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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“Q Gentlemen, thank you for coming to give evidence to the Committee. I could ask about a huge range of issues, but I will start with ground rents. Various provisions in the Bill touch on ground rents. You will know, for example, that schedule 2 imposes a 0.1% cap on their treatment in valuation. Clause 21 and schedule 7 deal with existing ground rents and how we will treat those. What are your views on the fact that those provisions provide leaseholders with the enfranchisement right to buy out their ground rent under a very long residential lease, but we also have the consultation ongoing with five options? How do those provisions interact?”
“The Law Commission did an awful lot of work on how to improve the process for multi-block sites, particularly following the Supreme Court decision two years ago on Settlers Court. I think that is another missed opportunity.”
“On the right to manage, one of the most egregious issues is where groups of leaseholders have attempted to get a right to manage and have been hit for extortionate legal costs, where their petition for right to manage has been resisted by the landlord. There are certain landlords out there who always, always, unfailingly take this through the legal steps. They rack up legal costs, but of course they can get that back through the service charge. That is an issue that I urge is the worst deterrent to right to manage. Liam Spender: The lack of right to manage for fleecehold estates—for estates subject to management schemes—is one of the most obvious omissions in the Bill.”
“Sebastian O ’ Kelly : In relation to leasehold houses, it is a bit of an embarrassing omission that the proposal is not there. The spreading of leasehold houses around the country simply to extract more cash from the unwitting consumers who had purchased houses from our plc house builders was a national scandal, actually, and it was frankly a try-on too far and caused a huge amount of kerfuffle. There will be times when you would have to build a leasehold house—when the builder does not actually own the land—but they are very isolated cases, and largely this scam has self-corrected through the adverse publicity.”
“Q I have two other brief questions. The Bill does not include provision to ban new leasehold houses. If the Government’s intention, as I think has been made clear, is to bring those provisions forward through Government amendments in Committee or on Report—at a later stage—what should they look like? In your view, should we look for those Government amendments to do or not to do particular things? On the right to manage, only eight of the 101 Law Commission recommendations on right to manage have found their way into the Bill. We face the issue that Mr Boyd referred to—we could add in many more provisions to the Bill. Are there any specific RTM recommendations from the Law Commission that it would be really worthwhile to try to incorporate into the Bill?”
“Cath Williams: On peppercorn ground rent, we have noted a new definition of a long-term lease being 150 years, which we have never come across before. Many members in our group—there are over 27,000 members in the National Leasehold Campaign—have modern leases with ground rents at significantly less than 150 years, at around 99 or 125 years. That means that the provisions in the Bill do not give them the opportunity to revert to a peppercorn ground rent. If we have read it correctly—we are not legally trained—they would be excluded as having a non-qualifying lease. That is our understanding: that they would be excluded. That could be a significant number of leaseholders who will not benefit from the peppercorn ground rent opportunity in the Bill.”
“A peppercorn ground rent would massively change the playing field and help us to move towards our vision of commonhold, so we need to get a peppercorn ground rent for existing leaseholders in there. With the Leasehold Reform (Ground Rent) Act 2022, which means new builds do not have a ground rent, we have created a two-tier system. The Bill really does need to look at existing leaseholders and what can be done to help to put them in a similar position to new leaseholders. If ground rents are wrong for the future, they were wrong in the past and we therefore need to be bold enough to go back and fix that. Peppercorn ground rent has to be the solution. This is an amazing opportunity and I hope that will be the outcome of the consultation.”
“I am confident that it will, in the end, ban leasehold houses, but currently that has not been achieved. The Bill improves the transparency of service charges, but just being able to see the fact that leaseholders are being ripped off more does not actually fix the root cause of the problem. As we all know, the root cause of the problem is the leasehold system per se. I am concerned that the Bill sticks more plasters on a system that we all agree is immensely outdated and needs to go. There is no mention anywhere in the Bill of our long-term vision of achieving commonhold. That is our vision, and it is the elephant in the room. The Bill does not even mention commonhold and how we can move towards it.”
