Matthew Pennycook
MP for Greenwich and Woolwich · Labour · United Kingdom
“It is a pleasure to serve with you in the Chair, Dame Siobhain. I congratulate the right hon. and learned Member for Kenilworth and Southam (Sir Jeremy Wright) on securing this debate.”
“I will address the right hon. and learned Gentleman’s specific question in due course. Before I do so, I want to put on the record the policy in relation to villages. He can rest assured that I will address the point; if he is unsatisfied, he is more than welcome to intervene again. A number of hon. Members mentioned villages.”
“I will say two things in respect to that, and I will come on to detail how the approach works in relation to decision making very shortly. In general terms, developers can make whatever claims they like about any particular site across the country; it is for the local authority to assess whether, in its view, that site constitutes grey be…”
“and learned Gentleman’s point about what is likely to constitute grey-belt land. Let me directly address his other two specific points. Is this a significant policy? Absolutely, and it has been judged as much by the Office for Budget Responsibility and other external commentators. Is it deliberate? Absolutely. We want, as the right hon.”
“Where authorities may wish to restrict development in villages for other reasons, a range of tools are available, such as conservation areas or normal development management policies. On the right hon.”
“We have to put in place policies that, through the decision-making route, allow homes still to be brought forward in that interregnum, but then we have to push heavily to drive towards universal plan coverage. At that point, the protections are in place.”
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“They include costly and time-consuming disputes in cases in which the price payable is close to the level of the non-litigation costs in question for low-value claims, and the potential for landlords to game the new system by arguing for a price payable below the threshold, in order to secure both it and associated non-litigation costs because of the burden of disputing the amount. We appreciate that the Government have incorporated into the clause the Law Commission’s recommended remedy, namely that in low value claims for which the non-litigation costs are higher than the premium payable, the leaseholder would be required to pay the lower of the two values, one of which is to be prescribed by the Secretary of State.”
“We also appreciate that there are risks in prohibiting a landlord from passing on non-litigation costs to leaseholders in instances in which they would be required to spend more in carrying out the transaction than they received for the asset. The Law Commission highlighted a number of those risks in its final report on enfranchisement, including the incentive created for landlords not to co-operate with a claim, or for them to transfer the low-value freehold into the name of a shell company, then liquidate the company and ensure that the lease becomes bona vacantia. We are concerned, however, that exempting claims below a certain value will create a different set of practical problems. I hope I can get the Minister to engage with those problems, with a view to convincing him to reconsider.”
“As the Minister has made clear, the clause entails only a selective extension of rights in this area, because it does not ensure—as the press release that accompanied the publication of the Bill claims it does—that all leaseholders will no longer have to pay their freeholder’s costs when making a claim. Instead, by means of proposed new section 19C, it makes exceptions to the general rule whereby the price payable for the freehold or extended lease is below an amount to be prescribed in regulations. We understand the rationale for the proposed new section, namely that leaseholders should pay a freeholder’s non-litigation costs in such circumstances, so that low-value claims do not cost the freeholder money; the Minister has been very clear that the Government believe that that must happen to ensure that the process is fair for both sides.”
“The market value for premiums is shaped by the laws this House passes, and it is right in principle that, to achieve the Bill’s objectives of making it cheaper and easier for leaseholders in houses and flats to extend their lease or buy their freehold, leaseholders do not pay non-litigation costs in addition to the payment of a premium, as determined by the new method proposed in schedules 2 and 3. It is because we believe that leaseholders should not be liable for these costs as a result of an enfranchisement or lease extension claim on principle, irrespective of the method by which the premium is calculated, that we take issue with the fact that the clause as drafted does not protect all leaseholders from liability for costs incurred.”
“We note the Law Society’s concern that landlords are being asked to bear their own non-litigation costs despite the fact that the proposed standard valuation method provided for by schedule 2, which the Committee has just considered, will lead to payable premiums below full open market value because it caps the capitalisation rate. However—this point touches on one of our previous debates—political decisions set the rules of the game for market competition. In our view, it is simply not the case that there is some kind of inherent market value for premiums that is entirely independent and autonomous of legislation in this area. Every sale of a flat and every lease extension process relating to a flat since 1993 has been undertaken against the backdrop of the 1993 Act, which reduced ground rents to a peppercorn.”
