Liam Spender is a Trustee of the Leasehold Knowledge Partnership. Personally affected by the cladding scandal, Liam is a Solicitor-Advocate and Senior Associate at Velitor Law practising commercial litigation and arbitration in the City of London. Views in this article are personal and do not constitute legal advice. Liam is unable to take individual cases or to give legal advice to individuals.
The Bill to ban the creation of new ground rents in England and Wales continues its progress through Parliament. The government suffered one defeat on an amendment proposed by the Liberal Democrats. The government saw off further attempts by Labour and the Liberal Democrats to amend the Bill.
Peers voted 243-238 to add a Liberal Democrat amendment to the Bill requiring landlords, on pain of a fine up to £30,000, to give leaseholders information about the ban on ground rents before granting any informal leasehold extension (results here: https://votes.parliament.uk/Votes/Lords/Division/2549)
Peers voted 256-245 to reject the Liberal Democrat’s second amendment requiring a government assessment of the impact of the new law after six months, including current ground rents and fire safety remediation paid by leaseholders under existing leaseholders.
Voting 243-219, peers rejected Labour’s attempt to add an amendment to require the government to publish draft legislation within 30 days of the new law passing explaining how it will extend the ground rents ban to existing leaseholders (results here: https://votes.parliament.uk/Votes/Lords/Division/2550).
Inevitably, the government will use its 83-strong Commons majority to overturn the Liberal Democrat amendment in the Commons, perhaps setting up a later round of ping-pong between Lords and Commons, as seen with the Fire Safety Act earlier this year.
The government bowed to cross-party pressure at earlier stages of the Bill, agreeing to increase the fines for landlords who continue to charge, or to receive, ground rents after the Bill comes into force. Following these changes, landlords breaching the new law will be fined a minimum of £500 and a maximum of £30,000, with separate arrangements for fines in Wales.
Whether these higher fines will be enough to persuade perennially cash-strapped local authorities to put significant resources into enforcement of the new law remains to be seen.
Peers considered a wide range of other technical amendments to the Bill, including on informal extension and an amendment that would exempt many urban developments from the ban on ground rents. Other amendments included amendments to adapt the new law so it will work in Wales.
Unfortunately, even after the amendments today, the Bill continues to suffer from a clear loophole that will allow service charges to be manipulated to recreate ground rents in a different form. The loophole persists despite the government’s amendments to the definition of “rent” in the Bill.
The Bill awaits its final stage in the Lords, Third Reading, which will now come in September. The Bill will then move down to the Commons for further consideration, perhaps becoming law in 2022.
The government promised today that it will bring the law into legal effect within 6 months of that date, so perhaps by mid-to-late 2022.
Glaring loophole continues …
Today the Lords agreed to an amendment to carve out service charges for insurance, maintenance and services from the definition of “rent” in the Bill. The Bill caps anything that is not “rent” at a peppercorn.
The government’s largely pro-freeholder amendment means that fixed or variable service charges found in many leases will not be reduced to a peppercorn under the new law.
While of some comfort to leaseholders, who have an interest in ensuring the common parts of properties are maintained properly through fair and proportionate service charges, this is a charge largely benefiting landlords.
The amendment was accompanied with many warm words that landlords should not attempt to charge for anything other than bona fide services of value to leaseholders.
The government doubtless intended these warms words as what lawyers would call a Pepper v. Hart statement, something courts may take into when deciding what a statute means if there is any doubt over the language later. Such statements are rarely, if ever, of any practical value in litigation revolving around the wording of our laws.
Unfortunately, even with the amendment proposed by the government and the warm words accompanying its introduction in the Lords, the law leaves open a clear path for freeholders to manipulate service charges to recreate ground rents in disguise.
Examples may include charges for overseeing a managing agent, for arranging insurance or for renting a car park space.
Such charges will be presented as bona fide charges for services of value to leaseholders. The inevitable result will be costly and avoidable litigation whilst these charges are challenged by leaseholders, assuming they are noticed at all.
The government has already been warned of the dangers of this at all previous Lords’ stages of debate, see the LKP reports here: https://www.leaseholdknowledge.com/make-sure-ground-rents-are-dead-and-buried-by-improving-the-leasehold-reform-ground-rent-bill/ and here: https://www.leaseholdknowledge.com/leasehold-reform-ground-rent-bill/
Failing to prevent this manipulation of service charges leaves open the prospect of charges akin to ground rent persisting long after this new law comes into force, rendering the Bill nothing more than a paper tiger, much like the Landlord and Tenant Act 1987.
The government’s failure to act on this central issue leaves leaseholders vulnerable to exploitation, with view viable avenues of challenge. And, perhaps as intended, public policy continuing to be bent out of shape in favour of property interests.
Danger of informal lease extensions persists
The Liberal Democrat peers, led by Lord Stunnell, noted the ongoing danger of informal lease extensions. The new law will allow, in cases where leases are extended informally, ground rents under existing leases to continue to for the life of the original lease, which may be 80 years or more.
