Leasehold and Freehold Reform Bill

Public Bill Committee, 23 January 2024.

Clive Efford (Labour, Eltham)

Before we begin, I have a few preliminary reminders for the Committee. Please switch electronic devices to silent. No food or drink is permitted during sittings of the Committee, except for the water provided. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk or, alternatively, pass their written speaking notes to the Hansard colleague in the room.

We will now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped for debate. Amendments grouped together are generally on the same or similar issue. Please note that decisions on amendments take place not in the order in which they are debated, but in the order in which they appear on the amendment paper. The selection and grouping list shows the order of debates. Decisions on each amendment are taken when we come to the clause to which the amendment relates. Decisions on new clauses will be taken once we have completed consideration of the Bill’s existing clauses. Members wishing to press a grouped amendment or new clause to a Division should indicate when speaking to it that they wish to do so.

Clause 1 - Removal of qualifying period before enfranchisement and extension claims

Lee Rowley (Conservative, North East Derbyshire)

It is a pleasure to serve under your chairmanship, Mr Efford. Today, we begin our line-by-line consideration. I first want to note and put on record my thanks to all the witnesses who gave evidence to the Committee last week. It was hugely useful to hear their insights, which will improve the Bill over the coming days and weeks ahead.

I am delighted to bring the Bill to Committee, and I look forward to the debate that will follow. Before we proceed, I quickly draw the Committee’s attention to a minor issue regarding the Bill’s explanatory notes. Paragraph 18 refers incorrectly to the right

“for an intermediate landlord to reduce (‘commute’) the rents that they pay”

following statutory lease extensions and ground rent buy-out claims. That is a drafting error as the clauses were not in the Bill when introduced. I have since tabled an amendment to introduce those clauses on intermediate leases, which we will debate shortly. I apologise for that minor drafting error and reassure the Committee that the explanatory notes will be updated to reflect the latest clauses before the Bill enters the other place.

I also want to make a small point in relation to legal language that I will use throughout the session. In existing legislation, leaseholders are referred to as “tenants”, which legally, they are. In everyday language, however, we often use the term “leaseholders” to differentiate long leaseholders from tenants holding shorter tenancies or those with less security of tenure. For simplicity, I will use the term “leaseholders”. Likewise, I will use the term “landlord” to mean both landlords and freeholders. In many cases, the landlord will be the freeholder, although that is not always the case. Where the provisions concern freeholders, I will use that term rather than “landlord”.

I now turn to part 1, which deals with leasehold enfranchisement and lease extension. When people buy a leasehold property, they will want to ensure that they have the long-term security and control they need to make it a home. They may have a short lease and wish to extend it, or they may have concerns about their landlord and wish to buy them out to have full ownership and control of that home.

The current requirement, where a homebuyer has to wait for two years before they can extend their lease or buy their freehold, is an obstacle for leaseholders and results in higher costs, as the price for enfranchising increases year on year. Furthermore, many investors take advantage of a loophole to avoid that requirement, while ordinary homeowners, who may be less familiar with the process, can find themselves in difficulties. There are also inconsistencies in the current law where, in certain circumstances, people can rely on a previous owner’s period of ownership to satisfy the requirement whereas others are unable to do so.

Clause 1 seeks to remove that barrier to leaseholders who wish to exercise their enfranchisement rights. It removes the requirement to have owned the lease of a house for at least two years before qualifying to buy their freehold or extend their lease. It also removes the requirement to own the lease of a flat for two years before extending the lease. This gives leaseholders the flexibility to make a claim immediately upon buying a leasehold property, and it will reduce their costs. It also resolves inconsistencies in the current law. The measures will remove an unnecessary restriction for leaseholders. I commend the clause to the Committee.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I thank the Minister for his explanation of clause 1. I add the Opposition’s thanks to the witnesses who gave evidence to us last week. It was extremely useful. Before I begin, I would like to declare an interest. My wife is joint chief executive of the Law Commission, whose work we will be debating extensively in the days to come.

It is a pleasure to start line-by-line consideration with you in the Chair, Mr Efford. It is a genuine privilege to serve on a Public Bill Committee comprised of hon. Members who have not only a real interest in the subject matter, but real expertise. It is my sincere wish that we draw on all of it in the days ahead to improve this legislation and, as much as the Government Whip may discourage it, that hon. Members on the Government Benches, including the hon. Members for Walsall North and for Redditch, as former Housing Ministers, take the opportunity to participate actively in our deliberations.

Having not had a suitable chance to put it on the record, I would like to take this opportunity to formally welcome the hon. Member for North East Derbyshire back to his place. He and I disagree politically, often viscerally, when it comes to many, many issues, but he is a hard-working, diligent and thoughtful Minister. I look forward to the robust and, on the whole, constructive debates we will have over the coming sessions.

Before I turn to the detail of clause 1, I want to put some brief general remarks on the record to frame what is to follow. As we made clear on Second Reading, we are fully in support of the principle of the Bill and the intent behind its provisions. The range of measures that the Committee will consider will, without question, provide a degree of relief to leasehold and freehold homeowners in England and Wales, by giving them greater rights, powers and protections over their homes. That is obviously to be welcomed. However, during Second Reading we also expressed our deep regret about the Bill’s lack of ambition and bemoaned the implications for leaseholders, who are being routinely gouged by freeholders under the present flawed system.

I want to be as clear as I possibly can with leaseholders who may be following our proceedings as to the Opposition’s approach to the Committee stage. While we welcome in principle the provisions contained in the Bill, we do have concerns about the efficacy of several of them, including clause 1. As such, we will seek to probe and rectify their various defects and deficiencies so as to ensure that they truly deliver for leaseholders. We will also engage constructively with the Government in relation to any significant new measures introduced into the Bill, not least the glaring omission of provisions designed to ban the sale of new build leasehold houses. We will introduce a number of specific targeted measures designed to give leaseholders a little more control over their future and strengthen the foundations on which future, bolder reform will be enacted.

What we do not intend to do is attempt to persuade the Government of the benefits of using this Bill to enact all, or even significantly more, of the hundreds of Law Commission recommendations on enfranchisement, right to manage and commonhold, which the Government have chosen not to include in this Bill. The Government had the opportunity to bring forward ambitious legislation and enact all the Law Commission’s recommendations from its three reports in 2020, thereby delivering on the promises that successive Ministers have made to leaseholders over the past years. They have made the political choice not to do so. Attempting to radically overhaul this piece of legislation by means of hundreds of amendments required to implement all those recommendations would not only be an onerous, perhaps impossible, undertaking, given its limited nature, but would delay the Bill’s passage and, with a general election in the months ahead still a distinct possibility, put it at risk entirely.

We want leaseholders to benefit from the measures in the Bill as soon as possible. We therefore wish to see it, albeit suitably strengthened, out of Committee as quickly as possible to maximise its chances of receiving Royal Assent. Make no mistake, Labour is committed to bringing the current iniquitous leasehold system to an end, overhauling it to the lasting benefit of leaseholders and reinvigorating commonhold to such an extent that it will ultimately become the default and render leasehold obsolete. Leaseholders across the country therefore have our firm commitment to finish the job in due course.

Turning to clause 1 and the rest of part 1, one of the reasons that the Bill can reasonably expect a speedy passage out of Committee is that parts 1 and 2, together with related schedules, implement a subset of Law Commission recommendations that are almost entirely uncontentious. Part 1 of the Bill, as the Minister has said, concerns leasehold enfranchisement and extension.

As I have said, the clauses in this part implement some but not all of the Law Commission’s recommendations designed to make it cheaper and easier for leaseholders in houses and flats to extend their lease or acquire their freehold. They include procedural changes as well as substantive ones that extend tenant rights and empower leaseholders by giving them greater control and value. There is in that respect, and as we touched on during the evidence sessions last week, an explicit and very welcome redistributive intent that underpins the legislation.

As the Law Commission exhaustively detailed in its final 2020 report on leasehold enfranchisement, the case for reforming the present enfranchisement regime is incontrovertible. It is not only incredibly complex but inconsistent. As a result, leaseholders face unnecessary litigation, uncertainty and costs when attempting to exercise their rights under it. The law in this area needs to be overhauled and we therefore welcome the objective that underpins each of the provisions in this part.

We wish to probe the Government further on various issues relating to the precise drafting of those provisions, as well as seeking to address the flaws of a limited number. As the Minister made clear, clause 1 removes the two-year qualifying period before enfranchisement and extension claims can proceed in respect of both houses and flats by amending the relevant sections of the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, which I will hereafter refer to simply as the 1967 and 1993 Acts.

Clause 1 implements recommendation 29 from the Law Commission’s final 2020 report on leasehold enfranchisement. We welcome the clause. A core objective of the Bill is to increase access to enfranchisement by rendering more leaseholders eligible for such rights. By liberalising this and other qualifying criteria, we are confident it will achieve that objective.

As the Committee is no doubt aware, the current two-year ownership requirement was designed primarily to prevent investors benefiting from enfranchisement rights intended for residential leaseholders. Yet it is patently not achieving that objective given the relatively simple workarounds that sophisticated commercial investors can and do take advantage of. Indeed, the requirement can fairly be said to have created a market designed explicitly to facilitate their doing so—a development entirely at odds with the rationale for the two-year ownership requirement. At the same time, that requirement presents a significant barrier to ordinary leaseholders exercising enfranchisement rights and, importantly, leads to rising premiums for many of them as a result of waiting for two years in which capital values may have increased or lease lengths reduced.

Abolishing the requirement for leaseholders to have owned premises for two years prior to exercising enfranchisement rights, so that they have the right to carry out an enfranchisement claim as soon as they acquire their lease, is an entirely sensible reform. It would also resolve the current inconsistency between the position of trustees in bankruptcy and of personal representatives, and avoid the technical, costly and error-prone workarounds that have been created involving the assignment of a benefit of notice.