“The fact that a landlord sells his or her asset and receives a share of the profit as a result is not sufficient justification for departing from an arrangement in which reasonable non-litigation costs are factored into the ultimate price. That is not least because the decision to enfranchise or extend a lease is often not discretionary; it is often a requirement brought about by the fact that a lease is due to expire, because the payable premium is rising as the lease shortens or as a result of the decision to move or re-mortgage. We therefore fully support the intention behind clauses 12 and 13 to provide for a new regime based on the principle that leaseholders are not required to pay the freeholder’s non-litigation costs in those circumstances.”
“As the Law Commission’s 2020 final report on enfranchisement puts it, the effect of the law and current market practice is that “the landlord is over-compensated for the non-litigation costs that he or she has to incur in order to transfer the interest to the leaseholder.” In addition to the fact that landlords are over-compensated for non-litigation costs, many of those who are better resourced use the fact that such costs are borne by leaseholders as leverage in negotiations on the price of the lease extension or freehold acquisition, confident that the expense of challenging those costs in tribunal will dissuade many leaseholders from doing so. The Opposition’s view is that freeholders should not receive compensation in respect of non-litigation costs.”
“In addition, as things stand, through capitalised ground rents they are extracting funds from leaseholders over long periods—often decades—prior to securing that profit share for no explicit services in return, a point that the hon. Member for Redditch made. The valuations of lease extensions and freehold acquisitions under the existing statutory regime rely on prices agreed via an open market transaction, but those valuations do not account for the fact that leaseholders are expected to pay their landlord’s non-litigation costs. A landlord in an enfranchisement or extension transaction therefore receives both a price for the asset being sold, which reflects the market rate without non-litigation costs factored in, and their reasonably incurred non-litigation costs on top.”
“The argument for imposing non-litigation costs has always been that in enfranchisement or lease extension claims, a landlord is being forced to sell his or her asset, and that that justifies a departure from the costs arrangements that operate in open market sales of residential property, where any valuations and final price will reflect the fact that each party must pay their own costs. However, when it comes to lease extensions or freehold purchases, a landlord is obviously not simply being compensated for the value of the asset they are being compelled to sell. They are instead securing, through the payable premium, a share of the profit to be made from selling to the leaseholders in question.”
“I thank the Minister for his explanation of the Government amendments and for his initial response to my amendments and the amendment tabled by my hon. Friend the Member for Brent North. We welcome the new costs regime provided for by these provisions. The Minister is absolutely right that, as things stand, there is no balance of power: the playing field is tilted very much in favour of landlords rather than leaseholders. That needs to be addressed. Under the current law, leaseholders are required to pay for certain non-litigation costs incurred by their landlord when responding to an enfranchisement or lease extension claim. That obviously does not reflect normal practice in residential conveyancing, where each party bears their own costs.”
“I will have to come back to my hon. Friend on that point, but my understanding is that, by deleting the relevant proposed new sections, amendments 4 and 5 would ensure that in all circumstances non-litigation costs will not be chargeable to leaseholders. That was certainly the Opposition’s intent in proposing the amendments.”
“With that in mind, I am minded to press amendment 4 to a vote and, if that is successful, amendment 5 as well.”
“I have taken on board what the Minister said about the Government’s position being that the exemption is essential to ensure that the new process is fair, but we are very concerned that the prescribed sum that the Secretary of State will bring forward will become the de facto minimum amount payable for those low-value claims. Because of the problems challenging that, I think that leaseholders will be deterred from taking this process forward. That is the best-case scenario. The worst-case scenario—I fear that this is the more likely scenario, for the reasons outlined by my hon. Friend the Member for Brent North and the hon. Member for Redditch in relation to the behaviour of some freeholders —is that it will become a recipe for litigation and gaming of the low-value exemption in ways that will be detrimental to leaseholders.”
“I thank the Minister for that response. Before turning to amendments 4 and 5, I have a brief note about the amendment tabled by my hon. Friend the Member for Brent North. It is a very strong idea, and there is a genuine deficiency in the law. If he is minded to press it to a vote, I would certainly support him. He may want to return to it at another date. On amendments 4 and 5, perhaps I have misunderstood the Minister. We are not trying to make the argument that the Government have forgotten to include something in the Bill or that there is something missing; the point is that the exemption that they are providing for low-value claims will cause problems.”
