Examination of Witnesses

Leasehold and Freehold Reform Bill – in a Public Bill Committee am 2:21 pm ar 18 Ionawr 2024.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Philip Freedman CBE KC (Hon) and Philip Rainey KC gave evidence.

Photo of Caroline Dinenage Caroline Dinenage Chair, Culture, Media and Sport Committee, Chair, Culture, Media and Sport Committee, Chair, Culture, Media and Sport Sub-committee on Online Harms and Disinformation, Chair, Culture, Media and Sport Sub-committee on Online Harms and Disinformation 2:40, 18 Ionawr 2024

We will now hear oral evidence from Philip Freedman from the conveyancing and land law committee at the Law Society, and Philip Rainey from Tanfield Chambers. We have until 3.10 pm for this session. Could the witnesses introduce themselves for the record?Q

Philip Rainey:

I am Philip Rainey KC. I am a barrister in private practice at Tanfield Chambers and, among other things, I have specialised in leasehold enfranchisement and service charges and so forth for probably 20 or 25 years.

Philip Freedman:

I am Philip Freedman. I am a solicitor and therefore only an honorary KC. I am a member of the Law Society’s conveyancing and land law committee. I am a member of the Commonhold Council. I am a consultant at Mishcon de Reya, and was a senior property partner there for many years. We act for both landlords and tenants, investors, pension funds, right-to-manage people and all sorts of people who have a vested interest in the different sides of these issues.

My wife and I live in a flat. We are leaseholders. It is a block that was enfranchised under the right of first refusal under the Landlord and Tenant Act 1987, when the developer wanted to sell the building. I am one of about five people out of about 75 people who are actually interested in participating in the running of the block. We have about 52 flats, and if you take everybody, including husbands and wives, there are about 72 people who could potentially be directors participating in the landlord company, and only about five of us are interested in doing so.

Philip Freedman:

May I add one thing? You may have received a briefing on the Bill from the Law Society. I have been asked to tell you about a small correction to it. May I do that?

Philip Freedman:

The parliamentary briefing from the Law Society refers in the summary to the issue of new leasehold houses and urges that the Law Commission’s proposals for land obligations should be enacted—it says to enable “flats” to be sold as freehold. That should be “houses”. The law about positive obligations under leases, as distinct from under freeholds, indicates that leases are much better in relation to enforcement than freeholds at the moment, and it would very much help if freehold law was upgraded so that the obligations on positive matters such as performing services and paying for services could be brought into line, so that freehold is as least as effective as leasehold. This is a case where freehold is not as effective as leasehold.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

Q Gentlemen, in our evidence sessions so far, we have had very wide-ranging discussions —let me put it that way—not just about the principle of the Bill but about property rights, the functioning of market capitalism and liberal democracy, and everything but. As the shadow Minister for the Bill, I would like to use your expertise to focus on what is actually in the Bill and how we might improve it, so my first question is a very specific one on clause 12. I think I put it more to Mr Freedman than to Mr Rainey because of that Law Society briefing. It relates to valuation, which is one of the more complex matters that the Bill deals with.

The Law Society has expressed concern that the provisions in clause 12 designed to protect most but not all leaseholders from non-litigation costs that landlords may incur when responding to an enfranchisement or lease extension claim may cause issues, because under the proposed new valuation method, the price payable may be below full open market value. Could you clarify why you believe that to be the case? The standard valuation method in schedule 5 provides for a market value element. Why does the Law Society believe that it does not represent full open market values?