Although the clause is entirely uncontentious from our perspective, I do have one question for the Minister: why have the Government chosen to include subsection (2)(c) and, consequential on that reform, subsection (3) in this clause? Subsection (3A) of section 39 of the 1993 Act concerning what happens in the event of the death of a qualifying tenant clearly needs to be overhauled to account for the removal of the two-year qualifying period, but surely the Government wish to ensure that the right of a tenant’s personal representative to exercise enfranchisement rights on their behalf in the event of their death is sustained? Will the Minister confirm whether I am right in believing that that is the Government’s wish?

If so, given that the right would not appear to be sustained as a result of the drafting of clause 1, is it maintained by means of other provisions in the Bill? If not, surely the Government must accept that the decision to simply omit the relevant subsection (3A) needs to be reconsidered to ensure that the right is maintained in future? The omission may affect only a small number of leaseholders going forward, but it is important that we ensure their personal representatives are conferred the rights that they would have enjoyed had they lived. I look forward to the Minister’s response.

Lee Rowley (Conservative, North East Derbyshire)

First, let me echo the remarks of the hon. Member for Greenwich and Woolwich. He said some kind words about me and I would like to say the same about him. He has always been extremely constructive and helpful. We share the aim of trying to improve the legislation and I am grateful to be working with him. I hope we can work in many areas and agree more than we disagree. He was right when he said that this is incredibly complicated. Having tried for the past two months to get into all the details, there may still be areas where I am unable to answer all the questions from hon. and right hon. Members today. I will do my best, but I will write to them if I am unable to answer anything.

I am grateful to the hon. Gentleman for confirming that Labour will support this clause. On his specific point around where leaseholders have sadly passed away and there is a requirement for a personal representative or equivalent, it is not our intention to make that process any more difficult or to change the fundamental ability of people to make decisions about how to dispose or deal with properties that are left in the event of a death. Having spoken to officials and those involved in the drafting of this, my understanding is that the exemptions referred to in subsections (2)(c) and (3) become effectively moot. The removal of the two-year rule preventing a representative from taking action means that at the point they inherit the property—or whatever legal approach is taken to transfer it the estate to a new owner or representative—the problem goes away.

If, for some reason, we have missed something, I would be very happy to take anything from the hon. Member for Greenwich and Woolwich or others, either now or in writing, which I can go away and look at. Our understanding is that this does not need to continue, hence why we have chosen to remove it within the clause.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I welcome that clarification from the Minister and his indication that it is the Government’s firm intent to ensure that personal representatives can exercise enfranchisement rights on behalf of a leaseholder who has died, because of the removal of the two-year rule. I urge the Minister or his officials to look at the precise wording of this clause, because we are worried that—his comments notwithstanding—it may not do this in practice, and there may be some ambiguity. I do, however, welcome the assurance he has given. On that basis, we will not oppose this clause standing part of the Bill.

Lee Rowley (Conservative, North East Derbyshire)

To confirm, I am happy to double-check this, but I hope what I have just indicated stands.

Clause 2 - Removal of restrictions on repeated enfranchisement and extension claims

Lee Rowley (Conservative, North East Derbyshire)

Currently, the restrictions placed on leaseholders to make a claim to buy their freehold or extend their lease can be seen as excessively punitive. Leaseholders are prevented from making a claim to buy their freehold or extend their lease for 12 months, when a previous claim has failed even on a minor point. In addition, a claim for a lease extension on a house can be obtained only once, and we seek to remove those unnecessary barriers for leaseholders, which frustrate their ability to buy their freehold or extend their lease.

Clause 2 seeks to address this problem by removing the requirement to wait 12 months to submit a new claim if the previous one has failed. It will also remove the restriction on bringing a further claim where a lease extension has already been obtained for a house. This means that leaseholders will be able to put in a further claim to enfranchise or extend their lease as soon as they have resolved the issues with their failed claim. Leaseholders of houses will not be prevented from making a claim for a lease extension if one has already been obtained, preventing the landlord from being able to regain possession of the property from a leaseholder when the lease eventually comes to an end.

Clause 2 will also remove provisions that give courts powers to prevent new enfranchisement or lease extension claims for five years where a claim has failed, and the leaseholder did not act in good faith or attempted to misrepresent or conceal material facts. These powers are old and surplus to requirements, coming from the 1967 Act, which has been overtaken by developments in the law around civil restraint orders since then. These restraint orders are more flexible, better developed, subject to more rigorous checks, and may be fairer than the existing power. Therefore, the existing law and the Bill can still deal with meritless of abusive enfranchisement claims. The tribunal already has powers to award costs for such unreasonable behaviour. The removal of these should not change that; it is simply a tidying-up exercise, and a recognition that other parts of the law do this better. These measures will remove barriers to leaseholders being able to take up their right to enfranchise or extend their lease without unnecessary delays.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I welcome that explanation of the clause, which, as the Minister says, removes various restrictions on repeated enfranchisement and extension claims. It is our understanding that they include the provisions in the 1967 Act and the 1993 Act that prevent tenants from starting new enfranchisement or lease-extension claims within 12 months of an earlier claim failing to complete; the provisions of the 1967 Act that give courts the power to order compensation and prevent new enfranchisement or lease extension claims for five years after a claim has failed; and the provisions of the 1967 Act that prevent tenants from bringing a further lease extension claim where a lease extension has already been obtained under the Act.

We welcome the clause, which enacts part of the Law Commission’s first recommendation from its final report on leasehold enfranchisement. In our view, the existing restrictions on leaseholders making fresh enfranchisement or extension claims where an earlier claim in respect of the same premises has been withdrawn or struck out, or has otherwise failed, are not justified. On payment of an appropriate premium, leaseholders should, in principle, be entitled to obtain a new, extended lease as often as they wish and should be allowed to make repeat good-faith enfranchisement claims.

I have two questions for the Minister, both of which relate to bad-faith claims. First, page 13 of the explanatory notes accompanying the Bill makes it clear that subsections (1)(c) and (d) remove restrictions on new claims within five years where a tenant has not acted in good faith or has attempted to misrepresent or conceal material facts. For the record, I would be grateful if the Minister could clarify precisely how those subsections remove restrictions on tenants within the said circumstances, because it is not entirely clear to us from reading the clause. I would also be grateful if the Minister could clarify why the Government believe it is appropriate to remove restrictions on repeat claims where a leaseholder has acted in bad faith. Is it the case, as I suspect, that the provisions in the 1967 Act that restrict repeat claims on those grounds have rarely, if ever, been used? In effect, are the Government just tidying up the statute book in respect of the relevant historical provisions?

Secondly, the Minister will know that the Law Commission proposed that freeholders should have the right to apply to the tribunal for an enfranchisement restraint order, with the purpose of preventing leaseholders from making repeat claims that are entirely without merit or that are, either of themselves or when considered together, frivolous, vexatious or otherwise an abuse of process. The Minister gave an indication in his opening remarks that the Government’s view is that the necessary order powers are already there, but I would like him to explain why they did not believe it was appropriate to incorporate into the clause the Law Commission’s recommendation to give freeholders the right to seek such an order from the tribunal. Do the Government believe that the likelihood of leaseholders making bad-faith claims of the kind that an ERO would allow the tribunal to prohibit is negligible? If so, what evidence is that belief based on? If the Government accept that some leaseholders may make repeat bad-faith claims, why do they believe there is no need to provide a mechanism by which such behaviour could be prevented? I look forward to the Minister’s response.

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to the hon. Gentleman for his comments and, again, for indicating his support for the intent of clause 2. On his question with regard to subsections (1)(c) and (d), I will write to him, given that it is a technical question about the specific description in the legislation. Hopefully, I will be able to provide the comfort he seeks.

As he indicated later in his remarks, we believe there is the ability for vexatious claimants, in whatever sense, to be accommodated by the existing legislation elsewhere, so there is no need to replicate that or to retain something that is very rarely used. That is the reason for removing it.

Finally, on his point about orders from a tribunal and the Law Commission’s recommendation, it goes back to the fact that we believe the process that is in place is already mature and very capable of responding to the legitimate points he highlights. Therefore, there is no need to create an additional process in the Bill, but I will write to him to absolutely clarify that point and make sure that we have everything we need.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I welcome that clarification from the Minister and look forward to any further detail that he might provide to the Committee via written correspondence.

Rachel Maclean (Conservative, Redditch)

May I ask the Minister to confirm that clause 2(2) refers to schedule 7 to the Bill? In our evidence sessions last week, we heard from certain leaseholders who were concerned that they would not benefit from the provisions if their lease was less than a certain number of years. Paragraph 2(2)(a) of schedule 7 states that a lease will not qualify if

“the unexpired term of the lease is less than 150 years”.

There was some debate about that length. Will the Minister address those leaseholders’ concern that the period is too long and that there should not be that restriction? Or will he write to me later to address what considerations went into that provision? If we are excluding people from these welcome provisions, perhaps we should seek to otherwise widen the group of people who can benefit from having their leases converted to a peppercorn lease.

Lee Rowley (Conservative, North East Derbyshire)

We will probably talk in detail about the 150-year decision—the Law Commission proposed 250 years—in relation to quite a number of areas later this morning, so I do not want to pre-empt that now. As I will explain later, the Government’s intention was that, if a lease is coming up in a reasonably short period of time, it is advantageous to align everything together, as opposed to doing just one thing, because there will be the potential for double costs and the like. I am happy to talk about that more when we get further into line-by-line consideration.

Clause 3 - Change of non-residential limit on collective enfranchisement claims

Matthew Pennycook (Labour, Greenwich and Woolwich)

I beg to move amendment 1, in clause 3, page 2, line 19, at end insert—

“(2) After section 4(5) of the LRHUDA 1993, insert—

‘(6) The Secretary of State or the Welsh Ministers may by regulations amend this section to provide for a different description of premises falling within section 3(1) to which this Chapter does not apply.

(7) Regulations may not be made under subsection (6) unless a draft of the regulations has been laid before, and approved by resolution of—

(a) in the case of regulations made by the Secretary of State, both Houses of Parliament;

(b) in the case of regulations made by the Welsh Ministers, Senedd Cymru.’