“We therefore seek reassurances from the Minister that the Government are thinking seriously about how they will ensure that the first-tier tribunal will be adequately resourced to effectively and efficiently discharge all its new and proposed responsibilities, including in relation to this Bill. Could he tell us what additional resources the Government are proposing to allocate to the property tribunal, and what initiatives are being considered to ensure that it has the relevant skills and capacity to guarantee that it can do that?”
“The Government are proposing to increase the tribunal’s workload through the changes that they are making through the Renters (Reform) Bill, which is still making its way through the House. In particular, the new statutory procedure for increases of rent that that Bill provides for, with an expanded right for tenants to challenge, is likely to see the level of market rent referrals that the tribunal deals with rise. Now the Government are proposing, through this Bill, that the tribunal also be given responsibility for resolving all enfranchisement disputes. As I said, although we welcome the proposal to do so, the obvious risk of enacting this combination of further and expanded jurisdictions for the tribunal, in the absence of additional funding, judges and court staff, is that it will result in backlogs.”
“We welcome these clauses, but I want to probe the Minister on the issue of the first-tier tribunal’s ability to deal with all enfranchisement disputes. The tribunal’s present caseload is not unduly onerous, but, following the end of the pandemic, it has reported a gradual increase in its leasehold management work—in particular, challenges relating to service charge costs—as well as more applications for rent repayment orders. In addition, it now has responsibility for resolving the vast majority of disputes arising from the Building Safety Act 2022, including those concerning remediation orders and remediation contribution orders under part 5 of that Act.”
“As the Minister has said, clauses 14 to 17 variously amend both the 1967 and 1993 Acts to transfer jurisdiction from the county court to the first-tier tribunal for a number of matters and provide the FTT with the necessary additional powers to exercise its expanded jurisdiction. We welcome these sensible clauses, which enact recommendation 82 of the Law Commission’s final report on leasehold enfranchisement. Although it is our hope that a number of measures in the Bill will have the effect of reducing the frequency with which disputes arise during enfranchisement claims, a great many still will. It is sensible to give a single body responsibility for them, and for that body to be the FTT, given its skills and expertise.”
“We take no issue with any of the Government amendments in the group. I rise to speak briefly in relation to clauses 14 to 17, which, as the Minister has said, concern the jurisdiction of the county court and tribunals. The current law divides the responsibility for resolving enfranchisement disputes between the county court and the tribunal, but there is considerable evidence that this creates complexity, can cause confusion and additional expense for the parties, and creates discrepancies due to the differing powers of the county court and of the tribunal to order one party to pay the other’s litigation costs. The workaround that has been attempted—namely, the increased deployment of tribunal judges as county court judges and vice versa—has not overcome the inherent tensions regarding the division of power in this area.”
“Clause 18 No first-instance applications to the High Court in tribunal matters”
“Amendment 41, in clause 16, page 34, line 36, leave out from beginning to end of line 2 on page 35 and insert— “(3) An application may not be made under subsection (1) to the court unless the application relates to proceedings in respect of which the court has jurisdiction under or by virtue of any provision of Chapter 1, 2 or 7 (including section 91A).” This amendment provides that applications under section 92 of the 1993 Act may be made to the county court only if the court is dealing with related proceedings under the 1993 Act. Amendment 42, in clause 16, page 35, line 17, leave out subsection (7).— (Lee Rowley.) This amendment is consequential on Amendment 41. Clause 16, as amended, ordered to stand part of the Bill. Clause 17 ordered to stand part of the Bill.”
“(5B) The variation of a lease on behalf of a party in consequence of an order under subsection (5A)(b) has the same force and effect (for all purposes) as if it had been executed by that party.” This would give the tribunal jurisdiction to deal with cases where landlords cannot be found or identified, to appoint a person to execute a variation of a lease (eg. if a party to the lease is absent or unco-operative), and to enable the Schedule to continue to apply if the notice given was of no effect.”