“Q Thank you for coming to give evidence to us. I have a general question to start. Large parts of the Bill are broadly uncontroversial and uncontentious, not least because they implement Law Commission recommendations. There is lots we could add in, but let us try to keep a focus on what is in the Bill. In your view, to what extent does the Bill deliver for leaseholders in terms of transparency, fairness, enhanced consumer rights and empowerment? What areas could we look to strengthen or tighten up? Katie Kendrick: The Bill is very much welcomed and long overdue. As we all know, the Law Commission reports were fantastic and very detailed. The Bill is lacking significantly on the detail of the Law Commission recommendations. The headline was that the Bill would ban leasehold houses, and obviously the Bill as it stands does not do that.”
“They are in limbo, so they do not know whether to enfranchise now or to wait for the Bill to go through. The Bill says that it will make it easier, cheaper and quicker, but the devil is in the detail, and we do not know what the prescribed rates will be. We are being promised that it will be cheaper, but will it? It all depends on who programmes the calculator. Ultimately, will it actually be cheaper? The Bill says that it will abolish marriage value, which is hugely welcomed by leaseholders, so those people with a short lease approaching the golden 80-year mark are waiting. Do they go now?”
“Q A huge amount of the Bill is left to future regulations and statutory instruments. That is understandable in many cases—I am thinking of the service charge provisions and others. Are you concerned that it will take a long time to bring some of the measures into force? Is there a specific concern about the incentives that that creates in the time between them coming into force and the Bill receiving Royal Assent? As the Bill is drafted, there are some hard cliff edges, for example, on the new 999-year leases, where you have people who must extend before they come in. However, there are some potential cliff edges if the commencement dates on lots of these things are 12, 18 or 24 months away. Is that a concern? Katie Kendrick: It is a big concern, because leaseholders are trapped.”
“Q Some of them will not have a choice, will they? Katie Kendrick: No, some people do not have a choice. People’s lives are literally on hold, and have been for many years, waiting for the outcome of the legislation. If we need further legislation to enact the Bill, people cannot sell. Housing and flat sales are falling through every single day because of the lease terms and service charges. It is horrendous. It will grind the buying and selling process to a halt.”
“Further, in clause 28, there is a word I have not seen before in relation to service charges. That is that there is an obligation to provide leaseholders information about variable service charges “arising”. I am not sure what that means, and it would benefit from some explanation. That is the sort of word that will find its way into tribunals, I would expect. If “incurred” did, and found its way to the Court of Appeal, “arising” could do with some explanation. The report, which is the second element in clause 28, which a landlord is required to—”
“Some consistency between those professions would be helpful. We would very much benefit from cost classifications that would support the provision of service charge accounting. It would also support the tribunal in understanding where to look for certain costs in relation to service charges. Cost classification would simply be some headings, some detail beyond that and then detail of the service that has actually been provided. I am stepping entirely outside my area of comfort, but I confess I am married to a chartered accountant who specialises in commercial service charges. I have some wonderful Sunday morning conversations with him over breakfast. Those are points that, between us, we have come up with—looking at the way that service charge accounts have been prepared.”
“They are the people who do not speak loudly to Committees such as these. Yet, service charges are as much about the money as they are about the services. A balance sheet will give completeness. Income and expenditure will tell you what has come in and what has gone out. It makes sense. While we are there, might I also invite the Committee to consider trying to bring together the differing understandings of “incurred” in the 1985 Act, as against what an accountant will understand. An accountant will understand a cost being incurred when that service is effectively provided. When I consume electricity, I incur a cost from an accountant’s perspective. From a lawyer’s perspective, I do not incur that cost until either, as a landlord, I receive the invoice, or I pay that invoice. So, they are very different dates and times.”
“If I may make a suggestion, it would be extremely helpful for the Committee to engage with either a firm of accountants or, in fact, the Institute of Chartered Accountants in England and Wales; the Committee could then ask how they would go about formulating a proper system—probably in conjunction with the Royal Institution of Chartered Surveyors, under the fourth edition of the code, hopefully—in order to bring service charge accounting into the arena that it is currently in in the commercial code, or the professional statement that the commercial environment has in it. Accounts is a big area, and it would be immensely helpful to have more involvement all round from accountants. I will not say accountants are the elephant in the room, as that would be a discourteous metaphor. They are the people who are never seen in tribunals.”
