Clause 34 - Limits on rights of landlords to claim litigation costs from tenants

Leasehold and Freehold Reform Bill – in a Public Bill Committee at 4:15 pm on 25 January 2024.

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Question proposed, That the clause stand part of the Bill.

Photo of Clive Efford Clive Efford Labour, Eltham

With this it will be convenient to discuss the following:

Clause 35 stand part.

New clause 3—Prohibition on landlords claiming litigation costs from tenants—

(1) Any term of a long lease of a dwelling which provides a right for a landlord to demand litigation costs from a leaseholder (whether as a service charge, administration charge or otherwise) is of no effect.

(2) The Secretary of State may, by regulations, specify classes of landlord to which or prescribed circumstances in which subsection (1) does not apply.

(3) In this section—

“administration charge” has the meaning given by Schedule 11 of the Commonhold and Leasehold Reform Act 2022;

“dwelling” means a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, or outhouses and appurtenances belonging to it or usually enjoyed with it;

“long lease” has the meaning given by sections 76 and 77 of the Commonhold and Leasehold Reform Act 2002;

“service charge” has the meaning given by section 18 of the Landlord and Tenant Act 1985;

“landlord” has the meaning given by section 30 of the Landlord and Tenant Act 1985.

This new clause would prohibit landlords from claiming litigation costs from tenants other than under limited circumstances determined by the Secretary of State.

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

We know that leaseholders can be deterred from challenging costs, or the services that their landlord provides, at court or tribunal for fear that they will also be charged their landlord’s legal costs. The ability of the landlord to charge litigation costs will depend on whether the lease allows for that. That can mean that leaseholders have to pay litigation costs even if they win. Currently, the onus is on leaseholders to make an application to the relevant court or tribunal to limit their liability to pay those costs.

Clause 34 seeks to flip that presumption, and instead requires landlords to apply to the relevant court or tribunal for permission to recover their litigation costs from leaseholders, whether as an administration charge or through the service charge. It does that by inserting proposed new section 20CA into the Landlord and Tenant Act 1985 relating to litigation costs passed through the service charge, and inserting proposed new paragraph 5B into the Commonhold and Leasehold Reform Act 2002 regarding litigation costs recovered as an administration charge.

In the future, a landlord’s litigation costs will not be payable by a leaseholder unless the landlord has successfully applied to the relevant court or tribunal for an order. The relevant court or tribunal may make such order where it considers it just and equitable in the circumstances. We have also taken a power to set out matters that the relevant court or tribunal must consider when making an order on an application. We will carefully consider the detail of these matters with stakeholders, including the tribunal.

Where the landlord is applying to pass on their litigation costs through the service charge, they will be required to specify each individual leaseholder they are seeking to recover their costs from. We have sought to further protect leaseholders by ensuring that a lease, contract or other arrangement has no legal effect if it seeks to disapply this legislation. These measures will prevent leaseholders from being charged unjust litigation costs by their landlord, and will remove barriers to leaseholders holding their landlord to account. I commend the clause to the Committee.

On clause 35, at the moment landlords can charge the costs of a legal dispute to leaseholders. This is an imbalance, as landlords are in a better position to seek legal representation and are more frequently represented than leaseholders at hearings. We understand that there is no other area of law where the parties start from such an unequal position. Clause 35 gives leaseholders a new right to apply to the relevant court or tribunal to claim their litigation costs from their landlord. It does that by implying a term into all leases, ensuring greater balance between landlords and leaseholders with regard to litigation costs. On a leaseholder’s application, the relevant court or tribunal may make such an order if it considers it just and equitable in the circumstances. We have also taken a power to set out matters in regulations that the relevant court or tribunal must take into account when making an order.

Clause 35 also makes it clear that any costs that a landlord is ordered to pay to a leaseholder are considered to be litigation costs incurred by the landlord. As such, if the landlord wants to recover such costs through the service charge or as an administration charge, they will need to apply to the court or tribunal under clause 34.

