Leasehold and Freehold Reform Bill

Baroness Taylor of Stevenage Excerpts

Committee stage
Monday 22nd April 2024 Lords Chamber

Debate on whether Clause 7 should stand part of the Bill.

[Baroness Taylor of Stevenage (Lab)]

My Lords, I am pleased to start Committee stage of this long-awaited Bill. I understand that it is not correct protocol to reiterate Second Reading speeches in Committee, so I shall not do that, but I believe that there are some long-standing unanswered questions relating to the Bill. Though we will probe some of them through our amendments, it is disappointing and unhelpful to reach this stage without some of those issues being clarified. If the Minister can comment, either in her early responses in Committee, or as the Bill proceeds, it would be helpful.

I hope we do not have to reach Report before we know, for example, the outcome of the consultation on ground rent; whether the Government have given up on their proposals to scrap leasehold as a tenure for flats; how the Government propose to help freehold homeowners who find themselves trapped in what have become known as fleecehold charges for estate management, an issue raised powerfully by the Law Commission again in its recent briefing; whether the Government intend to use the Bill to put right some of the building safety issues around qualifying and non-qualifying leases, including those relating to buildings under 11 metres in height, which undoubtedly would have been better addressed by the Building Safety Act but were excluded; and why proposals for a regulator of property agents—supported across this House, and discussed again just last week—continue to be resisted. We would be grateful for clarification from the Minister on the commencement date of the provisions in the Bill, as she has indicated in a written response to my noble friend Lord Kennedy that it will not be until 2026.

It is worth opening this group by talking about the news reports over the weekend. We learned from the Times that the costly regime of ground rent will continue for a further 20 years. Although those ground rents may be capped at £250, we have not had any official announcement on that yet.

The amendments in this group relate directly to the ban that was introduced on Report in the Commons; it was added in late so it was not able to be properly scrutinised there. So our main question is: when exactly will the Government do what was reported over the weekend? Will they amend the Bill at an even later stage, with even less opportunity to scrutinise?

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Moved by

[Baroness Taylor of Stevenage]

12: After Clause 25, insert following new Clause—
“Report on providing leaseholders in flats with a share of the freehold(1) The Secretary of State must publish a report outlining legislative options to ensure that all qualifying tenants in newly-constructed residential properties containing two or more flats have a proportionate share of the freehold of their property.(2) The report must be laid before Parliament within three months of the commencement of this Act.”Member’s explanatory statement
This new Clause would require the Secretary of State to publish a report outlining legislative options to provide leaseholders in flats with a share of the freehold.

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[Baroness Taylor of Stevenage (Lab)]

My Lords, just before I move my amendment, I should say that I omitted to thank the Minister for her collaborative approach to the Bill in advance of it coming before the Committee. I now do so and rectify that omission. I also thank the Law Commission, as she did, and the many groups that have a leasehold interest and met us in recent weeks. I hope the Committee will forgive me for not mentioning that earlier on.

Amendment 12 requires the Secretary of State to publish a report outlining legislative options to provide leaseholders in flats with a share of the freehold. I shall resist the temptation to go over the ground again of why the Government did not include flats in their ban on new leases, although it would be helpful to know from the Minister what level of consideration was given to enacting the recommendations of the Law Commission in full in regard to this matter, particularly as it was the stated intention of the Secretary of State—that is what he wanted to do. There has been a commitment to this ban on leasehold at least since 2017. One would think that there has been plenty of time to get the work done. Indeed, the Law Commission has done much of the heavy lifting on what would be needed.

Our later amendments seek to determine the Government’s appetite to move in due course to a more widespread system of commonhold as the default tenure. The successful adoption and implementation of this in other jurisdictions has been well debated and discussed in your Lordships’ House. It is certainly the clear intent of my party to move as quickly as possible to that tenure. However, that would be a policy decision, as distinct from the implementation of the Law Commission’s recommendations, and would necessarily have to follow the legal scheme that those recommendations would introduce. As that is not proposed in the Bill but follows the Secretary of State’s intent to do away with the archaic system of leasehold altogether, there is a strong case to make a start with a transitional regime.