“I am going to check that the numbers have been properly extracted and check a small sample of the invoices to make sure that what is said has been invoiced has found its way into the accounts.” What we do not find for leaseholders, unless the lease requires something like an audit, is a proper review of service charge accounts with a balance sheet, an income and expenditure report, and notes to the accounts. The first thing I must say as I am explaining this is that I am not an accountant—far be it.”
“I have come across many cases where leaseholders are repeatedly asked to pay on-account service charges and they never receive a reconciliation at the end of the year, so there is no real knowledge of what is being spent. We could do with looking at a template for the provision of service charge accounts. That may be a matter for regulation, rather than the Bill, but I want to explain to you why I say that is important. When the service charge accounts come over, they have often been prepared by the managing agent, who has then instructed an accountant to review them in some shape or form. Often, the accountant will simply say, “I have agreed a set of procedures that I am going to follow in relation to the service charge accounts.”
“What we would really benefit from is consistency in the regulations, so that across the board, as a leaseholder moves from one flat or property to another, they can expect to see the same charges set out in the same way, broadly speaking—so that they know what to look for when they go from one place to another. The clause I have had quite a look at, with the benefit of some accounting input, is clause 28. It will insert two new sections into the Landlord and Tenant Act 1985, which is the framework we are looking at when looking at the Bill from the perspective of these clauses. It is good that we have a time limit for the provision of service charge accounts.”
“I wanted to put that out there as the good news to start off with. From an improvement perspective, I want to start with clause 28, which deals with the provision of the written statement of account and the report the landlord will be required to provide. I have very little to say about clauses 26 and 27. Clause 26 brings the fixed service charge into the service charge regime. Clause 27, as you say, relates to the service charge demand. We do not know what the regulations are going to say. We do have an existing framework—a relatively limited one—for service charge demands, so there is something there, but we will need to see what the regulations do.”
“If I receive a demand for payment of maintenance of a park on my estate, it matters not to me whether I am a leaseholder or a freeholder—the money that I pay is exactly the same. I wanted to set that out as my starting point, if I had a blank piece of paper and endless parliamentary time and patience. Having said that, we are where we are. I have made notes and, with your permission, I will run through them as quickly as I can, while still providing some degree of detail. I am a lawyer—I am one of those people whose living is derived from working with leasehold. I am one of the people who is often criticised in this arena. I have had a good look at the clauses of the Bill. There are good things: there are time limits and an enforcement provision, and we are undoubtedly attempting to achieve some transparency.”
“Amanda Gourlay: I would like start by quickly saying that while the Bill is welcome—as far as I am aware, we have been working towards leasehold reform for about six years now, from a service charge perspective—in an ideal world, although I appreciate that we are not starting with an ideal world, the best starting point would be to repeal everything we have so far so that we can codify and consolidate everything. I say that in relation to service charges, which apply only to leasehold properties, but also to bring all the charges relating to services and works that homeowners, occupiers and residents might pay within one regime, so that we are not looking at a separate regime for estate management charges or for estate management schemes, which are different from estate management charges, but we bring everything into one place.”
“Q Amanda, thank you for coming to talk to the Committee. You have expertise in a number of areas, but I wanted to probe you on something that we have not gone into the details of—the service charge provisions in clauses 26 to 30. Lots is left to regulations, but these clauses are potentially quite transformative—particularly clause 27, as most leaseholders will experience that clause as it relates to service charge demands. In your view, looking to improve the Bill further, what are the flaws, inconsistencies, deficiencies and problems with these clauses, albeit the regulations are coming, and what stipulations might we look to put in the Bill about what those regulations must look like?”
“Is Mr Gardiner correct in specifying that there are circumstances in which you would want to withhold because the non-payable enforcement clauses do not bite in the relevant way? Amanda Gourlay: I am instinctively nervous about withholding, even if it is simply a question of process.”
