Examination of Witness

Leasehold and Freehold Reform Bill – in a Public Bill Committee am 2:40 pm ar 18 Ionawr 2024.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Jack Spearman 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 3:10, 18 Ionawr 2024

We will now hear oral evidence from our seventh panel. Jack Spearman is chair of leasehold reform at the Residential Freehold Association. For this session, we have until 3.30 pm. Could the witness please introduce himself for the record?

Jack Spearman:

Good afternoon. My name is Jack Spearman. I am from the Residential Freehold Association. We are a representative organisation for the UK’s largest professional freeholders. Our members represent, or have management over, about 1 million leasehold properties in England and Wales. I chair the British Property Federation’s committee on leasehold reform. I am also a director at Long Harbour, which is a regulated investment manager, and we have invested in residential freeholds.

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

Q Mr Spearman, thank you for coming to give evidence to us. The Government’s 2017 consultation on tackling unfair practices in the leasehold market, which I think attracted more than 6,000 responses, found that freeholders regularly price-gouge leaseholders on service charges, ground rents, lease extensions and freehold acquisitions, as well as making arbitrary and unjust rules about what leaseholders can and cannot do with their homes. Is it not the case that many, if not all, of your members routinely engage in rent-seeking behaviour by gouging leaseholders as a matter of course and that the concerns of the RFA about the Bill are almost entirely related in various ways to how it might frustrate them or prohibit them from doing so?

Jack Spearman:

Each lease will set out the terms of what can and cannot happen under that lease, so when people talk about changing terms, you have to be quite careful about what you are actually saying. The rent is set as a rent and a review is set as a review, so you cannot just change rent arbitrarily—the same as for service charge and many other things. I think what you are talking about is some of the aspects that are frustrating, whether it enfranchisement or lease extensions. It will probably surprise a number of you that our members do support a large number of the measures in the Bill, including a number of the amendments that you have put forward in Committee.

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

Q Okay. I may come back to some other specific issues if we have time, but specifically on insurance, the Financial Conduct Authority’s report of September last year on insurance for multi-occupancy buildings found evidence of high commission rates and poor practice, which were

“not consistent with driving fair value to the customer”.

It also found that the mean absolute value of commissions more than doubled between 2016 and 2021 for managing agents and freeholders of buildings with fire safety defects. Is it not fair to say that, again, many, if not all, of your members have benefited hugely from soaring buildings insurance premiums over recent years, so do you think the Government are entirely justified in seeking by means of clause 31 to limit their ability to charge insurance costs?

Jack Spearman:

In terms of insurance premiums, they have generally all risen, for a number of reasons that you will be aware of, whether that is cost inflation, inflation generally or insurance premium tax. Let us not forget that the Government benefit from a lot of these things, and they are all rising at the same time.

What I would say is that there is merit in making sure that people who are actually providing services to administer the insurance work have some form of compensation for what they are doing. If the insurance premium was to double because there is an issue with cladding, why should someone take the benefit of that? The same could be said for remediation projects, for example, where VAT is paid. But, yes, I agree that a measured form of that would be helpful. The problem with the Bill currently is that it leaves all of that to secondary legislation, as you know. It would be helpful to see the primary legislation set out how that might work, and that is one of our recommendations.

Clearly, our members do a lot of work on insurance, whether that is administering claims, dealing with inquiries or sending out invoices to collect the insurance premium over hundreds of people—it is a job that someone has to do. It could be risk management, so telling the insurer what is on the building. You would be amazed to see how many insurers that our members deal with offer to insure a building without knowing what is on it. When we tell them what is on it and what is in it, a very different type of cover can be offered. So there is value, contrary to what people will say, although I do accept, clearly, that, like in any system, there are bad practices.

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

Q Just briefly while we are on that, have you got any sense of whether your members are complying, or are prepared to comply, with the new FCA rules that are coming into force at the end of this month with regard to the right to request to see the insurance?

Jack Spearman:

Again, our members have always been of the view that the insurance is for the benefit of leaseholders. They provide the cover, and they provide the certificates; it is something that we have all been doing for a large number of years. So, yes, we do, and those that do not will obviously have to anyway under the FCA regulations.

Photo of Andy Carter Andy Carter Ceidwadwyr, Warrington South

Q Thank you very much for your written submission to us. You say in there: “The RFA has serious concerns that the Government’s proposals to cap ground rent will lead to significant cost to the UK taxpayer…and have…negative consequences for leaseholders” What are the costs for UK taxpayers of this piece of legislation?

Jack Spearman:

One of the key and largest impacts of this Bill has not even been considered yet, because it has not been introduced. Some form of restriction on ground rent is going to be introduced at some point as an amendment. You are being asked to scrutinise a piece of primary legislation that does not have a number of impacts in it—for example, setting capitalisation rates, deferment rates and dealing with ground itself. So you are scrutinising something that is incomplete, and the impact of which none of us here know.