The introduction of a mandatory share of freehold in all new blocks of flats, as proposed in our amendment and that of the noble Lord, Lord Bailey of Paddington, alongside the requirement to establish and operate an RMC—a right to manage company—with each leaseholder given a share, would be a sensible staging post on a path towards a commonhold future. It would make conversion to commonhold at a later date a far simpler process. We urge the Government to accept these amendments as they would ensure that we have started on the path to confining leasehold to the dustbin of history, which is where we believe it belongs, and would make it clear that the Bill is not ruling in one set of homes and home owners to the ban and ruling out another. That other is affecting by far the greatest number of leaseholders, with 70% of leaseholders occupying flats. To be clear, this is not an alternative to leasehold. If such a measure were brought into force, any leaseholder resident in a new block of flats would own both the lease and a share of the freehold. It would ensure, in effect, that all new blocks of flats were collectively enfranchised by default, without the need for leaseholders in them to go through the process of acquiring the freehold.

The advantage of having a default share in the freehold is that it would give the leaseholder a direct say on what happens in their building, as is the case with those who have already been collectively enfranchised. It would also provide additional valuable rights, such as the right to a long lease extension on the basis of a peppercorn rent; in other words, the rights that will be accorded to existing leaseholders but without the cost of paying a premium to the freeholder that is still required to exercise that modified right.

We know that flat owners having a share of the freehold can cause tensions; for example, in agreeing how to proceed on crucial decisions, such as whether to cover the cost of major works through service charges. That is why it is essential that proper management arrangements are in place as a matter of course, to reduce the likelihood of damaging disputes between neighbours. That is why we propose mandatory RMCs on new blocks of flats as a corollary to the new clause.

Labour is unequivocal about the fact that commonhold is a preferable tenure to leasehold, in that it gives the benefits of freehold ownership to the owners of flats without the burdensome shortcomings of leasehold ownership. As we have heard, the Law Commission made 121 recommendations on commonhold, designed to provide a legal scheme that would enable commonhold to work more flexibly, and in all contexts. It is vital that if commonhold is to be the default tenure, it is enacted fully and properly, with full account of the Law Commission recommendations.

We have not sought to persuade the Government to incorporate any subset of the Law Commission commonhold recommendations into the Bill, but we need to reform the legal regime for commonhold in one go. Labour is committed to doing so if the British people give us the opportunity to serve after the next general election. In the meantime, it would be good to give current leaseholders a share in the management of their properties. I beg to move.

[Lord Bailey of Paddington (Con)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Taylor of Stevenage. I do not want to rehearse the reasons why I think that a mandatory share of the freehold is necessary, in the way that the noble Baroness laid out. I want to speak more to the contact that I have had with so many different groups and individuals who feel that they are trapped in their leasehold.

The number one thing that comes up is, of course, service charge abuse. Which? did a study in 2011 which suggested that 700 million service charges had been overcharged. The market for that has grown now to 6.7 billion, so we can only assume that this overcharging has grown along with it.

The challenge becomes: how do we make this market fair? How do we make sure that these abuses are washed away? That is to give the people paying the bills control, and not to lock them into the monopoly that leaseholders are currently locked into. Ultimately, the answer would be commonhold, but while commonhold is not on the table, we need to look at a share of the freehold. It should be mandatory, and it should happen straightaway. The noble Baroness laid out very eloquently the benefits that this would give to leaseholders.

We must understand that leaseholders do not want a landlord; that is why they have left the private rented sector—to avoid landlords. These amendments should stand. They really give leaseholders what they want. I have tabled an amendment which asks the Government to retain the power to bring forward a share of the freehold on new flats. That is the most important thing going on here.

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[Baroness Scott of Bybrook (Con)]

My Lords, I thank the noble Baroness, Lady Taylor of Stevenage, and my noble friend Lord Bailey of Paddington for their amendments.

Amendment 12 would require the Secretary of State to publish a report, within three months of the commencement of the Act, into the legislative options for mandating that new-build flats be sold to leaseholders with a proportionate share of the freehold. We appreciate the benefits that share-of-freehold arrangements have over ordinary leasehold arrangements with third-party landlords, which is why we are making it simpler and cheaper for leaseholders of flats to enfranchise collectively and, therefore, achieve share-of-freehold arrangements. However, the commonhold framework has already been designed as the optimal legal vehicle for the collective ownership of flats. As such, the Government want to see the widespread take-up of commonhold, and for it to be the future preferred tenure for owners of flats, rather than share of freehold.

The noble Baroness, Lady Taylor of Stevenage, asked why the legal framework was so complex. We need to determine precisely what property the mandate is applied to, exemptions, the processes for phased developments, the enforcement of developer liabilities for remedial works and so on. We would also need to prescribe the constitution for resident management companies—since they are presently unregulated—and to consider how the management functions are to be exercised by such companies, resident participation in decision-making, and the procedures and jurisdictions for dispute resolution. It is a complex issue, but one that we are working on—the Law Commission has worked on it for us for a number of years—and we feel that it is important that we continue with moving to commonhold rather than mandate share of freehold.

