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 unfortunately unable to give legal advice to individuals, or to take individual cases.
On 14 June the House of Lords completed the Committee Stage of the Leasehold Reform (Ground Rent) Bill. The Bill currently seems likely to go down to the Commons before the start of the summer recess on 15 July. If the present speed of progress continues it may become law by the end of 2021.
The Bill is vitally important. It abolishes the right of landlords to charge monetary ground rents. Therefore it brings to an end the lifeblood of the leasehold sector, which in recent years has imposed so much misery on people living in flats and houses alike.
Notwithstanding the importance of the Bill, and the warm welcome it has been given to date in the House of Lords, there remain critical issues with the Bill’s drafting and likely effectiveness in practice. These issues must be addressed if leaseholders are to have any effective protection under the new law.
The Committee Stage of the Bill saw an effort to improve the drafting of particular parts of the Bill. Key issues arising included the definition of “rent”, the right for existing leaseholders to buy out their ground rents, the applicability of the Bill to informally extended leases, penalties for breach of the new law
The Bill was considered in Grand Committee, as opposed to a committee of the whole House of Lords. The Grand Committee procedure meant it was not possible to force a vote on any individual amendment. Grand Committees proceed by unanimity. Amendments are withdrawn rather than being put to a vote.
While Lord Greenhalgh – the Minister of State for Building Safety and responsible for the Bill – did indicate the government was open to further discussions regarding a few of the amendments, it was disappointing to see repeated references to the importance of passing the Bill at speed. Improving the Bill would make it effective in practice.
The minister’s approach echoes the tactic the government adopted earlier this year in relation to the Fire Safety Bill. When that legislation was before Parliament the government again prioritised speed over effectiveness, leaving leaseholders facing potentially ruinous costs for remediation of cladding and other fire safety defects.
The risk with this Bill is that it will spawn ground rents in all but name, allowing the iniquitous nature of the leasehold system to continue.
Nonetheless, the Bill is an opportunity finally to excise an iniquity that should never have been allowed to persist to modern times. Repeatedly ground rents have been weaponised by profit-grubbing developers and yield-hungry investors.
The leaseholders living in buildings where aggressive ground rents prevail are the ones who have paid the real, and very heavy, price. Parliament must use the one chance it has in its hands to ensure that this relic is ended and ended for good.
The next stages of the Bill are the Report and the Third Reading. The Lords will have the ability to force votes on these issues, perhaps amending the Bill, before it is sent to the Commons for further consideration.
The Hansard Report of the first day of Grand Committee is here: https://hansard.parliament.uk/lords/2021-06-09/debates/FE17BB13-B471-4834-8594-0CA094CB0074/LeaseholdReform(GroundRent)Bill(HL)
The Hansard Report of the second day of Grand Committee is here:
Dates for Report stage and Third Reading stage are yet to be set, but Report normally comes about 2 weeks after Committee stage.
The importance of a clear definition of Ground Rent
On the second day of Committee (14 June), Lord Young of Cookham – formerly Sir George Young, a Conservative former Cabinet minister – put down an amendment to improve the definition of ground rent.
Lord Young’s amendment attempted to make clear that ground rent would include fixed service charges, or service charges which varied only in accordance with any one or any combination of:
- an amount of money (for example, increasing by £50 each year); or
- a period of time (for example, doubling every 20 years); or
- a specified measure (for example, the Retail Prices Index measure of inflation).
Lord Young explained that the inclusion of fixed service charges in the definition of rent was deliberate, to avoid ground rents being recreated under another name.
Lord Young pointed out that many in the legal profession, including the Law Society itself, have already raised concerns that the absence of a clear definition of “rent” in the bill.
The current definition does not distinguish between rent and service charges, defining “rent” as including “anything in the nature of rent, whatever it is called”.
The issue with this is that it is not clear from the definition what is, and what is not, in the nature of rent. As mentioned in previous posts LINK , the “rent” reserved under a lease often includes service charges and sometimes separate insurance rents. The reservation of these other charges as rent entitles the landlord to seek forfeiture if the rent (as defined) is not paid in accordance with the terms of the lease.
There are other problems with the definition. Not all leases caught by the Bill are leases of individual residential dwellings sold at a premium (ie a new flat sold for £250,000, with the £250,000 being the “premium”). Some leases of residential dwellings are for fixed terms but at market rents instead of a premium (for example, an agreement to lease a property for 10 years at an annual rent of £12,000 per year). As currently drafted, the Bill precludes the creation of this second category of leases because the £12,000 per year – if it is deemed a payment in the nature of rent – is to be prohibited.