Philip Freedman:

This started with the Law Society’s recommendation to the Law Commission that one thing that might save costs for leaseholders was if they did not have to pay the landlord’s costs on a collective enfranchisement or lease extension. We put forward the view that if the enfranchisement price is market value, then each side should bear its own costs. If you were to buy a house, you would not pay the seller’s costs; each party would pay their own costs. That is what happens in the market. We said that in the context of enfranchisement being at market value. The Law Commission took that on board, and its report very clearly says that its recommendation that each side should pay some costs and tenants should not have to pay the landlord’s costs—

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

My question is: why do you not think that the valuation method in here is full market value?Q

Philip Freedman:

Because the suggested notional capping of ground rent at 0.1%, in many cases, where it applies, will reduce the purchase price below what it is in the open market at the moment. At the moment, in the open market, the ground rent stated in the lease is payable. We are aware that there are proposals for retrospective legislation, as one might call it, to interfere with existing leases and to say that the ground rent should be capped at a certain amount, but at the moment those rents are lawful, and those rents are therefore reflected in the price that someone would pay to buy the flow of ground rent. Therefore, if you assessed the purchase price for the enfranchisement as if the ground rent were capped and would not be as much as it actually would, then you would be reducing the purchase price to below the market price.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

Q That is very clear and very useful.

I have a second question, relating to clause 59, which concerns regulation of remedies for arrears of rentcharges. Do you agree with my view that the Government are trying to fix a historical law that is essentially beyond repair? Should we be looking to abolish section 121 of the Law of Property Act 1925?

Philip Freedman:

I think yes. I had to draft some rentcharge provisions many years ago, when we were acting for clients who were selling some industrial buildings on a new estate. They wanted to sell them freehold. There was no commonhold at that time and the issue of enforcing positive covenants was difficult. We came up with the suggestion that the rentcharges legislation should be used to allow an estate company to collect service charges, maintain drainage systems and so forth. It was agreed that the Law of Property Act gave excessive remedies to landlords for non-payment. I am all in favour of limiting the remedies so that, if someone does not pay for something, they can be sued for it, just as with the amendment in relation to forfeiture. It seems to me—this is my personal view—that limiting forfeiture, as you have proposed doing through your amendment, is the right thing to do, although I do have three points to make on that.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

Q I will quickly come to that, but do have anything to add in relation to clause 59, Mr Rainey?

Philip Rainey:

I agree that forfeiture for non-payment of a rentcharge on an estate, which is usually a relatively small sum of money, is a sledgehammer to crack a nut. I would be in favour of replacing section 121 rather than repealing it, so that there is a coherent and measured set of remedies for rentcharges. That is bearing in mind, as Philip just said, that a lot of the estate rentcharges covered by that legislation have nothing to do with residential; they are quite common on industrial estates. That is one of the unintended consequences that might occur if you were simply to repeal section 121.

Photo of Matthew Pennycook Matthew Pennycook Shadow Minister (Levelling Up, Housing, Communities and Local Government)

Q That is extremely useful. I wish that we had you both for more than half an hour.

I have one quick final question on the abolition of forfeiture. Would you agree that we should do away with forfeiture entirely—it sounds like you do—on the grounds that it is a wholly disproportionate response to the breach of a lease? If so, what should we replace it with? Is suing for a debt—as happens with any other debt—and an injunction if the breach relates to conduct a sufficient response or, if we abolish forfeiture, should we be looking to replace it with some other system of recompense?

Philip Freedman:

My view is that there are three aspects of the proposed abolition of forfeiture for leasehold dwellings that we should look at. One is that it should apply to individual leases of single dwellings, rather like the ground rent abolition; it should not apply to leases of multiple dwellings, such as a lease of 50 flats to some lettings company, which is a commercial enterprise, effectively. It should apply to leases of individual dwellings granted at a premium.

The other thing is that the threat of forfeiture is over the top in relation to financial debt—arrears of rent, service charges or whatever. You can sue for those. There may be refinements in relation to suing, but basically you can sue for them. But if a tenant has knocked down walls that they should not have, caused a nuisance or annoyance to other tenants in the building, or used the property for some unlawful purpose, then the remedy would be to threaten an injunction, as you have indicated. An injunction is a difficult remedy to enforce: it is very costly and it is at the discretion of the court—there are all sort of hurdles about injunctions. If, in the residential sector, the first-tier tribunal was given the power and jurisdiction to order parties to a lease to comply with the terms of the lease, free from the constraints of existing law in relation to injunctions, then one could avoid the need for forfeiture. Removing forfeiture for financial payments and damages is fine, but for other breaches it presents a problem.

