I beg to move amendment 10, in clause 26, page 42, leave out lines 12 and 13.

This amendment would ensure that the statutory test of reasonableness would apply to fixed service charges.

In considering part 3 of the Bill, we move away from provisions that draw on recommendations made by the Law Commission across its leasehold enfranchisement and right to manage reports from 2020 and instead turn to other Government proposals on the regulation of leasehold. The first five clauses in this part concern service charges in residential leases. The Government’s stated objective in including the clauses in the Bill is to improve the consumer rights of leaseholders by requiring freeholders or managing agents acting on their behalf to issue service charge demands and annual reports in a standardised format and a more transparent manner so that leaseholders can more easily assess—and, in theory, challenge—any unreasonable or erroneous charges.

We very much welcome the intent of the clauses. While much of the detail will await the statutory instruments required to bring them into force, the clauses have the potential to improve tangibly what is without doubt one of the most contentious and, for leaseholders, injurious aspects of the feudal leasehold tenure. My office receives scores of complaints, literally on a weekly basis, from leaseholders in my constituency who believe that when it comes to the setting of their service charges, they have been subjected to unreasonable costs; costs artificially inflated as a result of outright error, such as the duplication of charges for the same service; large periodic increases that are rarely justified; or abusive practices, such as the deliberate misuse of funds. Even when leaseholders do not believe that there is a specific problem with their service charge amounts, my experience talking to many thousands of them over the years in Greenwich and Woolwich is that most nevertheless feel that they are not particularly aware of or informed about what their charges are spent on or what their future liabilities might be.

That may well be a trend that is particularly prevalent in constituencies such as my own that contain a significant number of new-build leasehold flats, but my team and I increasingly find—as I am sure other hon. Members find in their own caseloads—that a sizeable proportion of the work we do involves simply demanding from freeholders and managing agents, on behalf of leaseholders pushed to the financial brink, a detailed breakdown of service charge costs. We are then frequently required to assist individual leaseholders or informal groupings of them in probing the relevant freeholder or managing agent on the justification for individual charges, and more often than not we expose discrepancies or charges levied for services that are not provided as a result.

Given that a Member of Parliament is involved in those cases, most freeholders, head lessees or managing agents will, in such circumstances, ensure that the aggrieved leaseholders are reimbursed, thus avoiding the need for them—[Interruption.] My hon. Friend the Member for Brent North laughs, but we have had success on occasion, once the relevant error is exposed. In those circumstances, it avoids the need for the leaseholders in question to take the matter to tribunal, with the detrimental implications that the current cost regime entails. However, many —perhaps most—do not, instead relying on the barriers that leaseholders face in going to tribunal to ensure that the unjustified costs are still paid and not challenged. I would wager that, in the scenario that I just set out, I am not alone among Members of the House in dealing with service charge disputes of that kind on a regular basis. To my mind, that is a clear indication that the current service charge regime is woefully failing to adequately serve leaseholders or protect their interests. The Opposition take the view that there is a cast-iron case for making changes to the regime, with a view to ensuring that service charges are levied in a more appropriate, transparent and fair way.

Although we welcome clauses 26 to 30 in principle, they will introduce a further degree of complexity into what is already a somewhat byzantine regime. Given that the Government are not proposing to repeal and replace the entire service charge regime with a consolidated and codified set of regulatory provisions that apply to all services and works, we think it is important to ensure that the new provisions are entirely consistent with those in the various Acts that underpin the existing regime, particularly the Landlord and Tenant Acts 1985 and 1987. They will improve its functioning in practice, and the various amendments we have tabled to these clauses seek to achieve that aim.

Clause 26 makes a number of technical amendments to the 1985 Act to extend part of the existing regulatory framework to cover fixed service charges. To the best of my knowledge, there is no formal definition of what a fixed service charge is, but these can be understood as charges that apply at the start of a 12-month accounting period, that are set by the tenancy or lease, and that are not based on the actual cost of the service provided and incurred by the landlord, as is the case with variable service charges. Such charges can be extremely burdensome. The 2015 case of Arnold v. Britton, for example, involved a provision that increased the service charges by a fixed compound amount each year, with the result that leaseholders of some fairly modest holiday chalets on the Gower peninsular became liable, on the basis of the freeholder’s interpretation of the relevant provisions, for fixed annual service charges, rising to over £1 million by the year 2072.

