damages” and insert “Penalties”.

See explanatory statement to Amendment 19.

Amendment 22, in clause 30, page 49, line 34, leave out “damages” and insert “penalties”.

See explanatory statement to Amendment 19.

Amendment 23, in clause 30, page 49, line 39, leave out “damages” and insert “penalties”.

See explanatory statement to Amendment 19.

Amendment 24, in clause 30, page 49, line 41, leave out “damages” and insert “penalties”.

See explanatory statement to Amendment 19.

Amendment 25, in clause 30, page 50, line 2, leave out “damages” and insert “penalties”.

See explanatory statement to Amendment 19.

Amendment 134, in clause 30, page 49, line 29, at end insert—

“(4A) An order under subsection (2)(c) or (4)(c) may include an order that the landlord remedy any breach revealed by the application in respect of any other leaseholder.

(4B) Where the tribunal makes on order under subsection (4A), the tribunal may make an order that the landlord, or (as the case may be) D, pay damages to any other leaseholder in respect of whom a breach revealed by the application must be remedied.”

This amendment would enable a tribunal to order the remedy of a breach in respect of, and damages to be paid to, a leaseholder affected by a breach revealed by the application to the tribunal, even if that leaseholder is not a party to the litigation.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

Clause 30 substitutes existing section 25 of the 1985 Act, which includes penal provisions dealing with any failure to comply with the relevant provisions, with proposed new section 25A, which decriminalises the sanctions and applies a new enforcement regime. The new enforcement regime will allow a tenant to apply to the appropriate tribunal in instances in which their landlord did not demand a service charge payment in accordance with section 21C under clause 27, failed to provide a report in accordance with section 21E under clause 28, or failed to provide information in accordance with sections 21F and 21G under clause 29. The tribunal will have the power to issue an order that the landlord comply with the relevant provision within 14 days and that they pay a fine of up to £5,000 to the applicant, or other consequential orders.

We welcome the new enforcement regime, but we have three main concerns about how it will operate in practice. With amendments 19 to 25, we seek to address the first of those concerns, which is our fear that the use throughout clause 30 of the term “damages” may imply that leaseholders are required to provide proof of financial loss for the tribunal to order that the landlord pay a fine for failing to comply with one or more of the modified requirements introduced in clauses 27 to 29. The risk that the tribunal takes that view, and thus stipulates that proof of financial prejudice is required, is real, as we have seen with the reforms made to section 20 of the 1985 Act. We tabled this group of amendments to encourage the Government to consider replacing “damages” throughout the clause with “penalties” to make it explicit that an order for failing to comply with requirements under sections 21C, 21E, 21F or 21G of the 1985 Act requires no proof of financial loss on the part of leaseholders. I look forward to hearing the Minister’s thoughts.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

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.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

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.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

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.

Photo of Barry Gardiner Barry Gardiner Labour, Brent North

Amendment 134 would enable a tribunal to order the remedy of a breach in respect of, and damages to be paid to, a leaseholder affected by a breach revealed by an application to the tribunal, even if the leaseholder is not party to the application. Let me explain why that is appropriate. In an estate in my constituency, Chamberlayne Avenue and Edison Drive, FirstPort was the estate manager. It failed in the case that went to the leasehold tribunal, which was brought by one member of the estate. The tribunal quite correctly found in favour of the leaseholders. However, everybody else on the estate was equally affected, and they are now all having to bring a separate tribunal case against FirstPort in order to receive the same benefits and relief. It seems to me that where that is the case, it would make sense for the tribunal to be able to instruct the landlord that where there has been a failure affecting all the leaseholders, they should remedy that breach to all the leaseholders, not just the one who brought the case, if there are damages.