(3) In section 100 of the LRHUDA 1993—

(a) in subsection (2), after ‘making’, insert ‘provision under section 4(6) or’;

(b) in subsection (3), after ‘making’, insert ‘provision under section 4(6) or’.”

This amendment would enable the Secretary of State or (in the case of Wales) the Welsh Ministers to change the description of premises which are excluded from collective enfranchisement rights. Such a change would be subject to the affirmative resolution procedure.

Clive Efford (Labour, Eltham)

With this it will be convenient to discuss clause stand part.

Matthew Pennycook (Labour, Greenwich and Woolwich)

Clause 3 makes changes to the non-residential limit for collective enfranchisement claims. At present, section 4(1) of the 1993 Act excludes from the right to enfranchise buildings in which 25% or more of the internal floor area, excluding common parts, can be occupied or are intended to be occupied for non-residential use. The clause increases the non-residential use percentage to 50%.

We welcome the change, which enacts recommendation 38 of the Law Commission’s final report on leasehold enfranchisement and was suggested by, among others, the National Leasehold Campaign. The purpose of the non-residential limit is to confine enfranchisement to predominantly residential blocks, but as the Law Commission determined, the existing 25% limit

“does not achieve that purpose.”

There is a significant amount of evidence that it instead regularly prevents leaseholders from undertaking collective freehold acquisitions because a sizeable proportion of buildings fall slightly above it. As the Law Commission’s final report puts it,

“the 25% limit provides a significant bar to the ability of leaseholders to undertake a collective freehold acquisition”.

The Law Commission further argued that

“the arbitrary nature of the limit makes the bar to enfranchisement a source of considerable frustration for many leaseholders.”

Deciding where to draw the line in respect of the level of non-residential use permitted in a building before collective enfranchisement rights cease to be available is inherently difficult. There will always be outlying cases that approach or go beyond an increased limit. However, given that one of the explicit purposes of the Bill is to bring as many leaseholders as possible within the enfranchisement regime and, in respect of the non-residential limit, specifically to prevent developers building around it in order to exclude blocks of flats from enfranchisement rights, an incremental increase to 30%, 35% or even 40% does not, instinctively, feel sufficient.

The issue is inherently subjective, and the Law Commission recognised as much, but if enfranchisement rights should be enjoyed by buildings that are primarily residential in nature, a 50% threshold feels appropriate and fair, because it would ensure that the predominant form of ownership in such buildings remains residential. A 50% non-residential limit is likely to mean that the number of genuine cases that are excluded by it will be small, and it will inevitably reduce gaming by developers, because to exceed the 50% limit a building will have to be genuinely commercial in nature. At least, that is the hope.

We very much hope the clause serves to significantly boost enfranchisement rates and in due course to assist more leaseholders of mixed-use buildings to convert to commonhold. However, our reservation about the clause as drafted is that it provides no flexibility to further amend the non-residential limit. We believe it would be sensible to build in a degree of flexibility so that any future changes to the limit for collective enfranchisement rights do not require primary legislation but can instead be enacted through regulations.

One can imagine a number of scenarios that might lead to the effectiveness or reasonableness of the Government’s proposed 50% limit, which the Law Commission accepts is inescapably arbitrary, coming into question. For example, we might find in the years following its implementation that it does not manage to encompass a small but still unacceptable number of leaseholders in buildings that fall slightly above it, and we may wish to quickly take steps to allow them to exercise collective enfranchisement rights. Alternatively, a future Government may decide that they wish to use a criterion other than internal floor area to determine eligibility for such rights—for example, the percentage of the service charge paid by leaseholders. It is our understanding that, in both scenarios, new primary legislation would be required to make changes to the non-residential limit, either to increase the percentage of the internal floor area that can be occupied, or which is intended to be occupied, for non-residential use, or to entirely change the criteria upon which the limit is based. We therefore believe it would be preferable to give the Secretary of State the power, by means of regulations subject to the affirmative procedure, to vary the limit to account for changing circumstances. Amendment 1 would do so.

The amendment would amend clause 3, which itself amends section 4 of the 1993 Act by inserting new subsections into it. It would allow the Secretary of State to amend the whole of section 4 of the 1993 Act in any way they see fit to create a different description of a non-qualifying property. In short, it would hardwire flexibility in respect of the non-residential limit for collective enfranchisement claims into the Bill. We believe it is a sensible and reasonable amendment, and I hope the Minister agrees and makes it clear that the Government are happy to accept it. One lives in hope—I have done more of these Committees than I care to admit, so I know that even if I am right the Minister will not accept the amendment and will bring back a proposal at a later stage, but I hope he accepts the principle.

Before I conclude, I want to raise a separate but related matter to the non-residential limit that this clause makes changes to: how we define a building for the purposes of freehold acquisitions and right to manage claims, which we will debate in due course, and specifically whether buildings need to be structurally detached, with parts vertically divided, in order to be eligible for such rights. As hon. Members will recall, concerns about structural detachment and shared services were raised by several witnesses who gave evidence to the Committee last week. The fear that they highlighted was that the existing rules around structural dependency, particularly for buildings with extensive levels of overhang, such as those that arise when multiple blocks of flats are built over a shared car park, would frustrate many legitimate enfranchisement claims otherwise made possible by clause 3 and other provisions in the Bill that liberalise qualifying criteria and remove obstacles to enfranchisement.

The counter argument would be that rules around structural detachment and their applicability to the non-residential limit are necessary to avoid the creation of so-called flying freeholds and the block management problems that arise in such cases, and that such buildings are eligible for enfranchisement by a single claim if the tenants of the various blocks proceed together. The Law Commission appear to have agreed. It recommended retaining the existing test but making a small tweak that would allow minor deviations from the strict vertical division otherwise required for a part of a building to be separately enfranchisable. Notwithstanding the Law Commission’s reasoning, we believe it is important to properly consider whether the structural detachment rules will limit the opportunities for leaseholders to enfranchise using the liberalised qualifying criteria that clause 3 provides for.

Our amendment does not directly probe that issue because it is concerned with providing future flexibility in respect of legal title rather than physical building exclusions, but it is important that this Committee considers the impact of structural detachment rules as they currently operate, and the extent to which they may frustrate the Bill’s objective to expand access to enfranchisement. I would therefore be grateful if the Minister can tell us whether the Government have considered whether the rules on structural detachment may indeed frustrate leaseholders in that respect and whether they consider that a problem. If not, and they are convinced that there is good reason for the existing tests to remain in place, will the Minister tell us why they chose not to implement recommendation 33 of the Law Commission’s final report on leasehold enfranchisement, which would have provided for a relaxation of the currently strict approach to the 1993 Act’s vertical division condition? I look forward to the Minister’s response.

Barry Gardiner (Labour, Brent North)

I rise to support amendment 1. My hon. Friend the Member for Greenwich and Woolwich made an excellent speech in favour of it, and he is right to distinguish between this clause, dealing with enfranchisement, and later clauses on which we will look at the issues from the point of view of right to manage. Given the amount of reference to the Secretary of State in the Bill and that so much is left to him to decide afterwards, it is reasonable to ask the Minister why that has not been applied to this clause—otherwise, it looks as if the Government have considered the matter and ruled out any change in this area, which, as my hon. Friend suggests, is reasonable.

Mike Amesbury (Labour, Weaver Vale)

I, too, rise to support this very generous amendment from my hon. Friend the shadow Minister. It is pragmatic, and it would power up the Secretary of State, whoever that might be, to ensure that leaseholders are able to take control in hopefully larger numbers through extended enfranchisement. I hope the Minister will give the amendment very strong consideration.

Rachel Maclean (Conservative, Redditch)

May I throw the general issue of collective enfranchisement into the mix? The Minister may wish to come back on it at a later point if it suits him better. Many people in this situation have raised with me the sheer practicalities and difficulties of doing a collective enfranchisement. When people live in a huge block of flats with vast numbers of flats, they do not necessarily know who the other people are and certainly do not have their contact details. That, in and of itself, presents a barrier and an obstacle for some of these claims. We have heard evidence from groups affected by this situation—most notably the Free Leaseholders group, but there are many others—who have made this point repeatedly.

Matthew Pennycook (Labour, Greenwich and Woolwich)

The hon. Member raises a very pertinent issue. Is she minded to support our new clauses 30 and 31, which deal precisely with it?

Rachel Maclean (Conservative, Redditch)

The hon. Gentleman is a very persuasive orator in this Committee, as he is in many other fora, and I will definitely listen to those arguments when they are made. We all work in the spirit of improving this Bill. I very much hope that the Government will provide the explanations I have asked for, and specifically on this issue at this point.

Lee Rowley (Conservative, North East Derbyshire)

I thank hon. Members and Friends for their contributions. I will take them in turn. On the amendment, I find myself in the slightly unusual place of arguing against a Henry VIII power, as they are occasionally called and as he referred to them. As indicated, there are a number of Henry VIII powers in the Bill, and I am sure that people will have views on them when we get to them. Our colleagues in the other place often have very strong views on such powers. It is an unusual place to be, but I happily take it up.

I absolutely understand the point that hon. Members have made and the reality of what they are trying to articulate. The fact that we are making a change indicates that there are times when it is proportionate and reasonable to make changes. The reason for the Government’s not taking powers in secondary legislation—which I know, joking aside, that hon. Members would accept—is that there is a continuum for drawing or not drawing lines, and we think that this does not necessarily need to be on the line of taking powers in order to do things in secondary legislation, simply because this is a substantial change. It is being actively debated; Members are debating whether it is sufficient and, as my hon. Friend the Member for Redditch asked, precisely how it will work to improve the situation in practice. I think the Government’s preference is to keep that discussion in primary legislation. We recognise that primary legislation is always more challenging in terms of timelines and space in this place, but it is a sufficiently important change that it should be able to be debated in the way we are doing today.