“Q I just wanted to follow up on something, so that I am clear in my own mind in relation to Mr Gardiner’s question about the provisions in the 2002 Act that have not been brought into force, and it directly relates to what you have just said about proposed new section 21D. In some senses, many of the new requirements in this section are covered by the enforcement measures in clause 30. Is proposed new section 21D the only example, or are there other examples, of where that power in the 2002 Act might be considered necessary for a leaseholder to use, because the enforcement provisions do not cover the full gamut, if you like? I suppose that I am trying to get to where the enforcement clause is lacking.”
“It might be said that that is because the provision of those accounts is outside the control of the landlord, because the accountant is the person who is preparing the accounts and they may—you will understand that I am trying to argue both against myself and for myself. There is that possible argument that may be proposed as a counter-argument to mine.”
“Q I suppose what I am getting at is that you would not need to withhold if the enforcement clause properly covers all the requirements therein. Amanda Gourlay: It seemed to me that when I was reading through the clauses in the Bill that it was really section 25D that stood out as the measure that was not covered by clause 30. Clause 30 very clearly enumerates that we have section 21C(1) which is about the demand for a payment; 21E, which is about the reports—obviously, between C and E there is D, which is not in there—and then we also have 21E covered. You can literally trace those measures through. D was the one that stood out for me as being a necessity.”
“As for the robustness of the clauses, as you said, our reports—in particular on enfranchisement—gave recommendations that would have wiped away the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, to provide an entirely new and unified scheme for houses and flats. In the process of instructing counsel, the Government have made decisions on what to implement. We have had to think about how to carry over that policy in the context of legislation that performs keyhole surgery on existing legislation, rather than starting with a blank sheet. With that constraint in mind, however, I am confident that the clauses achieve their desired purpose.”
“I do not think that that is necessarily unusual, given the complexity of the legislation, and it reflects the continuous process of examining iterations of clauses to ensure that robust scrutiny is applied. I should explain the Law Commission’s involvement in the clauses. We have worked in much the same way that we would in producing any Bill: Law Commission staff have written instructions to parliamentary counsel, scrutinised drafts and iterations of the clauses, and commented back to parliamentary counsel. We have provided our usual role in the development of draft clauses.”
“Do they contain flaws? Are there omissions that mean they will not work in the way that the Law Commission intended them to? My second question is related to the Law Commission’s reports as a whole. My understanding is that they were meant to work as a complete package. In drawing on only a subset of recommendations, is there a risk that some of the underlying rationales for the options and recommendations that you made will be blunted or limited by the fact that others have not been included? Professor Hopkins: To answer your first question, I am confident that the clauses of the Bill that implement the Law Commission recommendations achieve their desired intent. I know from my team that there will be a number of technical amendments.”
“Q I again put on the record my declaration of interest that my wife is a joint chief executive of the Law Commission, which Professor Hopkins is representing. Professor Hopkins, thank you for coming to give evidence to us. I have two questions, perhaps three if we have time. My first relates to those clauses that implement options or recommendations made by Law Commission reports. Parts 1 and 2 of the Bill implement not all but a subset of those recommendations. I expect that the Law Commission will have had a dialogue with Government about what the clauses look like, but ultimately what goes into the Bill is a political choice for the Government. With a view to strengthening the Bill, I will be grateful if we can get a sense from you whether any of the clauses that draw on those options and recommendations is in any way problematic?”
“Q To ensure that I have understood you correctly, do you expect some technical amendments, whether minor or not, to come to clarify the provisions? Professor Hopkins: There will be some technical amendments to come that refine the operation of the clauses.”
“What is there in the Bill will have a considerable impact for leaseholders exercising enfranchisement rights, whether individually or collectively, and for leaseholders who are exercising the right to manage. There are other things in our schemes that are not there, and other benefits that will not be obtained. For example, sweeping away the ’67 and ’93 Acts, and providing a unified scheme, would bring with it the ability to remove some procedural traps that can arise. So there are other things in our scheme as a whole that are not in the Bill, but what is there will have considerable impact and a very positive impact for leaseholders.”