When this was put to Lord Greenhalgh in debate on 14 June 2021, his response was that the government’s intention was that future leases would not reserve anything as rent excepted the permitted peppercorn. That would represent a significant departure from the way leases have been drafted for decades. Lord Greenhalgh also said he was open to further discussions with the Law Society and others, but he made no commitment to improve the drafting.
Landlords will not easily give up their rights to forfeiture for so long as forfeiture exists. In the event that future leases are not drafted in the way the government intends, the inevitable consequence will be that leases will continue to reserve things other than the permitted peppercorn as rent. There will then be litigation over which payments are “in the nature of rent”.
If so, that would be an undesirable outcome. Leaseholders will have to pay charges which are not permitted rents in order to avoid forfeiture, at least until the definition is made clear. Leaseholders will also have to expend legal fees to assert rights they should already have by law not to pay anything other than a permitted peppercorn. If the definition is made clear, then leaseholders will be able to at least attempt to negotiate new leases which do not reserve prohibited rents.
None of that should come as a surprise to the government. Most legal disputes do not see the inside of a courtroom because they are settled. They are settled because when the law provides clear definitions, parties can negotiate a solution without the need for court proceedings.
In debate on 14 June 2021, Lord Greenhalgh also rejected the concerns expressed that ground rents could be replaced by fixed service charges. This risk has already been highlighted by several law firms and at least one set of chambers. Their commentary was mentioned during debate.
Lord Greenhalgh’s response was that the government did not want to see fixed service charges taking the place of monetary ground rents. He defended the use of fixed service charges as a cost-effective way of ensuring the upkeep of certain developments.
The government’s wishes aside, the leasehold sector has repeatedly proven it is hardier than the most invasive weed.
When the government indicated it would ban the sale of new leasehold houses, the sector rapidly moved to replace ground rents with new estate rent-charge schemes – ‘fleecehold’.
The current ill-defined “rent” in the bill allows room for any service for value, however vague the value, to be deemed not to be a prohibited ground rent. As mentioned in previous articles, charges for appointing and supervising managing agents, or for arranging buildings insurance, could rapidly become widespread as a means of circumventing the ban. Current case law would deem these not to be ground rents.
The statute book is full of laws which were well intentioned, but are easily circumvented in practice. For example, the Landlord and Tenant Act 1987 provides that leaseholders have the right of first refusal if their freehold is sold. Unfortunately, the law is a paper tiger. There are so many exceptions that the law benefits almost no-one in practice.
Why should leaseholders be forced to take the chance in relation to this ground rents legislation when Parliament has the opportunity in its hands to prevent all of that with a better definition of ground rent?
There is at the time of writing no further amendment to the definition of rent proposed. It remains to be seen whether such an amendment will be forthcoming from the government itself, or from another backwoodsman.
Informal lease extensions
Clause 6 of the Bill as currently drafted allows landlords agreeing informal extensions to leases to keep the ground rent at the same level for the term of the extended lease. That would include a ground rent that doubles on an unreasonable timescale, such as every 5 or 10 years.
Informal lease extensions are agreed by contract, rather than by exercise of leaseholders’ statutory rights. All too frequently, a freeholder will offer an informal lease extension at a reduced premium but a higher ground rent. The compounding effect of this higher ground rent results in vastly higher charges for leaseholders over the life of the informally extended lease. See this article by the late Louie Burns – a former trustee of LKP – for a description:
The principle behind this legislation is that from a certain date, yet to be defined, no new ground rents will be created. If that is the principle, there is no good reason why it should not apply to informally extended leases – which often take effect as new leases – not to be covered.
Instead, the Bill does the opposite. It continues to permit informal lease extensions to take place and for monetary ground rents to be charged for the original term of the lease being replaced.
Consider this example to see what a gift this provision will be to current freeholder ground rent investors. We are in 2026. The Bill is in force. Mr & Mrs Old Couple die and their son wishes to sell their modest flat. It is not mortgageable because the lease term is under 80 years, expiring in 2100. The current ground rent is £300 a year, doubling every 10 years.
The son approaches the freeholder, who offers a deal. The freeholder will extend the lease informally by 90 years from 2026. The landlord is a rare beast and agrees to keep the ground rent the same.