In addition, we have taken a power to describe which “relevant proceedings” will be subject to the leaseholder’s right to seek their costs. This is to help align the leaseholder’s rights with the right to costs that landlords currently enjoy. We have further protected the leaseholder’s right to recover litigation costs by ensuring that a lease, contract or other arrangement has no legal effect if it disapplies this legislation. I commend the clause to the Committee.

New clause 3 seeks to disapply terms in a lease that allow a landlord to recover their legal costs from leaseholders. It also allows exceptions for certain types of landlord to be set out by the Secretary of State in regulations. Currently, landlords are able to recover their litigation costs from leaseholders, and we absolutely agree that unjust litigation costs should not be incurred.

There may, however, be legitimate cases where a landlord may need to seek their litigation costs from a leaseholder—for example, where a leaseholder has breached their lease in a way that is affecting the other residents in the building, or where non-payment of a charge is limiting the upkeep or repair of the building. In these cases, where landlords have exhausted other means of addressing the dispute, we would want them to feel able to address such issues and be able to recover their litigation costs, if that is justified. That is why we have included measures in the Bill to rebalance the system, but we do not necessarily believe that we should go further at this time. We hope that the Bill takes a proportionate approach. I hope that I have reassured the hon. Member for Greenwich and Woolwich that we are committed to ensuring a fair approach, and that he will withdraw the new clause.

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

I must disappoint the Minister, because what he says does not reassure me. I rise to oppose clause 34 standing part of the Bill, and to argue in favour of new clause 3. As he has made clear, clause 34 amends the Landlord and Tenant Act 1985 and the Commonhold and Leasehold Reform Act 2002, with a view to limiting but not abolishing the right of landlords to claim litigation costs from tenants. Although the property chamber tribunal does not generally tend to shift the legal costs of the winning party on to the losing claimant, on various occasions landlords have been able to rely on contractual rights to recover costs against leasees. When that occurs, it is in essence a form of one-way cost shifting, and it is inherently unfair to the affected leasees. Previous attempts have been made expressly to limit these cost recovery provisions, notably by means of schedule 11 to the Commonhold and Leasehold Reform Act 2002, but despite those provisions, and the issue coming before the higher courts on several occasions, the ability of a landlord to recover costs incurred in litigating disputes persists.

We support the aim of scrapping the presumption that leaseholders will pay their freeholders’ legal costs when they have challenged poor practice, as outlined in the explanatory notes to the Bill, and we believe that, apart from in a limited number of circumstances, landlords should be prohibited from claiming litigation costs from leaseholders. As I have said, clause 34 does not prohibit landlords from claiming litigation costs from tenants; instead, it merely limits their ability to do so.

The clause allows landlords in certain, at present undefined, circumstances to apply to the relevant court or tribunal for an order to pass their legal costs on to leaseholders as an administration charge, or on to all leaseholders, irrespective of whether they participated in any given legal action, through the service charge. It may be that the matters that the relevant court or tribunal can take into account when determining whether to make an order on an application for costs will be defined in such a way as to protect the vast majority of leaseholders from unjust, one-way cost shifting, but to allow for cost recovery in circumstances where it is essential—for example, when the landlord is a company controlled by the leaseholders that needs to recover its reasonable legal costs via the service charge or risk going bust. However, as we consider the clause today, we have no certainty whatsoever about that, because the matters that the relevant court or tribunal can account for, as well as the application process, will be set out in regulations to come.

Even if we had certainty about what the Government will tell courts and tribunals that they can consider in determining whether to make an order, we fear that clause 34 is an invitation to litigate. Yes, regulations will prescribe the relevant matters that can be taken into account, but given the multiple Court of Appeal cases and numerous upper tribunal cases on what “in connection with” means, we will almost certainly see disputes arising about what costs are incurred “in connection with” legal proceedings, and whether they are compatible. The risk is that the outcomes of any such cases could erode the general presumption against leaseholders paying their freeholders’ legal costs that the clause attempts to enact.