I was heartily gratified by the explanation that the Minister and the hon. Member for North East Bedfordshire gave about “damages” not being the legalistic sense of damages, because I was beginning to worry that the second part of my amendment might fall foul of exactly what my hon. Friend the Member for Greenwich and Woolwich said. However, if we want to free up and speed up the tribunal system, that would be one way of doing so that would afford great relief to the very many people trapped in that situation.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

I thank the hon. Gentleman for his amendment, which he has just outlined. The Government are sympathetic to the intention of the amendment. It is not that we do not understand the point that he has made or the point that he articulated in relation to Chamberlayne Avenue; where freeholders behave badly, it should apply across the board, and that is the kernel of the point he makes. The challenge—and I am sorry to be difficult about it—is that, as I know the hon. Gentleman will appreciate, there is a potential ramification to asking a tribunal to make a read-across from one case to every other one. Even though it is highly likely that it will apply to all or almost all of those cases, there is the difficulty of creating the link that makes the assumption that it must apply. For that reason, we do not think we can accept the amendment, although I am sympathetic to the point made by the hon. Gentleman.

Photo of Barry Gardiner Barry Gardiner Labour, Brent North

I am grateful to the Minister, because it is really good to know that he will consider those points further. Let me therefore make a suggestion: if the tribunal were given powers through secondary legislation on estate cases where the matter is remedying something about the estate that applies equally to everybody, it should be obvious to the tribunal that anybody living on that estate is equally affected.

Let me give an example. If the managing agent, FirstPort, says that it has mended a fence, and it has charged everybody for mending that fence, but it is found that it did not mend the fence and it was not its fence to mend—this is the actual case. Everybody on the estate received those charges, and everybody on that estate was due therefore to be compensated for them. That will happen in some cases, but I accept what the Minister says. Would it make sense to consider giving the tribunal the power to instruct the managing agent to remedy the breach for any of those similarly affected, such that, if they did not, there was an additional penalty when that case was brought to the subsequent tribunal to prove that they were affected?

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

I am happy to ask the Department to look into that in further detail. I have no personal understanding of whether that would be possible or reasonable and proportionate and not have a series of other consequences, but it is reasonable to look into it further.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

Briefly, I welcome what the Minister said on the issue of damages versus penalties. It could be another word than “penalty”, but I hope the point that the amendment tried to make was understood. I am not certain, because I, like him, do not have expertise in the area, whether “damages” could be misinterpreted by a tribunal, notwithstanding what he said. I encourage the Minister to go away and ensure that the reassurance he has given—it is on the record and can be referred to, which is helpful—is understood and cannot be misinterpreted. I think we share the same end: this must be punishment rather than recompense, and leaseholders cannot be expected to provide proof of financial loss. If, as the Minister has indicated, that is the shared intention, I am happy to ask leave to withdraw the amendment, but I hope he will go away and reassure himself further that the tribunal can have no confusion on that point. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government) 3:15, 25 January 2024

I beg to move amendment 17, in clause 30, page 49, line 30, leave out “£5,000” and insert “£30,000”.

This amendment would raise the cap on penalties under this section (see explanatory statement to Amendment 19) for a failure to comply with duties relating to service charges to £30,000.

Photo of Clive Efford Clive Efford Labour, Eltham

With this it will be convenient to discuss the following:

Amendment 142, in clause 30, page 49, line 30, 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 a landlord to comply with the obligations imposed by new sections 21C (service charge demands), 21E (annual reports), or 21F or 21G (right to obtain information on request) of the Landlord and Tenant Act 1985.

Amendment 18, in clause 30, page 49, line 30, at end insert—

“(6) Penalties under this section must be at least £1,000.”

This amendment would insert a floor on penalties under this section (see explanatory statement to Amendment 19) of £1,000.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

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.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

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”?

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

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.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

To clarify whether my reading of proposed new section 25A(5) of the Landlord and Tenant Act 1985 is right, is the penalty a single amount that is shared, or an amount per challenge? This is important.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

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.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

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?

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

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.

Photo of Barry Gardiner Barry Gardiner Labour, Brent North

Could the Minister elaborate on something? Where a group of leaseholders brings the challenge—let us say that 30 leaseholders in the block all club together and bring the challenge—is it one challenge that pays one set of £5,000, or is it 30 challenges that pay £5,000 each? Otherwise, we risk leaseholders bringing one challenge and then everybody thinking, “Okay, if I’ve got to, I will now do it,” and making the same challenge over and over again, clogging up the tribunals. That is not what we want. If they all come together and make that application, surely they should all get the damages that the tribunal feels is proportionate.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

The hon. Gentleman is making a number of important points. As it is currently structured, one challenge of n people gets up to £5,000; if it is multiple challenges of one person or n people within challenge 2, challenge 3 or challenge 4, that would be £5,000. As it is structured at the moment, one challenge equals £5,000, irrespective of the number of people within that challenge.