The only other point is that we need to look at section 153 of the 1925 Act, which is the right for tenants, if they have a very long lease, do not pay any ground rent—it is a peppercorn—and are not susceptible to forfeiture, to enlarge into the freehold. That is a whole area of unclear law. It is not clear what the effect would be if you had one tenant in a block who declares that he now owns the freehold; it would be very unclear whether the management of the block would be affected. I think these things need to be addressed if one is going along that line with regard to forfeiture.

Philip Rainey:

Because I appreciate that we have limited time to answer, the only thing I would add is that forfeiture is arguably, again, a sledgehammer to crack a nut, but so can be an injunction: the remedy for breach of an injunction is essentially committal to prison. The prospect of not being able to forfeit and instead there being rafts of committal applications to fill up the jails with people who are, for whatever reason, refusing to comply with some kind of covenant—that is very annoying, but ultimately they should not be in prison—is also unattractive.

Ultimately, there needs to be some sort of measured method of removing a problem tenant from a block. We very much concentrate on the position of landlords against tenants, but one very difficult tenant in a block can ruin life for everybody else. The Law Commission proposed a replacement scheme, and I suggest that that should be dusted off and looked at. A lot of the objections to it come from the commercial sector, so bring it into force for residential leasehold first.

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

Q Our previous witness, Mr Vitali, talked about potential concerns about the effect of regulation on people’s understanding of property rights. Do you have any significant concerns about how the Bill affects property rights? If you do, what should we do about them?

Philip Rainey:

In a sense, that is a conceptual question.

Philip Rainey:

Yes, and one tends to avoid the philosophical points. Clearly, from a legal perspective the Bill interferes in an extremely significant way with property rights. Whether that is the right thing to do is a value judgment.

One thing that is sometimes overlooked—I am not defending the leasehold system; I am on record as being in favour of commonhold, which is inherently a more satisfactory system for holding flats—is that a lot of people will be disappointed when commonhold comes in. They will still find that they are not allowed to remove the supporting walls in their flat or to have a noisy party on a Friday night, because their neighbours do not want that. A lot of the things you find in leases and the restrictions when living in flats are because, if you live communally in a block of flats, you owe duties to your neighbours. There are responsibilities, in communal living, that do not apply if you live in a small house in a field, 500 yards from your neighbours. The restrictions in the leasehold system are not as unique to leasehold as you might think; I would suggest otherwise. To go back to your basic point, clearly the Bill alters property rights. It is a value judgment as to whether that is the right thing to do.

Philip Freedman:

I have heard a number of cases where the property industry is concerned about the transfer of value that will be effected by capping ground rents, removing marriage value and so on, in relation not just to the benefit to leaseholders but to the burden on those landlords that are pension funds and other organisations that will find that they are deprived of rental income that they have banked on and have thought will be reliable income over many years. They bought leases that were perfectly lawful, were not, so far as one can tell, entered into under any mis-selling, and the provisions for the ground rent are not necessarily unconscionable; the ground rents were invested in in good faith.

We must not lose sight of the fact that if there are winners, there are always losers. Some provisions of the Bill, which are fine, are to say that if the tenants are enfranchising, they do not have to buy the commercial bits of the building. Those can be left with the landlord under a leaseback, and therefore the value remains with the landlord. Both parties win: the landlord keeps the value and the tenants do not have to pay as much money. But where you are transferring value, there is always a loser, and there are lots of investors who appear to have bought in good faith and were not expecting retrospective legislation. Lawyers always do not like retrospective legislation. It is up to Parliament to decide whether the social benefit is sufficient to outweigh the concern about pension funds, and so on, that have invested in ground rents. The Law Society does not take sides between landlords and tenants, or different types of clients. We just want to make sure that Parliament focuses on the issue and makes the decision in the public interest.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q Mr Rainey, first, thank you for what you said about the preferability of commonhold to leasehold. Is it your view, therefore, that it would be good if the Bill were to make all new flats that are constructed leasehold with a share of freehold, as a staging post, in effect?