“Q And on the package as a whole working? Professor Hopkins: On the package as a whole, the Bill implements key recommendations that would be most impactful to leaseholders, in providing them with much greater security and control over their homes and in putting the financial value of the home in the leaseholder’s hands rather than in the landlord’s hands. It will also enable leaseholders to take control of the management of their block through the right to manage, enabling more leaseholders to do that than can do so at the moment. In particular, it extends the non-commercial threshold from 25% to 50%, which is a doubling, and it also enables more leaseholders to own their block through meeting that threshold.”
“Our recommendations as a whole were designed to provide a legal scheme that would enable commonhold to work more flexibly and in all contexts—to work for complex, mixed-use developments. With commonhold having failed once, there is a risk of partial implementation, meaning that commonhold has a second false start, which would probably be fatal to it. I think that the legal regime for commonhold needs to be looked at as a whole, to ensure that it works properly for the unit owners, developers and lenders who lend mortgages over commonhold. We need the legal regime that works. We need to remove any other blocks on commonhold.”
“Q On what is not there, the Government have chosen to include none of the recommendations on commonhold. We very much think that commonhold should be the default tenure going forward. Without enacting all of the 121 recommendations on commonhold, are there any that could be included in the Bill fairly easily, and in a way that would pave the way for commonhold in the future? Professor Hopkins: During Second Reading, the Secretary of State said that he thinks commonhold is preferable to leasehold, and I concur with that. We concluded that commonhold is a preferable tenure to leasehold. It gives the benefits of freehold ownership to owners of flats—the benefits that owners of houses already enjoy. Commonhold does of course have a history. It was introduced in the Commonhold and Leasehold Reform Act 2002 and has not taken off.”
“Professor Hopkins: In answer to both questions, I cannot sit here and say that every leaseholder will pay less. I can identify the fact that leaseholders with 80 years or less on their lease will pay less, because they will not pay marriage value, and that leaseholders with onerous rents will pay less, because of the cap on those taken into account. Overall across the system, having the prescribed rates will be a considerable saving for leaseholders on the whole, because that takes out the legal and valuation costs in negotiating a rate and a price. It takes out that entire source of dispute, which will be beneficial—”
“May I press you a bit further on valuation? This is a phenomenally complex area to understand, and the standard valuation method in schedule 2 is extremely technical. The Law Commission set out options—it did not make recommendations—but the Government have chosen to allow the Secretary of State to prescribe the applicable deferment rate. In all your work, did you wrestle at all with the fact that there may be some leaseholders who do not benefit from a fixed rate, in the sense they could have negotiated higher and more favourable rates in certain circumstances? Is that potentially a risk? Related to that, will it be the case that the Government need to set multiple rates to account for regional variations? Is a single fixed rate going to be an issue?”
“We recommended that the Association of British Insurers work with the market in order to put together a pooling arrangement, which they have been working on—”
“That is where the clauses that you mention, 31 and 32, come into effect—where there is a restriction on the commission that can be charged by the brokers or by the property management agents to the leaseholders. I think that how much impact these clauses will have will depend on how broadly or tightly the secondary legislation around these points is drafted. Of course, I and my colleagues will work closely with the Department as that gets put together. In terms of your second question, “Should a pooling scheme be included as part of the legislation?”, we believe, based on how parts of the market currently work, that pooling does work. By putting together buildings under one roof, as it were, for an insurance contract, you spread the risk; that reduces the cost of insurance. We see that as how it operates at the moment.”
“The service charges added on increased by about 160%, so they more than doubled. In our report, we recommended a number of pieces, including that leaseholders should be partially party to the contract, in that they should be provided with a copy of the documentation—previously, they have not been—and that insurers and brokers, when creating and selling products, should consider the needs of leaseholders, the people who are paying, in a way that insurers and brokers have previously not been required to. We also made a number of recommendations about the parts that were not relevant to FCA regulation but were part of the chain and to do with freeholders and property management agents.”