We understand the desire to offer leaseholders a share of freehold in the interim between leasehold and commonhold while the Government consider the Law Commission report and work on commonhold. However, we do not believe that mandating share-of-freehold sales would be a simple and quick undertaking. We also have concerns about using share of freehold across the whole housing market. It is not an optimum product for managing all types of shared properties, such as large and complex buildings—as we have heard—or buildings with extensive shared spaces. That is why the Government are committed to commonhold instead. We would prefer to work on one widespread take-up of a new tenure, and for that new tenure to be commonhold.

[Baroness Taylor of Stevenage (Lab)]

I will ask for some clarification, then. The policy was originally announced in 2017. The Law Commission did a great deal of work on what needed to be done to enact commonhold, and yet it is not in this Bill. The Minister has just reaffirmed the Government’s commitment to move to commonhold, so can she say how much longer it will take to get us to a situation where we have it?

[Baroness Scott of Bybrook (Con)]

I reiterate that the Government remain absolutely committed to widespread take-up of commonhold for flats. We have reviewed the Law Commissioners’ recommendations to reinvigorate commonhold as a workable alternative to leasehold, and I can assure noble Lords that we will set out next steps in due course.

Amendment 15B from my noble friend Lord Bailey of Paddington would require mandatory share-of-freehold arrangements to be made for block of flats in instances where flats are subject to long leases or collective enfranchisement. I thank him for this amendment and for his interest in this specific instance. We are aware of the interest in this and appreciate the desire to ensure that more leaseholders can obtain control or ownership of their building. Although we understand the benefits that share-of-freehold arrangements can have over ordinary leasehold arrangements with third-party landlords, we are also conscious that mandating share-of-freehold sales on new builds would require a complex legal framework to be constructed and to accommodate the mandate. As I have said, we do not believe that mandating share of freehold would be a quick or easy fix for leaseholders. The Government consider that the best option, as I have also said before, is to continue to work towards the widespread use of commonhold in future, rather than mandating share of freehold.

My noble friend Lord Bailey of Paddington was particularly keen on service charges. The Government will bring forward, through this Bill, a number of measures to require landlords to provide further information to leaseholders on a very proactive basis and to increase the transparency of their service charges and administration charges, as well as providing more information to leaseholders on a reactive basis. Those measures include the introduction of a standardised service charge demand form to standardise the information that freeholders are required to provide to leaseholders. We will mandate the provision of an annual report that sets out key information of importance to leaseholders. We will compel landlords to provide more relevant information to leaseholders on request. We will ensure that service charge accounts are provided within six months of the end of the previous accounting period that they cover, regardless of the lease terms, and this will be subject to a number of exemptions. We will require freeholders to proactively disclose—

[Baroness Scott of Bybrook (Con)]

All I can say to my noble friend is that that is exactly what the Government are working on and that further details will come forward in due course.

A number of things in this Bill will affect the transparency and accountability of freeholders to leaseholders, particularly on service charges, which is the one thing that my noble friend brought up. For these reasons, I hope that the noble Baroness and my noble friend will not press their amendments.

[Baroness Taylor of Stevenage (Lab)]

I thank all noble Lords who have taken part in the debate. I found it a bit of a frustrating debate in many ways. As I said, this policy was announced in 2017; we have had a very detailed Law Commission review and endless discussions in this House about how we move to commonhold. In a sense, my amendment was set out to probe whether we could have some route map towards commonhold, and this might be a first step towards that, to provide leaseholders with at least a share of freehold with a view to moving towards commonhold in the future. It seems that the Government want neither to set out what their route map to commonhold is or what the steps on it might be, nor to give us a timescale for that route map towards commonhold. Now we are faced with an indefinite timescale to get there and a Bill which could have enacted it but has not. I wonder how much longer we will have to wait. The seven years we have already waited is quite long enough.

It has been frustrating to unlock that but worth probing the Government’s intentions. I am grateful for the reassurance that commonhold is still the aim, but I would like to know how long it will take. However, in view of the discussions here today, I will for the moment withdraw the amendment.

Amendment 12 withdrawn.

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[Baroness Scott of Bybrook (Con)]

My Lords, to be clear, the Bill already removes the automatic 12-month bar on leaseholders that stops them making another enfranchisement claim, should an earlier claim have been withdrawn. My Amendment 16 supplements this by removing the right for a voluntary 12-month agreement to be made between parties to restrict further enfranchisement claims for a leasehold house. Removing the ability for a voluntary 12-month restriction makes sure leaseholders are not put under undue pressure to withhold their claims. This is an important protection for leaseholders and makes it clear that they can make fresh claims as needed.