“Amendment 40, in clause 16, page 33, line 26, at end insert— “(5A) In relation to paragraph 12 of Schedule 11— (a) if the landlord under a qualifying intermediate lease cannot be found or their identity cannot be ascertained, the appropriate tribunal may make such order as it thinks fit, including— (i) an order dispensing with the requirement to give notice under paragraph 12(3) of Schedule 11 to that landlord, or (ii) an order that such a notice has effect and has been property served even though it has not been served on that landlord; (b) make an order appointing a person to vary a lease in accordance with paragraph 12 of Schedule 11 on behalf of the landlord or tenant; (c) if the appropriate tribunal makes a determination that a notice under paragraph 12(3) of Schedule 11 was of no effect, it may— (i) determine whether another landlord or tenant could have given such a notice, and (ii) if it determines that they could have done so, order that paragraph 12 of Schedule 11 is to apply as if they had done so.”
“Amendment 38, in clause 14, page 29, line 8, leave out from beginning to end of line 41.— (Lee Rowley.) This amendment removes provision that is reproduced by Amendment 35. Clause 14, as amended, ordered to stand part of the Bill. Clause 15 ordered to stand part of the Bill. Clause 16 Amendment of Part 1 of the LRHUDA 1993 Amendments made: 39, in clause 16, page 32, line 43, at end insert— “(ha) any matter arising under paragraph 12 of Schedule 11 (reduction of rent under intermediate leases on grant of a new lease), including what rent under an intermediate lease is apportioned to the flat;”. This amendment is consequential on Amendment 73.”
“I welcome those reassurances from the Minister. Amendment 35 agreed to. Amendments made: 36, in clause 14, page 27, line 27, leave out subsections (3) and (4) and insert— “(3) An application may not be made under subsection (1) to the court unless the application relates to proceedings in respect of which the court has jurisdiction under or by virtue of any provision of this Part (including section 21ZA).” This amendment provides that applications under section 21A of the 1967 Act may be made to the county court only if the court is dealing with related proceedings under the 1967 Act. Amendment 37, in clause 14, page 28, line 5, leave out subsection (7). This amendment is consequential on Amendment 36.”
“For the purposes of anyone following our proceedings, there are several issues that we wish to raise in relation to clause 21 and schedule 7, but we will do so when we come specifically to debate schedule 7, which, as the Minister said, is where the right is detailed.”
“That is unless you go through a process of extending all the leases, and all those costs are passed on to the shared owner. There is a real problem there that is not addressed in the Bill as it stands, in my understanding.”
“Shared owners are sometimes, not always, in very complex ownership arrangements. There are problems for leaseholders generally, but there you have the additional party of a housing association in the mix. I could talk for half an hour on this; I will try to be very concise. I will just pick out one example, which relates to the fact that shared owners do not have a statutory right to lease extension. If they did, they would have a right to a 90-year extension. In the absence of that right, some shared owners are in complex arrangements where their landlord is a sub-lessee with only a short interest in the lease themselves, so is actually incapable of offering the equivalent to the benefit that a leaseholder would get under the statutory route.”
“Therefore, I will concentrate in my evidence on what I would like to see in the Bill; I cannot comment on the degree to which those amendments will achieve those things, so I just want to make it clear that I cannot comment specifically on the amendments. In terms of the Bill generally, obviously it is aimed at leaseholders. Shared owners are a very specific subset of leaseholders. They generally face additional problems over and above the problems faced by leaseholders. They have fewer rights and protections under law. They face additional burdens. They also have fewer protections under consumer protection, including new build codes. Therefore, they are generally disadvantaged. As it stands, the Bill does not represent a better deal for shared owners. That is partly because of the issue you referenced.”
“Among those were amendments that would exclude certain shared-ownership leases from enfranchisement and make the new valuation method for calculating the premium payable for shared owners non-mandatory. If you have had a chance to look at those—you may not have—could you give us your views on those specific amendments? We know that enfranchisement for shared owners is expensive—it is challenging—but, none the less, is it a regret, from your point of view, that these amendments have been tabled? Sue Phillips: I will start with yesterday’s amendments. I have had a look at them and I have called around legal experts, and, of course, it is far too short notice for a legal expert to comment, let alone a lay person like me.”
“Q Thank you all for coming in this morning to give evidence. I will perhaps return to Ms Higgins and Mr Smytherman if we have time in the session, but could I start with two questions to you, Ms Phillips, on shared ownership? First, the Bill makes provision for the treatment of intermediate leases in a number of areas, but it does not contain, as far as I can read, any measures to directly resolve many of the challenges that shared owners face. Could you give us your general views on the Bill from a shared-ownership perspective? What is missing? What might we look to include if we could? Secondly, the Government tabled more than 80 pages of complex amendments to their own Bill yesterday.”