Going to the taxpayer point, the Government say that no compensation will be paid, but unfortunately they also know that that is probably not going to be compliant with the European convention on human rights. Compensation is going to have to be paid, and it is either paid by the taxpayer or the leaseholder. That is what we mean by that.

Photo of Andy Carter Andy Carter Ceidwadwyr, Warrington South

Q Okay. In terms of the Bill setting out regulation for property managers, we heard from the Competition and Markets Authority earlier, and it has found significant areas of concern within this sector. Do you accept that it is an area that needs regulation and that there are bad practices at play here?

Jack Spearman:

One hundred per cent. We actually wrote to the then Secretary of State in 2018 and asked for a voluntary code of practice, which was in the leaseholders pledge in 2019.

Photo of Andy Carter Andy Carter Ceidwadwyr, Warrington South

Q Do you think a voluntary code is sufficient?

Jack Spearman:

Sorry, this is back in 2018 and 2019, when we were trying to get the Government to engage and we thought that the idea of some form of regulation was better than none. We fully support the introduction of the regulation of property agents working group, and Mr Pennycook’s amendments would see measures within 24 months. I think that is a good start. But, yes, broadly, like everyone else, we are saying, “Regulate the sector.” We are all tarred by the poor actors, ultimately.

Photo of Andy Carter Andy Carter Ceidwadwyr, Warrington South

Q I note that you use the term, when we are talking about capping rents, that it will send “a very damaging signal” to investors. Is that still your opinion—that investors are getting the wrong message from Government?

Jack Spearman:

It is hard not to get the wrong message when the Government have said that they—

Photo of Andy Carter Andy Carter Ceidwadwyr, Warrington South

Is this not the right thing to do? When you look at the practice that has been going on and the evidence that is there—the mis-selling and appalling behaviour—

Jack Spearman:

I think there are two things. Where ground rents are onerous and egregious, it is hard to say that there is not an argument for legislating to deal with them. When it comes to ground rents that are not doubling more frequently than 20 years, I think that is slightly harder.

The point about investments is that, in the same week the Government announced £29 billion of investment from pension funds into UK plc, they announced a consultation that could see a value transfer of £29 billion away from UK pension funds through the ground rent consultation. The general living sector, and building houses in this country, needs capital, and that needs to come from somewhere. There were reports over the weekend from Savills, for example, that £250 billion are required to meet housing demand in this country. Where is that going to come from? It is going to come from pension funds.

So this is, unfortunately, sending the wrong signal, and I think the Government are aware of that—we have certainly made those representations directly and to other Departments.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q I want to pick up on what Mr Carter said and your insistence that capping rents was sending the wrong signal to pension funds. I trust you are aware of the statement from the Pensions and Lifetime Savings Association that said that pension funds aggregate allocation to all types of property—commercial as well as residential—and that accounts for 4% of all pension holdings, and that none of their members have expressed any concerns with them about proposed changes to rules affecting leasehold and ground rents. Were you aware of that?

Jack Spearman:

Yes, I know where that came from.

Jack Spearman:

I would advise you to go and ask them again, because the pension funds we are talking about have made representations directly to the Government.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q If we are talking about, “Directly to the Government”, the Government’s own statement noted that the pension funds held less than 1% of assets in residential property, and added that any hit to pension funds would be within normal investment and depreciation tolerances. They said:

“We do not think it is fair that many leaseholders face unregulated ground rents for no guaranteed service in return.”

So the idea that you seemed to put out—“My goodness, the housing market was going to collapse because pension funds were not going to invest in property any more because they weren’t going to be able to extract the ground rents”—is a nonsense, is it not? You talked about £100 ground rent, but you know what is being done here. Your members are not limiting to £25 or £100 ground rents or peppercorn rents. Over the past 15 years, they have created a rentier structure wherein they can extract revenues from the ground rent that are exorbitant—in some cases, £8,000 a year for no service. Is that not true?

Jack Spearman:

You make a couple of points there. First, you seem to be suggesting that it is okay to steal the chocolate bar from the shop because it is only 1% or 2% of the stock—it is still not okay. The second thing I would say is that—

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q Nonsense. Justify the word “steal”. I would say the word “steal” is justified when there is no service being provided, and yet you are charging for it, even if it is only a chocolate bar.

Jack Spearman:

I can come on to the service provided. Ground rent is a consideration as part of the lease and the premium. You are right to say that, technically—legally—the ground rent does not afford service. But we would say that, through our members, a huge amount of work gets done as a result of that ground rent and as a result of pension funds having invested in it. Take the Building Safety Act 2022, for example—remediation, fire safety audits and building safety audits are all undertaken at no cost.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q Remediation—because the freeholder did not ensure the proper safety of the building in the first place.