Philip Rainey:

Yes. In a sense, that is the downside. It is possible to create what you might call commonhold-lite. It is a leasehold system—it is so encrusted with restrictions and requirements, although you own the freehold, that it is very similar. It would be only a staging post, because one of the problems with the current system is that it creates a “them and us” situation. You see it even when tenants own the freehold. Somehow they still think, “Well, it’s ‘my’ lease and it’s ‘them’”, which is them under another hat as the freeholder. Commonhold should eliminate that.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q Yes, I was taken by your remarks earlier about the disputes that can go on even where you have an enfranchised situation.

Philip Rainey:

If you go to Australia and look at the websites, you find “I hate my strata” websites. Neighbours will be neighbours.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Unfortunately, legislation cannot make your neighbours more considerate. I often wish it could.

Philip Rainey:

I think I would be inclined to agree that it would be a reasonable step forward to say that there should be a share of freehold with—

Philip Rainey:

With new build. You would have to have rules.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q I want to probe your thoughts on what I find a very tricky part of the way in which the pieces of legislation are now interacting with each other. One of the great freedoms for leaseholders who either cannot afford or do not wish to enfranchise themselves, but where the building has deteriorated to a terrible state under the existing freeholder, is the provision for a court-appointed manager under section 24 of the Landlord and Tenant Act 1987.

That is something that I hope we very much want to protect, because these leaseholders really require the protection of a court-appointed manager. However, the Building Safety Act 2022 bars the court-appointed manager from being an accountable person and from taking full responsibility for the necessary safety remediation works. That responsibility under the BSA ’22 regulations is now being given, in effect, to the one person whose track record shows that they are incapable and not to be trusted to perform the obligations of managing that building—namely, the freeholder who let it go to rack and ruin in the first place. The leaseholders, whom the courts sort to protect, will have that former, negligent freeholder back in charge. I do not know, but I am looking to you to tell us, how one might draft an amendment to the Bill to preserve the protection for leaseholders who find themselves in an incredibly invidious position.

Philip Rainey:

The first thing to say is that—as you may know—there is an ongoing piece of litigation, in which I am involved, where that question of whether a manager can be an accountable person is yet to be finally decided. The current position is that the first-tier tribunal has decided that the manager cannot be an accountable person. I therefore cannot comment on that outcome.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

I was aware that you were involved in the case, but I did not want to drag you into the specific—I wanted to keep you at the general.

Philip Rainey:

If, hypothetically speaking, the law is that a manager cannot be an accountable person; if, hypothetically speaking, that restricts what a manager can do; and if you, as Parliament, wished to alter that position, then you would amend the definition of a relevant repairing obligation in section 72 of the Building Safety Act 2022. That amendment would make it clear that a relevant repairing obligation includes an obligation under a manager order under section 24 of the Landlord and Tenant Act 1987.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q Right. You think faster than I can even listen. Are you saying that we could introduce an amendment to this Bill that amended the Building Safety Act 2022 in such a way that we could ensure that those protections continue?

Philip Rainey:

The obvious answer is that you are Parliament—you can change any law.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q I suppose my real question is, would you care to write to the Committee framing such an amendment?

Philip Rainey:

I could, if asked. As I say, you can amend section 72 to change a particular definition. Arguably at least, subject to the regulations, it is not actually necessary for Parliament to do it, because section 72 has a power for the Secretary of State to amend it—it is a Henry VIII clause, which I am not very much in favour of, but that probably could be done by secondary legislation.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

I have no doubt that the Secretary of State could do that, but I always feel more comfortable if things are on the face of the Bill.