In the example above, even though what we are dealing with is a new lease – a surrender and re-grant of the existing lease in exchange for the extended lease – the landlord gets to generate ground rent until the end of the unexpired term of the predecessor lease. In our example above, that is an income of £650,100 over the new term once the doubling is taken into account.
The landlord would not have received that benefit if the son had exercised statutory leasehold extension rights, because the Leasehold Reform, Housing and Urban Development Act 1993 would have reduced the ground rent to a peppercorn as part of the extension.
Nor would the landlord have received the benefit if he had bought back every flat and redeveloped the building as new residential dwellings. In that case – leaving aside problems with the definition of rent – the landlord would have given up all of his ground rent income and only been entitled to charge a peppercorn.
There is no principled basis on which landlords who are making such material changes to the terms of leases – indeed, most likely requiring the surrender and re-grant of the lease – should continue to be able to charge ground rents. The principle behind the bill is that such grounds rents should cease to be charged on all new leases.
The fact that this will be allowed to continue by the current drafting of the Act will create a powerful commercial incentive for landlords to push leaseholders into accepting informal extensions so as to preserve their rights to ground rents.
It is, of course, possible that the promised reforms to leasehold law, such as the right to buy out ground rents capped at 0.1% of the freehold value of the property, would ameliorate such concerns. But only if that legislation is passed and works in practice.
Lord Greenhalgh’s response? Leasehold law was too complicated to change by amendment from the opposition, so he proposed to do nothing about it. Doing nothing will lead to the situation described above, including leaseholders trapped with pernicious doubling ground rents. If a principled approach is to be adopted, then the government should look again at the protection for informally extended leases.
Following the Grand Committee stage, Baroness Grender and Lord Stunnell have put down another amendment to either drop clause 6 from the bill, or else to require freeholders to limit monetary ground rents in informally exended leases to no more than 0.1% of the freehold value of the property, see: https://bills.parliament.uk/publications/41892/documents/403
Tougher penalties for breach
On 14 June 2021, Baroness Grender and Lord Stunnell for the Liberal Democrats and Lord Lennie for Labour attempted to toughen up the penalties for non-compliance with the proposed ban on ground rents.
The Liberal Democrats proposed both increased fines and the extension of the banning order regime to freeholders who repeatedly flouted the new law.
Baroness Grender of the Liberal Democrats pointed out that ground rent investment is a lucrative industry. The current level of fines was unlikely to deter the largest ground rent investors. Baroness Grender had an example to hand. She said that in its most recent accounts, Proxima GR – a key part of the Tchenguiz Family Trust’s ground rents business – estimated it expected to receive £2.4 billion in ground rent payments between now and roughly 2080.
Unfortunately, Lord Greenhalgh brushed off these concerns, stating merely that local authorities will be free to impose penalties for every rent on every flat levied in breach of the new law. In large buildings that may result in fines of several hundred thousand pounds.
That, of course, assumes that the problems with the definition of “rent” discussed above are addressed. There can be no fines without a breach of the law. If the law is interpreted as not covering charges akin to ground rent, like the fixed service charges discussed above, then there will not be any penalties for imposing such charges on leaseholders.
Better rights for existing leaseholders
On 9 June 2021, several peers moved different amendments to attempt to give existing leaseholders the same protection as future leaseholders. The charge was led by Conservative peers Lords Blencathra, Young and Mackay (a former Lord Chancellor).
Each of the three peers proposed a different scheme for giving protection to existing leaseholders, ranging from extending the Bill to existing leaseholders (Lord Blencathra), giving the government the power to impose a 2-year right to buy out ground rents using means specified in regulations (Lord Mackay), or the detailed amendment proposed by Lord Young to give an option into existing leases for leaseholders to buy out their current ground rents at a fixed multiple capped at £7,500.
These amendments were well received. Unfortunately, they were each brushed off by Lord Greenhalgh. The reason offered was that this will be dealt with by a future round of leasehold reform, which is due in the next session of Parliament (i.e. 2022).
We can but hope that this future round of reform will be forthcoming and will be much more substantive than the current Bill. If not, over time – perhaps several decades – there will be a risk of the creation of a two-tier market for properties with ground rents and properties without.
The bottom line?
The Bill is welcome. And important. But we should prize quality of drafting as well as speed through Parliament if this is going to work in practice. We cannot condemn leaseholders to decades more of the same. Making a good law now involves addressing (at least) the issue of the definition of rent and informal lease extensions.
Parliament should take the chance to pass a good law now, rather than impose years of uncertainty and litigation on leaseholders.