Photo of Barry Gardiner Barry Gardiner Labour, Brent North

Does the Minister appreciate that that could lead to a situation in which we are multiplying challenges unnecessarily?

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

I absolutely appreciate the point that has been made. There is a balance to be struck here. Obviously we will need to go through the justice impact test, or whatever it is called, to check the volume of challenges that would potentially come into the tribunals system as a result of the changes in the Bill. Again, it is about trying to balance those very challenging concepts, making sure that there is a penalty—it is important to recognise that the penalty is doubling—but also that people have the ability to choose to do things or not do things. I know that members of this Committee will have different views about how to structure that balance.

Photo of Clive Efford Clive Efford Labour, Eltham

Order. We are getting a bit conversational in the exchanges we are having. Can Members make either interventions or speeches, please? It is difficult to follow what is going on up here.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

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.

Photo of Clive Efford Clive Efford Labour, Eltham

It is, so let it be short.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

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?

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

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.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

It is operational. It can be absorbed on the rare occasion that it will be charged, so we think that amount should be higher. Ultimately, as the hon. Member for North East Bedfordshire said, we have to make clear that we are very serious about the sanctions in this new section biting appropriately. For that reason, although I am not going to push the amendment to a vote at this stage, it is a matter that we might have to come back to. It applies to part 4 of the Bill—to residential freeholders—equally, and it is important that we get it right and convince the Government to look at this matter again. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing) 3:30, 25 January 2024

I beg to move amendment 48, in clause 30, page 50, line 14, leave out subsections (4) and (5).

This amendment is consequential on Amendment 123.

Photo of Clive Efford Clive Efford Labour, Eltham

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

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

Amendment 48 is consequential on amendment 123, which we discussed in our debate on part 2. Amendment 123 ensures that the Bill is clear for the reader by grouping a set of related amendments that are consequential to section 26 of the Landlord and Tenant Act 1985, which clarifies that the provisions of amendment 29 do not apply to tenants of public authorities.

Clause 30 will introduce new, more effective and more proportionate enforcement measures to replace existing ineffective measures. Subsection (2) will repeal the existing enforcement provisions under section 25 of the 1985 Act, which allow a local housing authority or leaseholder to bring proceedings against the landlord in the magistrates court. This measure proved an ineffective deterrent and has hardly been used.

Subsection (3) will insert a new section 25A into the 1985 Act. It sets out routes to redress. Proposed new section 25A(2) sets out measures for situations in which landlords have failed to provide the information required to be included within the annual report or have failed to provide the service charge demand form in the prescribed format. When those circumstances apply, the leaseholder may make an application to the appropriate tribunal. The tribunal may order that the landlord must serve a demand for payment using the correct form under section 21C or provide a report in accordance with section 21E within 14 days of the order having been made. It can also order that the landlord pay damages to the leaseholder.

Proposed new section 25A(3) sets out measures for where the landlord has failed to provide information on request. In such circumstances, the leaseholder may make an application to the appropriate tribunal. The tribunal may order that the information is provided within 14 days, or that the landlord pays damages to the leaseholder, or both.

Proposed new section 25A(5) provides that the damages payable to leaseholders must not exceed the £5,000 figure that we have just debated. Proposed new section 25A(6) will confer powers on the Secretary of State and Welsh Ministers to amend this amount to reflect changes in the value of money, if they consider it expedient to do so. Proposed new sections 25A(7) to (10) contain measures to ensure that landlords cannot pass through service charge demands that they have been ordered to pay nor draw on service charge moneys held in trust and hence seek to reclaim their losses. I commend the clause to the Committee.

Amendment 48 agreed to.

Clause 30, as amended, ordered to stand part of the Bill.