Eddie Hughes (Conservative, Walsall North)

I understand that it is appropriate to future-proof legislation and allow for flexibility, but I agree with the Minister that a substantial change has already been made. Proportionately, we are talking about the number of buildings that have already been constructed, and therefore the people that we are helping. I fully appreciate that the shadow Minister is concerned about future developers gaming the system, but in terms of proportion, it is important that we focus our efforts on the buildings that have been built.

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to my hon. Friend for highlighting that. The shadow Minister expressed hope that the Government would agree with some of his amendments at some point. I am afraid that I will have to dash his hope on this one. We understand its purpose, but on the basis that I have articulated, we would prefer to keep this in primary legislation. I hope that the shadow Minister might consider withdrawing the amendment.

On clause 3, as it stands, we have been clear that we want to improve access to collective enfranchisement so that more leaseholders of flats can enjoy the benefit of freehold ownership. Many leaseholders in mixed-use but predominantly residential buildings are currently prevented from buying their freehold, as hon. Members have indicated. Clause 3 amends the 1993 Act to increase that limit from 25% to 50%. This has been consulted on widely and was recommended by the Law Commission. Where residential leaseholders take up the majority of the floor space in a building, it is our view that they should be able to access the long-term security and control that comes with freehold ownership, if they choose to do so.

We recognise that this change impacts freeholders. If the leaseholders choose to buy their freehold, the freeholder stands to lose ownership of individual buildings, and that may fragment ownership of some areas over a longer timeframe. We believe that impact to be justified not only because of the significant benefit to leaseholders but because freeholders will be compensated for that loss. We do not believe, as a principle, that the single contiguous ownership of space is absolutely necessary for buildings to be managed well.

We have also heard arguments from leaseholders that they will be unable to professionally manage mixed-use buildings. Although I understand their point, through, for example, the delegation of a building’s management to an agent, that should be overcome. I accept the points made and understand the shadow Minister’s point on the difficulty of ensuring that leaseholders can be engaged to the point where they pass the threshold, whatever the number—and all numbers are ultimately arbitrary. As he has indicated, I think the Committee will return to this, but we think the clause, as it stands, is the right approach. Therefore, we resist the amendment and hope that the shadow Minister will withdraw it.

Matthew Pennycook (Labour, Greenwich and Woolwich)

First, on the Minister’s response, I am slightly reassured but not wholly convinced. I would like the opportunity to go away, look carefully at his remarks and consider whether we need to come back to this, and I reserve that right, Mr Efford.

On amendment 1, I am frankly not convinced by the arguments made by the Minister and the hon. Member for Walsall North. We well understand the concerns that they have both drawn attention to. As I have said, it is an inherently subjective decision as to where that threshold is drawn. We also accept that, when it comes to existing buildings, the number of leaseholders who are potentially excluded will be small in number. But we want to avoid a situation where our constituents are coming to us in buildings with a 51% or 52% rate and saying, “We can’t collectively enfranchise as you intended. We are frustrated by the powers in the Bill.” On the basis of the Minister’s argument, we will have to say to them, “You have to wait a good few years for another leasehold Bill—maybe many years based on the history of leasehold reform—for such a change to come forward.” It is a continuum; this a substantial change, and we are trying to build some flexibility into that change.

Barry Gardiner (Labour, Brent North)

Does my hon. Friend agree that this will probably affect the little people a lot more than the big, because of the likelihood of achieving 50% commercial within a leasehold block? Many of our town and city centres have buildings with commercial below and very few flats above. Therefore, it is much more likely that it will be a group of people—yes, a small group—living in that situation, rather than in the Shard, coming to us complaining.

Matthew Pennycook (Labour, Greenwich and Woolwich)

My hon. Friend makes a good point: it is not just the number but the type of leaseholder who we are potentially excluding. All we are saying, as I argued in great detail, is that Ministers should have flexibility to change, if there is sufficient evidence to suggest that large numbers are being excluded or—I refer to the gaming point—we see developers building with a 51% area just to escape the threshold. We do not propose that the 50% change; we think it is an appropriate and fair starting point, but surely the Government need some flexibility in this area.

I must say to the Minister that this is the first time I have heard a Government Minister say no to Henry VIII powers, but I am afraid that his argument for saying no to them was, from my point of view, entirely expedient and not particularly well justified. I urge the Government to think again. I am minded, purely because of the way in which the Minister has responded, to push the amendment to a vote. If the Government are flatly refusing to look at the issue, we must make clear that we feel strongly about it.

Clause 4 - Eligibility for enfranchisement and extension: specific cases

Lee Rowley (Conservative, North East Derbyshire)

Clause 4 introduces schedule 1, which repeals rights that enable landlords to block a lease extension or freehold acquisition claim for a house or flat where the landlord intends to redevelop or reoccupy the property. Where the blockers are used, compensation is only paid to leaseholders in houses, not those in flats. The blockers apply to a minority of leases that have not been extended and are very near to ending.

Although that means that, in practice, rights are rarely used, enfranchising leaseholders should have the opportunity to make their decisions about the need and scope of redevelopment once they own the freehold. Leaseholders with few years remaining on their lease should have the option of extending and securing their tenure. Where a lease is extended, landlords will continue to have statutory break rights that can terminate leases for redevelopment. We will consider break rights in schedule 6 and cover further details about the blockers when we come to consider schedule 1. I commend the clause to the Committee.

Matthew Pennycook (Labour, Greenwich and Woolwich)

As the Minister has made clear, clause 4 concerns eligibility for enfranchisement and extension in specific cases. It gives effect to schedule 1, which repeals specific limitations on those rights under the 1967 and 1993 Acts. As the Minister has detailed, they include: the right of a landlord to defend a lease extension or collective enfranchisement claim on grounds of redevelopment; the right to defeat a freehold acquisition or lease extension claim for the purposes of retaking possession of the property for personal use; and the limitations that prevent a sublessee from claiming a lease extension if their sub-lease was granted by an intermediate leaseholder out of a lease that had been extended under the relevant Act.

We welcome the clause, which implements, although is not confined to, recommendation 98 of the Law Commission’s final report on leasehold enfranchisement. When considering the case for reform in this area, the Law Commission made clear that its proposal could reduce the value of the leaseholder’s lease as a result of the transfer of some enfranchisement rights from a leaseholder who has previously extended his or her lease pursuant to the legislation to the leaseholder to whom they had subsequently granted a sub-lease. However, the Law Commission ultimately determined that any such loss of value was overstated. Its reasoning was—assuming that I have understood the relevant technical arguments correctly—that there would be no difference in value between the sum that the intermediate leaseholders could expect to obtain if their lease was acquired in a collective freehold acquisition under the present law and the value of the intermediate leaseholder’s interest in the light of its proposal.

This may not be an issue that the Government have deliberated on further in any way—it is extremely technical—but, if the Minister is able and if they did, will he tell us whether they are confident that clause 4 would not reduce the value of the leaseholder’s lease as a result of the transfer of some of their enfranchisement rights in accordance with its provisions? In short, do the Government believe that the Law Commission was correct to assert that the potential for any such loss of value is overstated and that, therefore, we can approve clause 4 without any concern?

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to the hon. Gentleman for his contribution. As he indicates, this is—I think by common consent—a rare issue in the first place, not that that diminishes the importance of ensuring that we get it right. It is very complicated, as he has indicated; different leases will have different elements within them and it is impossible to comment on every single case or every single instance, as has been indicated, because of the complexity. I am not aware that there is an indication that there is a general reduction in the value of leases for the very small number that this will cover. I will write to the Committee if what I have just said is incorrect or needs clarification in any way. I hope that, on that basis, we can make progress.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I welcome that clarification from the Minister and the offer to provide us with further details should they be needed.

Schedule 1 - ELIGIBILITY FOR ENFRANCHISEMENT AND EXTENSION: SPECIFIC CASES

Lee Rowley (Conservative, North East Derbyshire)

I beg to move amendment 57, in schedule 1, page 82, line 16, at end insert—

“Exception to enfranchisement for certified community housing providers

3A (1) The LRA 1967 is amended as follows.

(2) In section 1 (tenants eligible for enfranchisement and extension), after subsection (1B) insert—

‘(1C) This Part of this Act does not confer on a tenant a right to acquire the freehold of a house and premises if the landlord under the existing tenancy is a certified community housing provider (see section 4B).’

(3) After section 4A insert—

‘4B Meaning of “certified community housing provider’

(1) For the purposes of this Part of this Act, a person is a “certified community housing provider” if the appropriate tribunal has issued a community housing certificate in respect of the person.

(2) A community housing certificate is a certificate that the tribunal has determined that the person—

(a) is a community land trust within the meaning of section 2(7A) of the Leasehold Reform (Ground Rent) Act 2022, or

(b) is of a description, or satisfies conditions, specified for this purpose in regulations made by the Secretary of State.

(3) The tribunal may issue a community housing certificate only in respect of a person that has made an application to the tribunal for the certificate.

(4) The tribunal may cancel a community housing certificate—

(a) on the application of the person in respect of which the certificate is issued, or

(b) on the application of a tenant affected by the certificate, if the tribunal considers that—

(i) the person in respect of which the certificate is issued does not fall within subsection (2)(a) or (b), or

(ii) the certificate was obtained by deception or fraud.

For this purpose a tenant is “affected by” a certificate if, by virtue of section 1(1C), the tenant does not have the right to acquire the freehold because the certificate is issued in respect of their landlord.

(5) The effect of the tribunal cancelling the certificate is that the person is not a certified community housing provider unless the tribunal issues a new community housing certificate.

(6) The Secretary of State may by regulations provide for—

(a) the procedure to be followed in connection with an application for a community housing certificate;

(b) the procedure to be followed for the cancellation of a community housing certificate (including in connection with an application for the cancellation);

(c) any matters to which the tribunal must have regard in deciding whether to issue or cancel a community housing certificate.

(7) The Secretary of State may by regulations make provision about the application of this Part in circumstances where—

(a) a landlord’s application for a community housing certificate has not been concluded when a tenant gives notice of their desire to have the freehold of a house and premises under this Part, or

(b) a tenant’s claim to have the freehold of a house and premises under this Part has not been concluded when a landlord’s application for a community housing certificate is made.