“Q Have you explored any quick fixes for what we might look to persuade the Government to incorporate? Sue Phillips: The problem with looking for quick fixes is that shared ownership is so complex, you run a risk of creating unanticipated consequences. Those particular questions are better directed at a lawyer or a legal expert, which I hope you will do this afternoon, when you have legal experts presenting their views on this Bill.”
“That is what we, as the HomeOwners Alliance, when we get more than 4 million people coming to our website, can present and say, “These are the questions you can ask.” I really welcome that and having everything aligned so that it is similar. I am sure that we will go on to estate charges and people on freehold estates. Sorry—what was the first question?”
“Q Two quick questions while I have got you here—on slightly different subjects. The first relates to the purchasing of a lease initially. In its 2018 consultation on implementing reforms to the leasehold system, the Government committed to requiring freeholders and managing agents to provide leasehold information at the point of sale within a defined time limit and a maximum cost. That is not in the Bill; would you welcome that being incorporated? My second question is on the service charge provisions—clauses 26 to 30. In principle they might work very well; there is lots of detail to come through regulations. However, are there any specific ways in which you would like to see those service charge clauses tightened? Ms Paula Higgins: We really welcome standardisation and having standard forms.”
“We need to have better regulation of managing agents, developers, and of housing associations that are promoting shared ownership, to ensure that they are giving the right up-front information and to ensure that in blocks—as you said you did, Bob—you do the LP form right away. We know that there is lots of delay there. That is one of the reasons why buying and selling leasehold properties takes so much longer. So we really welcomed having that up-front information. That is through the BASPI form, and it is probably through the regulation and management—having regulation of estate agents and managing agents, which is another piece of the pie that I think would be really welcomed in the Bill. I would welcome it if it were put in the Bill.”
“Q Just on whether we should require freeholders to have standardised information at the point of purchase. Ms Paula Higgins: Even though estate agents are supposed to provide basic up-front information, when we did our report on leasehold, half of the estate agents on things we were looking at were not even providing the information that the property was leasehold or freehold. We know that work is going on, and that estate agents are supposed to provide up-front information—we understand that there is the BASPI form—but the reality is that it is not happening. They are not regulated; they don’t know what their obligations are. This is the other piece, particularly with managing agents, as you mentioned before.”
“Q Do you want to say anything on service charges? Ms Paula Higgins: On service charges, I think it is about being transparent. Some of the provisions in the Bill are about having proper annual accounts, so a lot of it is about trying to get that information. I have not looked at the detail of all the clauses there, but it is about people being able to get that information. That is why you need to have regulation of managing agents—to be able to provide that information properly.”
“Professor Steven: I am reluctant to answer that in any detail, because I am really not an expert on English land law. May I say something briefly about the Scottish perspective? The difference goes all the way back to 1290, when Edward I, in England, said, “You cannot have feudal grants of property.” Leasehold therefore had to be used, particularly for flats, because of the desire to impose obligations in relation to maintenance and contributions to maintenance. In Scotland, feudal grants were not banned until 2004, which means that flats and other properties were sold that way. We do not have leasehold in the way that you do. Existing feudal holdings were converted into outright ownership in 2004. We also had legislation on long leases that took effect in 2015, which also converted into ownership. The context is quite different.”
“Q Thank you for your time, gentlemen. We have half an hour, but I would love to get in three specific questions, so I encourage you to be as brief as you can while answering. The first question is on commonhold. Professor Steven, you have published extensively on the Scottish experience of commonhold legislation; Professor Hodges, I believe that you are a member of the Commonhold Council. On Tuesday, we heard from Professor Hopkins of the Law Commission that there are risks associated with a partial implementation of the Law Commission’s recommendations on commonhold. Do you agree with that, and if you do, are there any sensible steps we might take via amendments to the Bill to pave the way for commonhold in the future—for example, share of freehold in flats? Professor Hodges: I think that was for Professor Steven.”
“They need to train and do all sorts of things. You want to take out repetition or unnecessary cost in doing several things at once. It really is a change management point. We know where we want to get to—just do it basically.”