“Insurers write a policy and brokers sell it to a freeholder or property management agent who is the customer. They pass on charges to the leaseholder, who is partly a beneficiary of the product, but the primary beneficiary is the freeholder. The FCA is responsible for the insurer and the broker, the creation and selling of the product. That is where its role ends. Traditionally, the customer has been the freeholder, who has been the beneficiary, but our review found that there was no benefit in freeholders shopping around to get the best price, because they simply pass on the cost to the leaseholder, often with significant add-on charges and other functions. We found that the risk price that insurers charged between 2016 and 2021 pretty much doubled. The brokerage charge by brokers increased by more than three times, or 260%-ish.”
“Thank you for coming to give us evidence, Mr Brewis. The FCA published a report in September 2022 on insurance for multi-occupancy buildings. In a general sense, on the basis of the recommendations and potential remedies you outlined, to what degree do clauses 31 and 32 faithfully enact those recommendations? Furthermore, it would be useful to know whether the FCA might have any ongoing role in the arrangements that those clauses will introduce. Finally, in that report, the FCA made a recommendation about a pooled risk insurance scheme. Could that be introduced into the Bill as an additional means of providing leaseholders with protection? Matt Brewis: I will set out what the FCA is responsible for and what it is not, because that is the context for this and probably the questions to follow.”
“Q For a very long time. Matt Brewis: For a very long time. Unfortunately, I do not have the power to force anybody to write business that they do not want to. But the ABI has been working closely with a number of firms, and progress is being made. I believe that pooling remains the best option to reduce the cost to leaseholders. In terms of how that could be achieved, I think it is appropriate that the market try to do that. It is always possible for the Government to step behind that, albeit that would be at a significant cost—”
“Q But it would not necessarily require primary legislation—or would it, in your view, in terms of how you would implement such a recommendation? Matt Brewis: It does not require primary legislation for the market to do it itself, as it is seeking to do at the moment, working with us, working with the brokers and working with colleagues at DLUHC.”
“From my perspective, that is focused on providing the information to the insurer or the broker that allows them to appropriately price the insurance—to understand the risk factors of that building, to determine the likelihood of escape of water, the quality of its fire defences and other things, all of which in sum add up to whatever the risk price is. There are different methods for determining what is an appropriate brokerage fee. We have seen some firms come out to suggest that it should be a maximum of, say, 10% of the cost. Others take a time-and-costs-incurred approach, based on how much work they have done. Being clear about things that are directly relevant to the pricing of the insurance is the best starting point for what should be allowed to be charged.”
“Q To further explore Mr Gardiner’s point about fees, not commissions, what is your understanding of proposed new section 20G of the 1985 Act, which defines these excluded insurance costs? What would that cover? Or is that something for the secondary legislation as well? In which case, what should it cover, to fully protect leaseholders from all types of insurance costs that might be passed on unreasonably? Matt Brewis: It is quite a significant list. The question effectively is: what are the reasonable costs of writing an insurance policy, and then the appropriate checks to be carried out to ensure that that policy is enforceable?”
“Q In general terms, do I take from that that we should seek to define excluded insurance costs fairly widely, beyond a strict definition of commission, to ensure that we are broadly protecting leaseholders from the problems that you outlined in your September 2022 report? Matt Brewis: Yes.”
“If you can do only one thing to the Bill, even though it will not directly help existing leaseholders, it should be to say that all new flats must be share of freehold with a resident management company. Give us control of our homes, our lives and our money, please. It is 22 years since the last Act. Let’s do this.”
“Also—we might get on to this later—getting 50% of a large block is impossible, so doing that is absolutely the right thing. Another point is that the market for leasehold flats has collapsed, so the gap between the average price of a house and that of a flat is at its widest in England in 30 years. The fact is that buyers have woken up to the toxicity of leasehold, particularly after Grenfell and the cladding situation. They have worked out that this is a hideously one-sided deal. It is like the sub-postmasters, this idea that, every way you turn, people say, “You signed the contract. You’re responsible for the shortfalls. That’s the law, that’s the contract,” but it is so hideously one-sided.”