(8) Regulations under subsection (7) may in particular provide for—

(a) the claim for the freehold to be paused or to have no effect;

(b) a time period for the purposes of this Part to be extended in connection with the application;

(c) the landlord to compensate a tenant or reversioner in respect of reasonable costs incurred in connection with a claim to acquire the freehold—

(i) if the tenant ceases to have the right to acquire the freehold because of the issue of a certificate under this section, or

(ii) if the costs are incurred as a result of the claim being suspended because of an application for a certificate under this section;

(d) enforcement by the appropriate tribunal of any of the requirements of the regulations;

(e) the appropriate tribunal to make orders that are supplementary to the issue of a community housing certificate.

(9) Regulations under this section—

(a) may make different provision for different purposes;

(b) are to be made by statutory instrument.

(10) A statutory instrument containing regulations under this section (whether alone or with other provision) may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.’

3B (1) The LRHUDA 1993 is amended as follows.

(2) In section 5 (qualifying tenants for enfranchisement), after subsection (2)(a) insert—

‘(aa) the immediate landlord under the lease is a certified community housing provider (see section 8B); or’

(3) Before section 9 insert—

‘8B Meaning of “certified community housing provider’

(1) For the purposes of this Chapter, a person is a “certified community housing provider” if the appropriate tribunal has issued a community housing certificate in respect of the person.

(2) A community housing certificate is a certificate that the tribunal has determined that the person—

(a) is a community land trust within the meaning of section 2(7A) of the Leasehold Reform (Ground Rent) Act 2022, or

(b) is of a description, or satisfies conditions, specified for this purpose in regulations made by the Secretary of State.

(3) The tribunal may issue a community housing certificate only in respect of a person that has made an application to the tribunal for the certificate.

(4) The tribunal may cancel a community housing certificate—

(a) on the application of the person in respect of which the certificate is issued, or

(b) on the application of a leaseholder affected by the certificate, if the tribunal considers that—

(i) the person in respect of which the certificate is issued does not fall within subsection (2)(a) or (b), or

(ii) the certificate was obtained by deception or fraud.

For this purpose a leaseholder is “affected by” a certificate if, by virtue of section 5(2)(aa), the leaseholder is not a qualifying tenant because the certificate is issued in respect of their immediate landlord.

(5) The effect of the tribunal cancelling the certificate is that the person is not a certified community housing provider unless the tribunal issues a new community housing certificate.

(6) The Secretary of State may by regulations provide for—

(a) the procedure to be followed in connection with an application for a community housing certificate;

(b) the procedure to be followed for the cancellation of a community housing certificate (including in connection with an application for the cancellation);

(c) any matters to which the tribunal must have regard in deciding whether to issue or cancel a community housing certificate.

(7) The Secretary of State may by regulations make provision about the application of this Chapter in circumstances where—

(a) a landlord’s application for a community housing certificate has not been concluded when a nominee purchaser gives notice under section 13 of a claim to exercise the right to collective enfranchisement, or

(b) a claim to exercise the right to collective enfranchisement has not been concluded when a landlord’s application for a community housing certificate is made.

(8) Regulations under subsection (7) may in particular provide for—

(a) the claim for the freehold to be paused or to have no effect;

(b) a time period for the purposes of this Chapter to be extended in connection with the application;

(c) the landlord to compensate the nominee purchaser, a tenant or a reversioner in respect of reasonable costs incurred in connection with a claim to exercise the right to collective enfranchisement—

(i) if a person ceases to be a participating tenant because of the issue of a certificate under this section (and in this case the compensation may relate to reasonable costs for which the person is liable that are incurred after the person ceases to be a participating tenant),

(ii) if the participating tenants cease to have the right to collective enfranchisement because of the issue of a certificate under this section, or

(iii) if the costs are incurred as a result of the claim being suspended because of an application for a certificate under this section;

(d) enforcement by the appropriate tribunal of any of the requirements of the regulations;

(e) the appropriate tribunal to make orders that are supplementary to the issue of a community housing certificate.’

(4) In section 39(3)(a) (qualifying tenants for extension), before ‘(5)’ insert ‘(2)(aa), ’.

(5) In section 100 (orders and regulations), after subsection (2) insert—

‘(2A) But a statutory instrument containing regulations under section 8B (whether alone or with other provision) may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.’”

This amendment would provide for an exception to enfranchisement (but not extension) for tenants of certified community housing providers (persons certified as managing land for the benefit of local communities).

Clive Efford (Labour, Eltham)

With this it will be convenient to discuss Government amendments 30 and 32.

Lee Rowley (Conservative, North East Derbyshire)

As we considered regarding clause 4, schedule 1 repeals blockers to enfranchisement claims. The schedule repeals blockers that enable landlords to block claims for lease extensions and freehold acquisitions where the landlord intends to redevelop a property. The rights apply to cases where leases are very near to ending and, again, are rarely used. Compensation is paid to leaseholders only where the blockers are used in houses, not flats.

The schedule also repeals blockers that apply to niche cases, including: a blocker allowing a landlord or their family to reoccupy a house, which now applies to very few leases, due to its criteria; a public authority development blocker that has fallen from use; and a blocker to sub-lease extensions, where they are granted out of a superior extended lease.

The schedule makes consequential amendments that are necessary because of the repeals that I have just described. Where a lease is extended, landlords continue to have statutory break rights, which we will consider in later deliberations, and they may continue to seek voluntary agreements to end a lease. Public landlords may also have access to compulsory purchase orders. I commend that measure to the Committee.

I will now speak to amendment 57 and the consequential amendments 30 and 32. While we want to encourage many more leaseholders to buy their freeholds, there are good reasons for certain properties to be exempt from freehold ownership. For instance, certain community-led developments, providing affordable housing for local people, wish to be exempt from freehold acquisition—that is not their original purpose and it should not become so—so that the homes can remain affordable for the benefit of the community in perpetuity.

These amendments exempt community land trusts, a form of community-led housing, from freehold acquisition, as that model of housing relies on land being held in single ownership to remain as community-led housing. The amendments also provide a power for the Secretary of State to define in regulations further types of community-led housing, should that be necessary in future.

The exemption will only apply to an organisation once it has obtained a certificate from the tribunal that it satisfies the definition of community-led housing. That ensures that the exemption is properly targeted and not misused. An organisation will cease to benefit from the exemption if the certificate is cancelled by the tribunal. That includes where the organisation no longer satisfies the definition of a community-led housing organisation, or where the organisation asks the tribunal to cancel the certificate.

These amendments will protect the benefits of genuine community-led housing schemes from being lost to future generations. I therefore commend them to the Committee.

Finally, I beg to move amendment 58 in my name.

Clive Efford (Labour, Eltham)

Order. Amendment 58 is in the next group. We are debating Government amendments 57, 30 and 32 to schedule 1.

Lee Rowley (Conservative, North East Derbyshire)

My apologies, Mr Efford. I thought that we were debating these as a group. I will come to amendment 58 when we get to that group.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I rise briefly to speak to these four Government amendments and to make a wider comment on them and the other 116 amendments that have been tabled in the Minister’s name over recent days.

Having scrutinised these amendments as carefully as we could in the time available, we are as confident as we can be that none is problematic. Indeed, we very much welcomed the exemption provided for community-led housing.

As confirmed to the Committee by Professor Nick Hopkins, 18 of the 120 Government amendments tabled in Committee implement Law Commission policy that was not in the Bill as introduced and on which Law Commission staff have been involved in instructing parliamentary counsel. The vast majority of the other 102 amendments are merely technical in nature. Providing that the Minister sets out clearly their effect and rationale, as he just has in relation to this group of amendments, we do not intend to detain the Committee over the coming sessions by exploring the finer points of each.

However, I feel I must put on record our intense frustration at the fact that so many detailed Government amendments were tabled just days before commencement of line-by-line scrutiny began. The practice of significantly amending Bills as they progress through the House has become common practice for this Government and in our view it is not acceptable. Other Governments have done it, but it has become the norm under this Government. It impedes hon. Members in effectively scrutinising legislation and increases the likelihood that Acts of Parliament contain errors that subsequently need to be remedied, as happened with the Building Safety Act 2022; as the Minister will know, we have had to pass a number of regulations making technical corrections to that Act.

When it comes to this Bill, the Government have had the Law Commission’s recommendations for almost four years and access to Law Commission staff to aid parliamentary counsel with drafting. There really is no excuse for eleventh-hour amendments introducing Law Commission policy or technical amendments designed to clarify, correct mistakes, or ensure consistency across provisions.

Barry Gardiner (Labour, Brent North)

Is my hon. Friend as surprised as I was to find that a 133-page Bill has a 102-page amendment paper? As he says, this came late. It is not just Opposition Members who mind; it is hon. Members of all parties who want to adequately scrutinise the Bill. It makes life very difficult to go through detailed amendments, often amending previous legislation—therefore, we have to get that legislation and see what the impact of the changes is—and it impedes the work of Parliament in that respect. The Minister should explain why many of these amendments were tabled so late in the day.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I completely agree with my hon. Friend. I think I am justified in saying that it is frankly laughable that this has happened. We have an amendment paper that is almost—and may be, in due course—larger than the Bill itself. It reeks of a Government in disarray. Though I know that the Minister has picked up this Bill part-way through its development, I urge him not only to do what he can to ensure that when the Government publish any Bill it is broadly in the format they wish it to proceed in and see passed, but also to table any further amendments to this Bill in good time so that we can give them the level of scrutiny that leaseholders across the country rightfully expect.