Jack Spearman:

I disagree with that.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Q Mr Spearman, since we have limited time, let me turn to what you are saying to the members of the public. You have engaged in a number of polling operations. You have told people that only 1 in 4 people in a block would be able to agree with each other about how to manage that block. The implication is that many leaseholders do not want to take on the burden of management and, actually, some of them are incapable of taking on that burden of management—almost as if you are providing them with this wonderful service that they would not want to get rid of. But the figure of 1 in 4 people that you quoted in your survey was 1 in 4 people in the United Kingdom, and not leaseholders at all, was it not? It included people in Scotland who are not involved in the provisions of leasehold in England and Wales. So you went out to people who had no connection as leaseholders and surveyed them, and then claimed that was an argument.

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

On a point of order, Dame Caroline. I am wondering whether my colleague, Mr Gardiner, is getting to a question rather than just expressing a view.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

I just did, but you interrupted.

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

Indeed. Mr Spearman, you have misled people in the polling surveys and the conclusions you have drawn from them, have you not? Your own members—Consensus Business, Long Harbour and Wallace Estates—did surveying in which they found that 67% of residential leaseholders said that they would wish to take control of their building and get out from under you, but you suppressed that, did you not?

Jack Spearman:

We have never said that people are incapable of managing their building—absolutely not. The desire to do so diminishes with the complexity of the building. I am sure you have seen the Government’s own survey on living in shared buildings. You heard from Professor Steven this morning in Scotland about the issues with the system in Scotland—

Photo of Barry Gardiner Barry Gardiner Llafur, Brent North

A manager who works for a freeholder can be no different from a manager who works for an enfranchised set of leaseholders, can it? So the idea that the complexity is beyond the leaseholders is simply not a fair comparison.

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

Q Perhaps Mr Gardiner will call a point of order on me. I have been talking about this transfer of value. There are non-monetised here, but there is £1.9 billion of transfer. I think we have accepted from previous witnesses of all types that it is a political decision, but it is essentially taking from group A to group B. You just, I think, said there were ground rents that are not enumerated here, and I think you said they were not £1.9 billion, but £29 billion or £30 billion. Could you elaborate on that?

Jack Spearman:

This is a bit of an issue we have with the way the impact assessments have worked, because the impact assessment for the leasehold and freehold Bill did not take consideration of the consultation impact assessment that came out on ground rent. They are not working together. That is part of the issue of you not being able to scrutinise the impact assessment within the ground rent consultation, where the Secretary of State is on record as saying he wants a peppercorn ground rent; in that it says the impact would be £27.7 billion. If you add that to the £3.2 billion in the Leasehold and Freehold Reform Bill impact assessment, that is where you get to.

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

Q So just to be clear, as the Committee considers this Bill, including what may come from subsequent secondary legislation, it is not £1.9 billion of transfer, but £1.9 billion plus £28 billion. Is that fair? So we need to bring it all in, not just—

Jack Spearman:

I think it is a bit more, actually. Is it not £3.17 billion in this one?

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

Exactly—you have added them all up. I just did the first section.

Jack Spearman:

Indeed.

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

But a bit like an iceberg, the transfer of wealth from group A to group B is somewhere else; it is not here in the impact assessment.

Jack Spearman:

Agreed. Also, in terms of the people it is being transferred to and from, remember that while a lot of leaseholders are homeowners, there are also a lot of buy-to-let investors in that group—over 50% in our membership, of leaseholders are buy-to-let investors. That is a transfer from business to business being overseen by this Bill.

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

Very good. Does anyone else want to come in? I had another question, unless we have no more time.

Photo of Richard Fuller Richard Fuller Ceidwadwyr, North East Bedfordshire

Q Can I ask you about the discount rates that are used? We have the deferment rate and the capitalisation rate. Those will be determined in secondary legislation as well. Do you have any thoughts about what guidance should be given to the Minister about how those should be set?

Jack Spearman:

Yes. It is very important that, at the very least, the primary legislation sets out what reference the Minister should look to—something dynamic would be helpful, so that you don’t have these ridiculously long periods of time where one party is out or in. I think people have talked about looking at some long-term ideas, whether that is the National Loans Fund rate or the longest Treasury gilt. You obviously don’t want to make it too dynamic, so that it is always shifting around, but I think it should clearly reflect market value. It should be done on a no-act principle. It should be enabled to be dynamic so that, as I said, you do not have this problem of the Secretary of State having to arbitrarily change it—it should be able to move with the market. It should be something that is available for reference.