I look forward to hearing from noble Lords as to how they think that our enfranchisement reforms can be further improved. I beg to move.

[Baroness Taylor of Stevenage (Lab)]

My Lords, our Amendment 17 would enable the Secretary of State—or, in Wales, Welsh Ministers—to change the description of premises that are excluded from collective enfranchisement rights. Such a change would be subject to the affirmative resolution procedure. I thank the noble Lord, Lord Thurlow, for all his time in discussing the Bill with me, and I acknowledge his expertise in this area.

Clause 28, which our amendment targets, makes changes to the non-residential limit for collective enfranchisement claims. At present, Section 4(1) of the 1993 Act excludes from the right to enfranchise buildings in which 25 % or more of the internal floor area, excluding the common parts, can be occupied or are intended to be occupied for non-residential use. The clause increases that non-residential use percentage to 50%. We welcome the change, which enacts recommendation 38 of the Law Commission’s final report on leasehold enfranchisement and was supported by the National Leasehold Campaign, among others.

Of course, if the purpose of the non-residential limit is to confine enfranchisement to predominantly residential blocks, the Law Commission determined that the existing 25% limit does not achieve that purpose. There is a significant amount of evidence that, instead, it regularly prevents leaseholders from undertaking collective freehold acquisitions because a sizeable proportion of buildings fall slightly above it and that 25% is a significant bar to the ability of leaseholders to undertake a collective freehold acquisition. The Law Commission further argued that

“the arbitrary nature of the limit makes the bar to enfranchisement a source of considerable frustration for many leaseholders”.

We accept that there is no easy or non-arbitrary way in which to determine where that bar should be. However, it is the stated intention of the Bill to bring as many leaseholders as possible into enfranchisement, and it is therefore questionable as to whether limits under 50% would feel inherently fair. We would hope that a 50% non-residential limit would mean that the number of genuine cases excluded would be small and would remove the opportunity for developers to play the system, because only a genuine split between commercial and residential would apply.

Our main concern on this clause is that there is no flexibility built into it, and we are keen to probe whether a review after a period of time to determine whether the non-residential policy as set out is working in practice could be undertaken, or another mechanism used, so that changes for the limit in respect of collective enfranchisement rights do not require primary legislation but can be enacted through regulations. Enacting small but necessary changes that may occur in relation to the Government’s proposed limit—for example, whether that relates to individual cases that fall just above the limit, or a change in the criteria on using internal floor area to determine the rights, or changing altogether the criteria on which the limit is based—may need alternative mechanisms to resorting to future primary legislation. That is the purpose of our amendment.

I will comment briefly on the other amendments in this group. We understand the reasons for the amendments of the noble Lords, Lord Sandhurst and Lord Thurlow, and look forward to hearing the comments of the Minister on those amendments. In relation to the Question on whether the clause should stand part of the Bill, to be put by the right reverend Prelate the Bishop of Manchester, we understand the Church position as a landholder, but we feel it would go against the spirit of increasing the enfranchisement through the Bill to retain the 25% limit.

[Lord Sandhurst (Con)]

My Lords, I shall speak to Amendment 17A. I am sorry that I was unable to speak at Second Reading. I should also say that the noble Baroness, Lady Deech, who is unavoidably detained, has added her name to that amendment. We therefore have her support as well. Amendment 17A is directed at Clause 28 on mixed-use premises with substantial proportions of business and residential tenants. Currently, collective enfranchisement and lease renewal is not permitted where more than 25% of the premises are business premises. That figure is going to be changed to 50%, thereby making it easier for residential tenants to go down the collective enfranchisement route.

That will introduce management issues—I do not say that they are necessarily problems, but they are certainly management issues. The Bill proposes that, if 50% of the occupants are residential, that will be enough. That will mean that, unless more than half of the building is occupied by business premises, all residential tenants will be entitled to be enfranchised. That will create issues for management and, in particular, problems where some of those residential tenants are overseas companies. We know that there are increasing numbers of those, particularly in London.

Mixed-use buildings pose greater management challenges than purely residential ones. Freeholders need to be responsive and active property managers. Business tenants require swift responses so that they can manage their businesses. If they want changes to the premises and so on, they need their landlord’s consent so that they can go ahead. If there are difficulties with obtaining that consent because, for example, some—or possibly a large number—of the residential tenants are overseas companies, then one can see how unattractive such premises will become as business premises for the business occupiers.