Rachel Maclean (Conservative, Redditch)

I will not detain the Committee for long. In response to those comments from the Opposition, I observe only that when they were last in government— in 2002, if I am correct—they had the opportunity to address the system and rectify the failures that we are now dealing with. It is now left to this Government to do it. On that note, I want to say to my hon. Friend the Minister how important it is that the community-led housing sector is excluded. I would not normally say that about any form of housing, but we have recently strengthened the national planning policy framework to encourage more of that type of housing. We know it is popular and often commands local support, while other types of housing sadly do not, and we need to see more of it built. The sector has had extensive discussions. This is a sensible amendment, which I support.

Lee Rowley (Conservative, North East Derbyshire)

I thank my hon. Friend for confirmation of the importance of community-led housing, which we have spoken about previously. I absolutely agree about its importance.

I will not get into a broader conversation about the processes of government, other than to say that I note the concerns of the hon. Members for Brent North and for Greenwich and Woolwich. The intention is to give the Committee and the House as a whole as much scrutiny as possible. I am sure that the hon. Members will understand that, outside the bounds of the points that they are making, getting proposed legislation ready is often a complicated process—in particular ensuring that it is as correct as it can be. None the less, I have noted their points, but I hope to be grateful for their support for the underlying provision we are debating.

Lee Rowley (Conservative, North East Derbyshire)

I beg to move amendment 58, in schedule 1, page 82, line 28, at end insert—

“Eligibility of leases of National Trust property for extension

4A For section 32 of the LRA 1967 (saving for National Trust) substitute—

(1) Property is “inalienable National Trust property” for the purposes of this section if an interest in the property is vested inalienably in the National Trust for Places of Historic Interest or Natural Beauty under section 21 of the National Trust Act 1907.

(2) This Part does not prejudice the operation of section 21 of the National Trust Act 1907, and accordingly a tenant does not have the right under this Part to acquire the freehold of inalienable National Trust property.

(3) The right to an extended lease has effect subject to the following provisions of this section only if and to the extent that the existing tenancy demises inalienable National Trust property.

(4) In a case where the existing tenancy is a post-commencement protected National Trust tenancy, the tenant does not have the right to an extended lease.

(5) In a case where the existing tenancy is a pre-commencement protected National Trust tenancy, this Act is to have effect in relation to the right to an extended lease without the amendments made by the Leasehold and Freehold Reform Act 2024 (but without altering the effect of this subsection).

(6) In any other case, the right to an extended lease has effect subject to subsections (7) and (8).

(7) In determining whether the tenant has the right to an extended lease, the following requirements in section 1 do not apply—

(a) any requirement for the tenancy to be at a low rent;

(b) any requirement in section 1(1)(a)(i) or (ii) for the house and premises or the tenancy to be above a certain value.

(8) If the tenant exercises the right to an extended lease, the new tenancy must contain the buy-back term which is prescribed for this purpose in regulations made by the Secretary of State (the “prescribed buy-back term”).

(9) A “buy-back term” is a term which gives the National Trust the right to buy the whole or part of the extended lease if—

(a) it is proposed to make a disposal of the extended lease that is of a description specified in that term (which may be a disposal of the whole or a part of the property demised), or

(b) the National Trust exercises a prescribed buy-back term that is contained in a lease which is inferior to the extended lease.

(10) The prescribed buy-back term may, in particular, make provision about—

(a) the procedure where it is proposed to make a disposal that is of a description specified in the term;

(b) the procedure for exercising the right to buy;

(c) the price payable;

(d) the payment of costs incurred in connection with the operation of the term (including requirements for one person to pay costs incurred by another person);

(e) the operation of the term if the National Trust is not a party to the extended lease.

(11) If the National Trust is not the landlord under the extended lease, the National Trust may at any time apply to the appropriate tribunal for an order to secure that the extended lease is varied to contain (if or to the extent that it does not already do so) the prescribed buy-back term; and an order made on such an application may appoint a person who is not party to the extended lease to execute a variation of the lease.

(1) For the purposes of section 32, the existing tenancy is a “protected National Trust tenancy” if the tenancy is prescribed, or is of a description of tenancies prescribed, in regulations made by the Secretary of State.

(2) Regulations may not provide for a tenancy to be a protected National Trust tenancy unless the tenancy is within case A or case B.

(3) Case A: some or all of the property let under the tenancy is—

(a) property to which the general public has access, or

(b) part of property to which the general public has access (whether or not the general public has access to any property let under the tenancy),

whether the arrangements for public access are managed by the National Trust, the tenant or another person.

(4) Case B: the existing tenancy was granted to—

(a) a former owner,

(b) a relative of a former owner, or

(c) the trustees of a trust whose beneficiaries are or include—

(i) a former owner, or

(ii) a relative of a former owner.

(5) Regulations under section 32 or this section—

(a) may make different provision for different purposes;

(b) are to be made by statutory instrument.

(6) A statutory instrument containing regulations under section 32 or this section is subject to annulment in pursuance of a resolution of either House of Parliament.

(7) In section 32 and this section—

“commencement” means the day on which paragraph 4A of Schedule 1 to the Leasehold and Freehold Reform Act 2024 comes into force;

“disposal” , in relation to an extended lease, includes—

(a) the grant of a sub-lease of property demised by the extended lease;

(b) a change in control of a body (whether or not incorporated) which owns the extended lease;

(c) the surrender of the extended lease;

(d) a disposal (of any kind) for no consideration;

“former owner” , in relation to inalienable National Trust property let under a tenancy, means—

(a) a person who transferred the freehold of the property to the National Trust,

(b) a person who owned the freehold of the property immediately before its transfer to the National Trust by, or at the direction of—

(i) the Commissioners for His Majesty’s Revenue and Customs,

(ii) the Commissioners of Inland Revenue, or

(iii) the Treasury,

(c) a person whose executors transferred, or directed the transfer of, the freehold of the property to the National Trust, or

(d) a person who was a beneficiary under a trust whose trustees transferred, or directed the transfer of, the freehold of the property to the National Trust;

“post-commencement protected National Trust tenancy” means a tenancy which—

(a) was granted on or after commencement, unless it was granted under an agreement made before commencement, and

(b) is a protected National Trust tenancy;

“pre-commencement protected National Trust tenancy” means a tenancy which—

(a) was granted—

(i) before commencement, or

(ii) on or after commencement under an agreement made before commencement, and

(b) is a protected National Trust tenancy;

“relative” includes a person who is related by marriage or civil partnership;

“right to an extended lease” means the right under this Part to acquire an extended lease.’

4B For section 95 of the LRHUDA 1993 (saving for National Trust) substitute—

‘95 National Trust property

(1) Property is “inalienable National Trust property” for the purposes of this section if an interest in the property is vested inalienably in the National Trust for Places of Historic Interest or Natural Beauty under section 21 of the National Trust Act 1907.

(2) Chapter 1 does not prejudice the operation of section 21 of the National Trust Act 1907, and accordingly there is no right under Chapter 1 to acquire an interest in inalienable National Trust property.

(3) The right to a new lease has effect subject to the following provisions of this section only if and to the extent that the existing lease demises inalienable National Trust property.

(4) In a case where the existing lease is a protected National Trust tenancy, the tenant does not have the right to a new lease.

(5) If—

(a) the existing lease is not a protected National Trust Tenancy, and

(b) the tenant exercises the right to a new lease,

the new lease must contain the buy-back term which is prescribed in regulations made by the Secretary of State (the “prescribed buy-back term”).

(6) A “buy-back term” is a term which gives the National Trust the right to buy the whole or part of the new lease if—

(a) it is proposed to make a disposal of the new lease that is of a description specified in that term (which may be a disposal of the whole or a part of the property demised), or

(b) the National Trust exercises a prescribed buy-back term that is contained in a lease which is inferior to the extended lease.

(7) The prescribed buy-back term may, in particular, make provision about—

(a) the procedure where it is proposed to make a disposal that is of a description specified in the term;

(b) the procedure for exercising the right to buy;

(c) the price payable;

(d) the payment of costs incurred in connection with the operation of the term (including requirements for one person to pay costs incurred by another person);

(e) the operation of the term if the National Trust is not a party to the new lease.

(8) If the National Trust is not the landlord under the new lease, the National Trust may at any time apply to the appropriate tribunal for an order to secure that the new lease is varied to contain (if or to the extent that it does not already do so) the prescribed buy-back term; and an order made on such an application may appoint a person who is not party to the new lease to execute a variation of the lease.

(1) For the purposes of section 95, the existing lease is a “protected National Trust tenancy” if the lease is prescribed, or is of a description of leases prescribed, in regulations made by the Secretary of State.

(2) Regulations may not provide for a lease to be a protected National Trust tenancy unless the lease is within case A or case B.

(3) Case A: some or all of the property let under the lease is—

(a) property to which the general public has access, or

(b) part of property to which the general public has access (whether or not the general public has access to any property let under the lease),

whether the arrangements for public access are managed by the National Trust, the tenant or another person.

(4) Case B: the existing lease was granted to—

(a) a former owner,

(b) a relative of a former owner, or

(c) the trustees of a trust whose beneficiaries are or include—

(i) a former owner, or

(ii) a relative of a former owner.

(5) Regulations under section 95 or this section—

(a) may make different provision for different purposes;

(b) are to be made by statutory instrument.

(6) A statutory instrument containing regulations under section 95 or this section is subject to annulment in pursuance of a resolution of either House of Parliament.

(7) In section 95 and this section—

“disposal” , in relation to a new lease, includes—

(a) the grant of a sub-lease of property demised by the new lease;

(b) a change in control of a body (whether or not incorporated) which owns the new lease;

(c) the surrender of the new lease;

(d) a disposal (of any kind) for no consideration;

“former owner” , in relation to inalienable National Trust property let under a tenancy, means—

(a) a person who transferred the freehold of the property to the National Trust,

(b) a person who owned the freehold of the property immediately before its transfer to the National Trust by, or at the direction of—

(i) the Commissioners for His Majesty’s Revenue and Customs,

(ii) the Commissioners of Inland Revenue, or

(iii) the Treasury,

(c) a person whose executors transferred, or directed the transfer of, the freehold of the property to the National Trust, or

(d) a person who was a beneficiary under a trust whose trustees transferred, or directed the transfer of, the freehold of the property to the National Trust;

“relative” includes a person who is related by marriage or civil partnership;

“right to a new lease” means the right under Chapter 2 to a new lease.’”