“Q In that case, I will move over to Professor Hodges, in the interests of time, if that is okay. Professor Steven: Absolutely, and I can see you now. Professor Hodges: I am very supportive of all the work that the Law Commission has done on commonhold, and we discussed it two or three years ago. I would do it, and this is part of a wider discussion that I expect we will get on to shortly. It is about change management. At the moment, it is rather like the point mentioned by the three previous witnesses. Property law moves terribly slowly—for heaven’s sake, just get on with it. We have the agents, the tenants and the landlords. What we are doing is saying, “Well, do this. Then do that. Then do that. Then do that.” We know where we need to get to, and that would be a very good system if we can get there.”
“Q Unless they confound us, the Government have been very clear that they are not going to do a commonhold package. Would share of freehold be a good interim step? Professor Hodges: It is the obvious thing to do, isn’t it? But I would go further.”
“Getting a modernisation of that system is the answer to this basically. That is not there yet, but it is absolutely within sight and achievable.”
“Professor Hodges: Quite possibly, and this is a generic point about access to justice and simplifying dispute resolution. I think the answer to that is to move towards an integrated system, which actually the tribunal and several of the ombudsmen have been working on in the past year in relation to service charges. There are too many places where disputes can go. If we simplify that to an integrated system that supports decision making—part of the answer is clarity and transparency in regulation—but if you support that, things move much more quickly. It has always been the case that, for example, courts are slow. They are a very careful process and therefore you need experts and lawyers, and it takes money—it costs. Whereas, with tribunals and improvement, ombudsmen are free and they move quickly.”
“Q That is all I was looking for. My second question relates to non-litigation costs. The Government, when they published the Bill, claimed that it protected all leaseholders from non-litigation costs. However, clause 12 allows those costs to be passed on, either as they are or at a prescribed rate, in cases of low-value claims. That was because the Law Commission said that the shorter the expired term, the greater the risk for leaseholders in not extending but buying out their lease. This is a point about litigation in some senses, but do you think that, because of the difficulties of challenging a claim to that prescribed sum, leaseholders will be deterred from initiating the process of extending their lease or acquiring their freehold, if they still face, even at a prescribed rate, essentially non-litigation costs as part of claims?”
“Professor Hodges: I think that it is outside my competence to know the background. My answer would be: just move to commonhold.”
“Q My last question relates to ground rents. Clause 21 gives effect to schedule 7, which provides leaseholders with a right to permanently replace their ground rent with a peppercorn, without extending their lease. However, the Government are proposing to apply it only to those with very long leases, so 150 years left or more. The rationale is, as per the Law Commission, that the shorter the unexpired term, the greater the likelihood of disadvantage. Do you have any thoughts on why the Government have chosen that 150-year limit? The Law Commission said 250 years. Do you think it is right, in principle, that someone with a 120-year lease, who may wish to extinguish their ground rent but not extend, is prohibited from doing so on the basis of the Bill, as it stands?”
“There are obvious risks if you do not put that building block in place, because things are going to go wrong and there will be detriment to tenants and landlords.”
“Essentially, these people are all paying into the same pot, so should they not be covered by the same regulatory system? Professor Hodges: I think there is an enormous missed opportunity for simplifying across social housing, private and so on. In particular, I would introduce the regulation of property agents working group reforms immediately. Almost everyone wants them, as far as I can see, and it would be easy to do, because you would just cut and paste the relevant regulatory bits from the recently enacted Building Safety Act 2022 and put them in for private managing agents. As I said in the paper that I sent to you—I gather that Andrew Bulmer was talking about this two days ago here—there are three very good reasons why you need the regulation of property agents, each of which stands up on its own.”
“Q I am trying to adjust my questions to your areas of expertise, but I am trying to focus on the Bill rather than abstract discussions about regulatory systems and what we might want. I have a specific question that follows on from Mr Amesbury’s question. Part 4 of the Bill provides for a new regulatory regime for private and mixed-use estates. Do you think that that is a good idea in principle? We in the House—particularly Mr Fuller and a specific set of Members in whose constituencies this is a very real issue—have been talking for years about a separate management regime. Do you think it is a good idea in principle to establish a completely separate stand-alone regulatory regime for estate management, or should we look instead to incorporate it in the existing system?”