We take no issue with the clause, save for the fact that subsections (3), (4) and (5) amend various provisions of the 1985 Act to ensure that certain obligations remain applicable only to variable service charges, not fixed service charges. As such, various protections in the 1985 Act will continue to apply to variable service charges alone. Although some remedies are extended to the small number of leaseholders with fixed service charges under the Landlord and Tenant Act 1987, we struggle to understand why, in bringing fixed service charges within part of the existing regulatory framework, the Government have decided to exempt them from numerous protections under the 1985 Act.

Amendment 10 is an attempt to probe the Government’s decision to exempt fixed service charges from the test of reasonableness. Fixed service charges can and do include all sorts of unreasonable costs, and it strikes us as wrong that leaseholders who are obliged to pay them—not least those living in for-profit retirement developments without care, where this is a particularly prevalent arrangement—will not have the ability to challenge such costs if they feel that they are unreasonable. We are also concerned that exempting fixed service charges from the test of reasonableness may incentivise unscrupulous freeholders to create more of them, rather than relying on variable service charges, which are made more transparent by the other changes made in this part of the Bill. Amendment 10 would delete subsection (4)(a) to ensure that the test of reasonableness applies to fixed service charges, so that leaseholders subject to them are afforded greater protection. I hope the Minister will give it serious consideration.

I thank the hon. Member for his amendment. Even though I will not be accepting it today, it raises an important question and he is right to allow us to debate it. We absolutely recognise that leaseholders who pay fixed service charges do not have the same rights of challenge as leaseholders who pay variable service charges—that is accepted and understood—but it is also the case that there are good reasons for that.

As the hon. Member indicated, the main sectors where fixed charges exist are the retirement and social housing sectors, where households are often on limited and fixed incomes, as I do not need to explain to the Committee. Leaseholders, especially those on low incomes, who pay a fixed service charge have certainty about that charge, whereas those who pay variable service charges do not. Landlords benefit from not having to consider tribunal applications but, in return, they should have a clear imperative to provide value for money.

If we were to grant the right to challenge fixed service charges in a similar way to how variable service charges can be challenged, there would be some operational and practical challenges, which is one of the reasons why we will not agree to the amendment today. For example, if landlords underestimate costs in one year, but overestimate them in another, is it feasible and reasonable to be able to challenge the reasonableness only in the year in which the costs are overestimated? Should a reciprocal ability to challenge or to recover the balance of an underestimated cost in a year, on the basis that it would be reasonable to do so, not be proposed? Landlords might move away from employing fixed service charges and switch to variable service charges, which could have unintended consequences.

Fundamentally, I share the hon. Gentleman’s view that there are challenges in all parts of service charges, and so there will be challenges within fixed service charges. The whole point of other elements of the Bill is to provide transparency and visibility of the reasoning for charges being made. For the reasons I have outlined, we are not of the view that this extension should be made for fixed charges.

I want to pick up on the shadow Minister’s point about ambiguity. There is no definition of what exactly would constitute a fixed charge, so there is the opportunity for flexibility or the law of unintended consequences. Given the lack of opportunity for subsequent challenge, a landlord might choose to move a charge from one column to the other. When the Minister said he would not accept the amendment today, did he mean he would give this point some further consideration in the future, or was he just being polite?

I am grateful to my hon. Friend for his question. Notwithstanding the tone of my responses, given the Committee’s interest I will happily write to it to make sure there is clarity on that point. I hope that, as a general and broad macro point, my comment still stands.

The Minister has yet again confirmed his reputation for being reasonable. Can I probe him on the point about reasonableness? Many leaseholders complain that there is an amount in their service charges, which they may think is either reasonable or unreasonable, for a particular service, but when they enquire about the service provider, they find that it is in fact their landlord under another name. They then pay not only the cost of that arm’s length contractor providing the service, but a 15% service charge on top of it. Many people would feel that this is another rentier practice that landlords are using. I appreciate that the issue does not relate specifically to amendment 10, but I would very much like to get the Minister’s thoughts about the reasonableness of that practice on record.