This amendment would provide for tenants of National Trust properties to have the right to extension, subject to exceptions, and subject to a requirement to grant the National Trust the right to buy back the property in certain circumstances.

Lee Rowley (Conservative, North East Derbyshire)

My enthusiasm for the amendment was such that I started to speak to it earlier, but I am now moving it in the correct place.

The National Trust play a big role in looking after the heritage of the nation. Inalienable National Trust land is held for the benefit of the nation, forever. In order to ensure that that land remains in national ownership for future generations, freehold acquisition is restricted on National Trust land. None the less, the Government want to see National Trust leaseholders’ rights improved.

The amendment means that National Trust leaseholders will benefit from the new lease extension rights in line with other leaseholders, so that the 990 years will apply in this instance. The new rights will be subject to a narrow exception for a small number of leases of specified visitor attraction properties and donor leases. That will allow the trust to make bespoke lease agreements when a noteworthy property comes into its ownership—for example, where a property could be opened to the public in whole or in part, or where arrangements have been made with family members when a property has been gifted to the state and the trust itself. Those limited exceptions will be set out in regulations made by the Secretary of State in due course. Those leaseholders will retain their existing lease extension rights where they already have them.

The amendment also makes provision for the National Trust to buy back an extended lease at market value, if the existing leaseholder chooses to dispose of their lease. That will allow the National Trust to manage the long-term use of its inalienable land on behalf of the nation. I commend the amendment to the Committee.

Clause 5 - Acquisition of intermediate interests in collective enfranchisement

Lee Rowley (Conservative, North East Derbyshire)

The clause sets out how intermediate leases and leases of common parts are treated in collective enfranchisement claims for flats. In home ownership, intermediate leases are the middle rungs on a ladder between the freeholder at the top, and the leaseholder with rights at the end. Leases of common parts might cover parts of premises such as stairways.

The clause will introduce proposed new schedule A1 to the 1993 Act. The schedule sets out a series of gateways that require leaseholders to acquire certain interests, but also grants them further choices to reduce premiums. Qualifying leaseholders who participate in a claim must acquire all intermediate leases superior to their leases. They can, however, choose to leave in place the part of an intermediate lease superior to those qualifying leaseholders who are not participating. The intention is that this will help to reduce the premium where not all leaseholders wish to participate.

For example, leaseholders could leave the head lease in place above two out of eight flats, where the two are not participating. Where leaseholders acquire only part of a lease, they still need to acquire the relevant parts of leases above it in the chain to prevent a disrupted management structure.

The schedule sets out that leaseholders do not need to acquire a whole lease of common parts where certain legal tests are met, which will help to reduce premiums. The schedule prevents the acquisition of special cases of intermediate leases in collective enfranchisement. That includes qualifying leaseholders who own the immediately superior intermediate lease and landlords with enfranchisement rights over a flat. Those parts of leases can be retained by the owners to preserve their homes or tenure at the property. The schedule sets out various mechanisms for allowing leases to be left in place. That is done via an existing process called severing, and clause 16(6) gives the tribunal new powers to determine the terms of that.

The schedule preserves the necessary elements of the existing law that prevent ill effects arising from collective enfranchisement. Landlords can continue to require leaseholders to acquire interest, for instance where it would be impossible to maintain the premises. An exception that prevents the acquisition of interest held by public sector landlords continues. I commend the clause to the Committee.

Matthew Pennycook (Labour, Greenwich and Woolwich)

Clause 5 is extremely technical. It concerns the treatment of intermediate leases during a collective enfranchisement. I beg the Committee’s forgiveness for the level of complexity I am about to throw at the Minister; nevertheless, it is important to the leaseholders who stand to be affected. As the Minister said, the clause replaces section 2 of the 1993 Act on to the acquisition of leasehold interest, with a new schedule, A1, that will henceforth govern the acquisition of intermediate interests during a collective enfranchisement process.

New schedule A1 enacts part or all of five recommendations made by the Law Commission in chapter 13 of its 2020 report, and is uncontentious. However, when considering the treatment of intermediate leases and other leasehold interests in that chapter, the Law Commission recommended that a duty be imposed on the landlord dealing with the enfranchisement claim

“to act in good faith and with reasonable skill and care”

toward other landlords involved. Any such landlord should be able to apply for directions from the tribunal about the conduct of the response to the claim. It also recommended corresponding requirements for landlords who are not dealing with the claim to provide all necessary information and assistance to the landlord who is, and to contribute to the non-litigation costs of that landlord.

My reading of schedule A1 is that its effect will be that any settlement reached between a leaseholder and the landlord who is dealing with a claim, and any determination of that claim by the tribunal, will be binding on all other landlords. Assuming that I have interpreted the schedule correctly, can the Minister make clear why it does not appear to implement the duties and requirements that the Law Commission recommended should apply to landlords who are dealing with the claim and landlords who are not, respectively?

Finally, while I appreciate that we will consider the issue of valuation in more detail when we come to consider clauses 9, 10 and 11, I would be grateful if the Minister could also provide some clarification on how the Bill proposes to calculate enfranchisement premiums in instances where there are intermediate leases. Am I right in believing that schedule 2 treats intermediate leases as merged for the purposes of valuation?

On a related matter, the Minister will also be aware that the Law Commission set out the option of generally disregarding the existence of an intermediate lease when determining the premium payable on enfranchisement on the grounds that it would simplify the calculation and create greater fairness between leaseholders and between landlords, as premiums would not differ solely because of the existence or otherwise of one or more intermediate leases. It also recommended that on any individual lease extension claim, the rent payable by an intermediate landlord should be commuted on a pro rata basis.

If I have understood the relevant provisions correctly, neither proposal was incorporated into the Bill as first published. The second of those recommendations appears to be addressed by Government amendments 73 and 95. I would be grateful if the Minister could confirm whether my reading of those amendments is correct in that regard—via correspondence, if he needs to, as I appreciate that these are extremely technical questions. Broadly, we would like the Minister to expand on his remarks and provide some clarity about the treatment of intermediate leases during collective enfranchisement and the extent to which this part of the Bill as a whole reflects the Law Commission’s proposals. I look forward to hearing the Minister’s response.

Lee Rowley (Conservative, North East Derbyshire)

My response is short. I will happily write to the hon. Gentleman and to the Committee in due course on the technicalities to ensure that is correct.

Clause 6 - Right to require leaseback by freeholder after collective enfranchisement

Barry Gardiner (Labour, Brent North)

I beg to move amendment 127, in clause 6, page 9, line 42, at end insert—

“(3A) Any lease granted to the freeholder under paragraph 7A must contain a provision that any sub-lease created by the freeholder under their leaseback must contain a provision requiring the sub-lessee to contribute to the service charges reasonably incurred by the managing agent directly or indirectly appointed by the nominee purchaser.

(3B) The provision mentioned in subsection (3A) is implied into all pre-existing subordinate leases to a leaseback granted to a freeholder under paragraph 7A.”

Clive Efford (Labour, Eltham)

With this it will be convenient to discuss clause stand part.

Barry Gardiner (Labour, Brent North)

It is helpful to the Committee that we had the evidence session, because Liam Spender, the lawyer from Velitor Law, spoke directly about this matter.

We welcome leaseback because it is an important part of enabling tenants in commercial, or partly commercial, buildings to enfranchise. However, imagine that a person has just newly enfranchised, and some of the residents in that block have not participated in the enfranchisement process. It has been quite an acrimonious job debating and arguing with the landlord to get the enfranchisement to happen, but they finally have it. However, the landlord, or the former landlord, may not be happy about it. His capacity, now as the tenant, to cause problems is enhanced by the existing lease that those who have not enfranchised have with him. The moneys that need to be collected for the new landlord’s service charge do not come directly to them.

The whole point of the clause is to minimise those problems. There should be a condition in the leaseback to make it clear that any sub-lease that the former landlord gives, or retains, must contain a provision to say that the service charge is payable to the new landlord. Otherwise, we have a very torturous process in which those sums, which are required for the servicing of the building, may be delayed by a former landlord who feels aggrieved that he has lost control.

Matthew Pennycook (Labour, Greenwich and Woolwich)

My hon. Friend raises an interesting point, which has value. However, if he will forgive me, I would like some more time to consider any unintended consequences before I determine whether we could support it. Perhaps we could come back to it at a later stage, but if he is determined to push it I will come up with a position from the Front-Bench team.

Clause 6 inserts into the 1993 Act a new leaseback right for tenants participating in a collective enfranchisement claim, enabling them to require their landlord to take a leaseback of particular flats or units in the building, other than flats let to a participating tenant. We welcome the clause, as my hon. Friend made clear, which implements recommendation 21 of the Law Commission’s final report on leasehold enfranchisement.

At present, leasebacks are mandatory in certain circumstances. A landlord can also require leaseholders to grant them a leaseback of any unit not let to a qualifying tenant, or any flat or unit occupied by them and of which they are the qualifying tenant. However, leaseholders do not enjoy the right to require their landlord to take a leaseback with the effect that, in instances where the landlord refuses a request for a leaseback, perhaps because they are deliberately seeking to frustrate the process entirely, the premium payable in an enfranchisement claim includes the value of that interest.

The new leaseback right introduced by the clause will ensure that premiums that leaseholders would otherwise have to pay will be reduced. Collective freehold acquisition will become a possibility for larger numbers of them because a key funding constraint—namely having to pay for the reversionary value of those flats and units as part of their claim—will have been removed, and in many cases, collective freehold acquisition claims will be made considerably more affordable as a result. It will also increase certainty by ensuring that leaseholders have a far more accurate estimate of the costs of a claim at the outset. Finally, it is essential to ensuring that the increase in the non-residential limit from 25% to 50%, which we debated earlier, is of practical benefit to leaseholders. Without a new leaseback right, many leaseholders who would otherwise be interested in collectively enfranchising would be deterred because the cost of purchasing the whole of a building containing up to 50% commercial space would be prohibitive.