Philip Rainey:

I respectfully agree.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q If I can prevail on you for just a little longer, could you explain the just and convenient test, and how the BSA has affected that?

Philip Rainey:

The just and convenient test is effectively an equitable test. It is a very flexible test intended to allow the first-tier tribunal to take into account all of the circumstances and, in layman’s terms, to decide whether something is just, fair, convenient and going to work—the rights and wrongs and the practicalities of it. Because of the ongoing case, I do not think I can answer the second part of the question, as to how the Building Safety Act 2022 might have affected that.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

I am sure hon. Members can ponder on your words and work it out from there. Thank you; that is really helpful.

Photo of Eddie Hughes Eddie Hughes Ceidwadwyr, Walsall North

Mr Freedman, you represent developers and investors as part of your job. You just referenced the possible impact on pension funds. How significant is that? I am hearing, on the one hand, that people have very diverse portfolios, so although it would be a big number, it would be broadly distributed, nobody would actually feel any real impact and this is just a bit of shroud waving by people who would rather be very rich instead of quite rich. However, there are other people who say, “Hang on a sec, this is not very Conservative, is it?” or, as has been said, that we are talking about transferring wealth from one bunch of people to another. Clearly, Parliament can do that, but the impact might be greater on one than the otherQ . I just wondered about your thoughts on that.

Philip Freedman:

I am afraid that I cannot give you the answer to that. because I am not directly acting for those particular clients. I am afraid I know no more—

Photo of Eddie Hughes Eddie Hughes Ceidwadwyr, Walsall North

You do not have a view. We will not take your professional—

Philip Freedman:

I can completely understand that pension funds have invested in part in long-term income that they believed to be secure when they did it—that is, income for 90 years, 990 years or whatever it was going to be. I am told that a number of pension funds and other types of investment entity have invested cautiously, not necessarily buying portfolios where there are hugely escalating ground rents, but either fixed ground rents or modestly increasing ground rents that people would not say were egregious. However, they are still concerned because, in many parts of the country, particularly in the north-east, for example, property prices are so low that even 0.1%—even 1,000th of the price of a flat—would reduce the ground rent. The ground rent might be £100 a year or something, but the cap would result in it being £50 a year or something like that. Obviously, the impact would be great for those portfolios that have hundreds or thousands of these.

Photo of Mike Amesbury Mike Amesbury Shadow Minister (Levelling Up, Housing, Communities and Local Government)

Q Your organisation has said it is disappointed that the Bill does not deal with the regulation of managing and property agents. Can you elaborate on that? What needs to be included in the Bill?

Philip Freedman:

The Law Society has been participating in various working groups following Lord Best’s report, trying to help with the preparation of codes of practice that were intended to sit underneath the regulatory framework for property agents of different types, whether selling agents, managing agents or whatever. We feel that, because tenants often do not know what their rights are, and if they did know what their rights were, they may not want to spend the time or money getting someone to help them enforce their rights, you come back to the people actually doing the management. They need to be proactively willing to be transparent, and to realise that they have duties to the tenants as well as to the landlord. It needs a mindset change in the people who are doing the management. You do not want to rely on tenants having to try and find out what their rights are and then enforcing them. We feel, therefore, that a lot of the changes in the Bill, and other changes that have been talked about, will be better achieved if property managers are regulated, and that the right people with the right tuition being told what their duties are would be improved by regulation.

Photo of Lee Rowley Lee Rowley Minister of State (Minister for Housing)

Mr Freedman, in terms of your previous but one comment, to Eddie, on how you were told about the potential impacts on pension funds and the like, can you tell us, either now or separately if you prefer, who told you that? What is the source?Q

Philip Freedman:

It was one of the two partners in the firm I had been speaking to. Also, I have heard that various other bodies, like the British Property Federation, have been looking into these issues, and there has been a certain amount of it in the property press. It is only general awareness; I do not know any specifics.