I am grateful to the hon. Gentleman for raising that point. He articulates another example of good law being used in a way that is, in my view—without talking about individual incidents—both unintended and inappropriate. I am not a lawyer, and do not seek or have any desire to be one, but as I understand it, there is a concept of reasonableness within the legal domain based on an Act from a number of years ago. Hopefully that helps to answer part of his question, at least from a structural perspective. On the variable service charge side, without talking about individual instances, that kind of instance is a clear example of where those impacted would be able to go through the process of challenging it, which I think would be very sensible. If I were a leaseholder, I might be very tempted to do that, unless the charge could be justified in a different way. On the fixed service charge side, although I accept that there is the potential for these kinds of challenges, conceptually that needs to be balanced with the fact that when the contract was entered, an agreement was made to consent to that amount, for whatever reason—good or otherwise. That is why we are pursuing this. However, I take the hon. Gentleman’s broader point.

This discussion goes to the heart of some practices and problems that leaseholders have experienced across the sector. On behalf of the many retirement leaseholders, mentioned by the shadow Minister, the hon. Member for Greenwich and Woolwich, I will make a point and ask for reassurance from the Minister.

What we are talking about with this amendment is different from the ground rent issue. Ground rent is a payment for nothing—nothing is being provided—whereas something is being provided for service charges. There is a service, so there is a need for a charge; that is perfectly legitimate. As Conservatives, we do not dispute the fact that there should be financial recompense for services. However, we find ourselves with a problem, the law of unintended consequences and the drivers of business models.

I would welcome if the Minister could touch on this in his response, but my fear is that if ground rents are removed and business models need to adjust to make recompense for that, the natural behaviour of unethical operators in the retirement sector and possibly elsewhere—some are unethical and do not think about the people who bought properties in good faith—will surely be to seek to load their charges, their profit and loss, back on to the service charge in some way. I am not close enough to existing contracts to know whether they will be able to do that with a fixed charge, so the discussion might be better suited to when we talk about the variable charge. The Minister can help me on that.

The broad point stands, however, in the case of someone dealing with the estate of a loved one, perhaps someone who has passed on, is in care, is suffering from dementia or otherwise does not have the capacity to deal with all this—the Minister will be familiar with such cases. They might be stuck with a property that they cannot sell, and that often applies in such cases when service charges are racking up in a way that is difficult for people to get a handle on—

I agree with all the points that the hon. Lady is making. I wonder whether she is aware of the report by Hamptons last year, which said that service charges had increased by 50% over the past five years. That is an indication of just how much of the gouging she is talking about is going on. Furthermore, leaseholders paid a staggering £7.6 billion in service charges last year. Of course, much of that is for the proper renovation of the property, but it seems an extraordinary amount. In fact, 10 years ago, Which? estimated that leaseholders were being overcharged by £700 million.

I thank the hon. Gentleman for bringing those figures to the attention of the Committee. I am familiar with them, as are others. [Interruption.] I do not wish to detain the Committee any longer—I can see the Whip making that plain to me. I will leave my remarks there, perhaps to continue at a later point, but the Minister may wish to respond in detail.

I, too, do not wish to challenge the patience of my colleague the Whip. There will be people who have existing fixed charges; that should not change. There will also be people who have choices about whether to enter into new fixed charges, whether absolute or indexed to some extent. For an inappropriate attempt to do something with variable service charges, there will be the ability to apply to tribunals. I hope that we are closing off all the options that would allow the kind of instances mentioned.

I will be brief, so as to dispose of the amendment.

I appreciate what the Minister said. He provided some useful clarity. In particular, he highlighted the practical challenges in addressing this matter, and the potential for landlords possibly moving away from fixed charges and into variable. I think that there is a corresponding risk the other way. I appreciate and take on board what he said about the certainty of the charge.

I think the Minister alluded to the point that I am trying to make, which is that residents should have value for money, and they do not always get it on each occasion. We have deliberately not sought to apply all the protections that apply to variable service charges, but focused on the test of reasonableness. With the help of two former Housing Ministers, I think I had an indication from the Minister that he will do this, but I would appreciate it if the Government went away to satisfy themselves that the protections are in place for that category of leaseholder. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Ordered, That further consideration be now adjourned. —(Mr Mohindra.)

Adjourned till this day at Two o’clock.