Perversely, the new law may in fact result in more informal lease extensions being granted, as freeholders try to preserve a long tail of ground rents, thereby avoiding the ban contained in this new law.
The dangers of these informal extensions have been explained here by the late LKP Trustee, Louie Burns: https://www.leaseholdknowledge.com/advice/informal-lease-extensions-are-pure-poison/
Lord Greenhalgh, leading for the government, tried to head off the vote saying this was an issue for implementation of the Bill, promising better consumer information, work with the legal profession and better information for landlords to avoid the need for any amendments of the Bill in relation to informal lease extensions.
The Liberal Democrats, joined by Labour, forced a vote on the issue of whether leaseholders should be warned of the ban on ground rents and landlords fined for failing to comply. The Lords voted to add the amendment to the Bill, by 243 to 238.
Freeholder interests find a voice
Today also saw the first public full-throated attempt to protect freeholders’ interests in perpetuating ground rents. Landlords have been conspicuously absent from proceedings on the ground rents Bill, preferring to lobby behind the scenes. It is presumed their silence on ground rents is because they are saving their powder for a wide-ranging reform to leasehold and commonhold. The government promises those reforms will start their passage through Parliament sometime next Spring.
The Earl of Lytton, a chartered surveyor by profession and a hereditary peer, moved an amendment to exempt sites with more than 15 residential units let on long leases where there are “significant communal facilities” or where the landlord is a responsible person under the Fire Safety Order.
The Earl of Lytton argued that running such sites was expensive and, quoting from briefings received from ground rent investors and the retirement home sector, that ground rent income was necessary to meet the expenses of that work. This was a repeat of the familiar line that ground rent investors provide long-term stewardship of properties they own. The cladding and fire safety scandal have proven that this is anything but the case.
The Earl, sticking closely to the investors’ script, warned that without professional ground rent investors, the people living in complex buildings would not take on the responsibilities of managing such buildings. Without ground rents, the Earl warned that management would be left to disinterested amateurs, namely the people living in such buildings.
The Earl of Lytton pointed out that this work was likely to get significantly more expensive as a result of the recent Fire Safety Act, which brings the external walls of all buildings with two or more residential units in scope for an expensive fire safety risk assessment. The Earl acknowledged that the Building Safety Bill will heap further costs onto such buildings.
The Earl of Lytton’s amendment is misconceived. Nowhere else in the world allow a third party to take an income from people’s homes in the way leasehold allows in England. Elsewhere in the world, the only way to extract an income is to provide a service approved by people living in the building.
There is no evidence that buildings elsewhere in the world, managed by people who live in them, are any worse managed than buildings under England’s antiquated leasehold arrangements.
In England, in virtually all cases, these costs are already met by leaseholders via the service charge. In most modern tripartite leases, the Residents’ Management Company or embedded managing agent are appointed as responsible person under the Fire Safety Order, not the landlord.
In modern two-party leases, the maintenance covenants will inevitably allow the landlord to delegate its maintenance obligations to one or more agents, one of whom will be designated as the Responsible Person under the Fire Safety Order. Again, the costs of compliance will be passed on to leaseholders via the service charge.
The Earl did not push his amendments to a vote. Unfortunately, the Earl referred to the fact the ground rent investor interests, including the British Property Federation, continue to lobby the government for the rights of their investors. The Earl called on the government to heed that lobbying and to water down the Bill to enable the continuation of ground rents at complex sites.
Earl Lytton later in the same debate spoke in favour of the Liberal Democrat amendment to protect leaseholders and freeholders from the costs of remediating historic building safety and fire safety defects.
No help for current leaseholders
Former Conservative Lord Chancellor, Lord Mackay of Clashfern, proposed an amendment to give leaseholders the right to buy out ground rents in existing leases. That is not something proposed in the current Bill. The government promises that this reform will be made in a future stage of leasehold reform, which is promised next week.
Lord Mackay, noting his unsuccessful attempt to enact commonhold during his time as Lord Chancellor, argued that it was implicit in the abolition of ground rents that the current system failed many leaseholders. It is therefore only sensible to remove all unfair ground rent practices from the market.
Lord Mackay did not push his amendment to a vote but sounded a clear warning to the government that peers from all sides of the House, including the government’s own backbenchers, expect the government to deliver on its promises of comprehensive leasehold reform.
Whilst the Bill offers no firm action to help current leaseholders, Labour attempted to add an amendment requiring the government to produce draft legislation to protect existing leaseholders within 30 days of this law reaching the statute book puts the government under pressure.
Labour’s amendment was defeated by a vote of 243-219 this afternoon.
The Lords will return to consider the Bill for Third Reading in September, following the summer recess.
The bottom line
Ending ground rents cuts off the head of the snake of property interests that ensnares so much of government policy on land and housing. The Bill does not go far enough to stamp out ground rents for good.
The Bill continues to hold out the very real prospect of juicy fee-sized meals for the property interest snake. Those fee sized meals will come in the form of service charges expressed to be for bona fide services of value.
The government must choose whether the Bill will be effective in practice, or whether it will saddle leaseholders with yet another addition to the statute book made with good intentions but of no practical use.