We believe that it would be more prudent to implement, by means of the new clause, a general prohibition on landlords claiming litigation costs from leaseholders, and then clearly to identify a limited number of exceptions to that general rule through regulations. As I have said, such exceptions might include cases in which the landlord is a leasehold-owned company, or in which the costs are, in the opinion of the tribunal, reasonably incurred for the benefit of the leaseholders or the proper management of the building. That would cover the example that the Minister used. Amendment 8, which would simply delete clause 34, and new clause 3 would provide for that approach by leaving out clause 34 and replacing it with a new clause that provides for a general prohibition on claiming legal costs from tenants, and for a power to specify classes of landlord who will be exempted from it.

I appreciate that this is a complex argument about the best means to achieve an agreed end, but we think that clause 34 requires further thought, and urge the Government to give serious consideration to the issues raised by amendment 8 and new clause 3. As I said, the Government’s approach is a recipe for freeholder litigation, and it might mean far more leaseholders than we are comfortable with bearing the legal costs of their landlords.

Photo of Rachel Maclean Rachel Maclean The Minister of State, Home Department

I place on record my concerns about the Government’s approach to this issue, based on my experience in the Minister’s role, and having listened carefully to representations made, particularly by members of the all-party parliamentary group on leasehold and commonhold reform and a gentleman called Liam Spender, who detailed his experiences at the hands of FirstPort. That was an absolutely horrific, heartbreaking and shocking abuse of a decent, honourable and hard-working person buying a flat. He described it as being treated like a “lab rat” in a laboratory maze. I will not forget the testimony that he and many others gave.

Were I ever to be tempted not to follow the Whip’s advice to vote with the Government, it would be at this precise juncture, and I have spent seven years in Parliament. I feel uncomfortable about what is in the clause. Having seen the behaviour of some predatory organisations, and the way that they treat the decent men and women of our country, I could not in good conscience vote with the Government at this point, unless I hear strong words from the Minister, and something to reassure me that the measure will deal with such shocking situations.

We all have doubts about the balance of power, and we recognise that landlords should be able to protect their interests, if they are decent and behave well. At this point, however, I want to hear something from the Minister to reassure me.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing) 4:30, 25 January 2024

My hon. Friend has a huge amount of expertise and knowledge in this area. I am grateful to her for all her work in preparing for our discussion today. I am very happy to talk to her in more detail on this subject. She is absolutely right to articulate that progress must be made, and we must ensure that the correct balance is struck. I know that she will appreciate that there is a balance to strike, rather than there being movement in only one direction, but I appreciate the points that she made. I am happy to talk to her further outside the Committee, and I hope to provide her with the assurances that she seeks.

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

I thought that the Minister would provide a fuller response to our intention to remove the clause and introduce new clause 3. The hon. Member for Redditch is right to be concerned about the clause as drafted—I commend her for raising the issue. The spirit of the Committee has not been particularly party political, but I will give her the opportunity to break the Whip, because we feel strongly about the issue. Lots of leaseholders will find that they still bear legal costs because of the way in which the Government have approached this issue; it is a recipe for litigation. There is a much more sensible way to achieve the end that I think we all want: a general prohibition with a very limited number of exceptions, which could set out clearly in the Bill. We oppose the clause standing part, and will potentially move the new clause in due course.

Question put, That the clause stand part of the Bill.

Division number 13 Leasehold and Freehold Reform Bill — Clause 34 - Limits on rights of landlords to claim litigation costs from tenants

Aye: 8 MPs

No: 5 MPs

Aye: A-Z by last name

No: A-Z by last name

The Committee divided: Ayes 8, Noes 5.

Question accordingly agreed to.

Clause 34 ordered to stand part of the Bill.

Clause 35 ordered to stand part of the Bill.