I have two questions for the Minister. The first concerns intermediate leases, which we have just considered under the previous clause. As I believe may have been highlighted by some respondents to the Law Commission consultation, there will be circumstances in which a leaseback of some units to the landlord would not reduce the premium by any significant amount, because the majority of the value in the units in question will be held not by the landlord but by an intermediate interest. This obviously raises again the issue of how the Bill treats the calculation of enfranchisement premiums in instances in which there is an intermediate lease. I would be grateful if the Minister could clarify whether the Bill seeks in any way to address the impact that intermediate leases might have on the benefits that leaseholders could otherwise expect to secure as a result of the new leaseback right.

My second question concerns the terms of the leaseback required under the new right. My understanding is that these will be for a term of 999 years at a peppercorn ground rent, as under the current law, but I would be grateful if the Minister could confirm that that is the case and perhaps provide the Committee with any other important detail about leaseback terms that will apply to them.

Lee Rowley (Conservative, North East Derbyshire)

I will turn first to the amendment from the hon. Member for Brent North. I appreciate the point that he has made, and he articulated it very well. He is rightly concerned that all those who have an interest in a building should need to pay for it. The amendment’s intent is to require any leases granted to include a requirement to make contributions to service charges, as he articulated. Our understanding—I have checked, following the introduction of his amendment—is that the existing law should sufficiently cover this and it should be unlikely that intermediate landlords will not ensure that their sub-lessees contribute to the service charges of a property. But I recognise that the hon. Gentleman has a lot of experience, knowledge and background in this area over many years, so if he wants to write to me separately, with examples of where we potentially have not understood the detail of the point that he is making, I will be happy to look at that in more detail.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I intervene just briefly so that I can put this on the record. One of my slight concerns about the amendment from my hon. Friend the Member for Brent North is that it could complicate pro rata charges for leaseholders. I just wonder whether the Government have given that any thought. In many ways, the amendment is entirely unproblematic, and we support the intention, but there are a couple of concerns, that being one. Is that part of the Government’s thinking on my hon. Friend’s amendment?

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to the hon. Gentleman for pointing that out. As indicated, this all needs to be considered in the round. Very few things come without trade-offs and without consideration of other implications. One reason why we are not able to support this amendment today is that we do not think that it is necessary. As a result, I hope that the hon. Member for Brent North will not push it to a vote but will withdraw it. If we have missed something, I will be happy to look at that separately. As the hon. Member for Greenwich and Woolwich suggested, this is something that we do not think is necessary in the wider scheme of things, but if there is a thing that we have missed, I will happily take further information on it.

I will now turn to clause 6, which has been discussed already to some extent. The Government want to broaden access to collective enfranchisement, so that more leaseholders can buy their freehold. However, we recognise that increased access will remain theoretical if many leaseholders are unable to afford to buy their freehold. Therefore, this enfranchisement must be cheaper if leaseholders are to gain the benefits of the ownership that is being sought.

Clause 6 introduces a leaseback right for leaseholders that, if they elect to use it as part of a claim, will in some cases significantly reduce the up-front price that they must pay. “Leaseback”, as has been indicated, is the term commonly used to refer to an intermediate lease over part of a building that is granted to the outgoing freeholder as part of an enfranchisement claim. This leaseback covers the value of the unit, which is therefore retained by the outgoing freeholder and reduces the cost for leaseholders of buying the freehold. Currently, the outgoing freeholder can require the leaseholders taking forward a collective enfranchisement to grant the freeholder a leaseback of any non-qualifying units in a building. Clause 6 gives leaseholders an equivalent right to require the outgoing freeholder to take a 999-year leaseback, at a peppercorn rate, of any non-participating units in the building as part of the claim.

In mixed-use buildings, the question of affordability is even more acute, as leaseholders must pay for the freehold interest in non-residential parts of the building, which they have no existing financial interest in, as well as their flats, which they already partly own.

As we have discussed, clause 3 will increase the non-residential limit to 50%, allowing collective enfranchisement claims to take place in buildings with more non-residential elements. Leasebacks will therefore be of particular benefit to leaseholders who take advantage of the broader access that clause 3 provides. Subsections (2) to (4) will allow leaseholders to require the freeholder to take a leaseback.

Clause 6(5) will insert new paragraphs 7A and 7B in schedule 9 to the 1993 Act. Paragraph 7A sets out which types of units can be subject to a leaseback and which cannot, and the arrangements for where the freehold title of a unit is split. Leaseholders can require the outgoing freeholders to take a leaseback of their respective parts, but leasebacks must be granted for all parts of the unit overall. This differs from the slightly narrower right for outgoing freeholders, because they cannot insist on a leaseback of a unit if the freehold title is split.

Paragraph 7B sets out the terms of leasebacks where leaseholders require them to be granted. The terms are the same as those that apply when a freeholder requires a leaseback to be granted. These terms are chiefly that the leaseback must be for 999 years at a peppercorn ground rent; I hope that that answers the second question from the hon. Member for Greenwich and Woolwich. Any departure from these terms must be agreed by both parties or directed by the appropriate tribunal. This change will mean that collective enfranchisement is more affordable for leaseholders who wish to buy their freehold. Leaseholders will be less financially constrained by the number of flats that do not qualify or do not wish to participate in a claim, because, if they choose, they will not need to pay for those units.

Those leaseholders in mixed-use buildings that meet the requisite qualifying criteria for collective enfranchisement will no longer be limited by the non-residential element. This change will significantly improve access to collective enfranchisement in a practical sense, allowing more leaseholders real choice over whether they wish to own their freehold.

I think I have dealt with the second question from the hon. Member for Greenwich and Woolwich, which was about 999-year leases and peppercorn rents. I am happy to write to him on the specifics of intermediate leaseholders if that is helpful. I commend the clause to the Committee.

Barry Gardiner (Labour, Brent North)

I am grateful to the Minister for his remarks. It is clear that the Government do not feel that the amendment is necessary and that there will not be a problem with the newly enfranchised freeholder being able to obtain the service charge from all the leaseholders. If that is the case, I will be happy to withdraw the amendment.

I would, however, like the Minister to set out in writing to me and the Committee precisely why he believes that there is not a problem. If we still disagree, we can then bring the amendment back on Report and discuss it further. It would be really helpful to be clear about why the Government are confident that problems will not arise. We have made legislation on the basis of optimism before, and unfortunately our experience is that freeholders can often be quite vindictive.

Lee Rowley (Conservative, North East Derbyshire)

I am happy to give the hon. Gentleman that assurance, and I will be happy to write to him.

Barry Gardiner (Labour, Brent North)

On that basis, I beg to ask leave to withdraw the amendment.

Clause 7 - Longer lease extensions

Clive Efford (Labour, Eltham)

With this it will be convenient to discuss clause 8 stand part.

Lee Rowley (Conservative, North East Derbyshire)

Currently, leaseholders of houses can claim a lease extension of 50 years, and leaseholders of flats can claim an extension of 90 years. Leaseholders of houses can only ever make one lease extension claim; leaseholders of flats will need to claim repeated extensions both within and between generations, with associated costs. Leaseholders often have to worry about the value of their lease falling as the term runs down.

Clause 7 will amend the lease extension term for houses in the 1967 Act, from 50 to 990 years, and for flats in the 1993 Act, from 90 to 990 years. There is no restriction on the number of claims that can be made, although with a 990-year extended term it is envisaged that only one extension will be necessary; 990 years is as long an extension as can be reasonably given while facilitating multiple periods of 90 years to allow for consistency with existing leases and redevelopment breaks.

Increasing to 990 years the term of the statutory lease extension right maximises the benefit to leaseholders and gives leaseholders much greater security in their homes. This is particularly important where leaseholders do not qualify or are not in a position to buy their freehold.

The increase in the extension term will mean that leaseholders do not have to claim repeated extensions, pay associated repeated transaction costs or worry about the value of their property falling as the lease runs down. Leaseholders of flats and houses will be able to obtain a lease extension of 990 years at a peppercorn ground rent, in exchange for a premium determined by the amended valuation scheme set out in clauses 9 to 11.

I turn to clause 8. Currently, a lease extension for a house under the 1967 Act is made without payment of a premium, but in return for a modern ground rent during the period of the extension, where that rent is similar to a market rent. Because we are increasing the extension term to 990 years at a peppercorn rent, landlords will need to be compensated by payment of a premium, as is the case for flats. The clause makes amendments to the 1967 Act to ensure that landlords will be sufficiently compensated when a 990-year lease extension at a peppercorn is granted for a house. A qualifying leaseholder can obtain an extension of 990 years at a peppercorn ground rent in exchange for a premium determined by the amended valuation scheme set out in clauses 9 to 11.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I will spend some time on the clauses, because they are important.

As the Minister set out, clause 7 changes the lease extension rights given to tenants of houses and tenants of flats by the 1967 and 1993 Acts, respectively, to provide for a 990-year lease extension rather than, as is currently the case, a 50-year extension under the 1967 Act and a 90-year extension under the 1993 Act. Clause 8 works in conjunction with clause 7 to that end, by making consequential amendments to the 1967 Act that are required to set ground rents under such extensions at a peppercorn and ensure that the premium payable is based on the amended valuation scheme set out in clauses 9 to 11, as the Minister made clear.

Taken together, the clauses not only provide for the standard lease extension term to increase to 990 years at a peppercorn rent, but ensure that the rights available to tenants under each of the Acts are made equivalent. This reform, which draws on recommendations 1 and 2 of the Law Commission’s final report on leasehold enfranchisement, is long overdue. The right to extend one’s lease is important for leaseholders who do not qualify for a right of freehold acquisition or who do enjoy such a right but, for whatever reason, either cannot or do not wish to purchase the freehold. It is particularly important for leaseholders who live in blocks of flats, as the vast majority do in constituencies such as mine, because it is the only enfranchisement right they can exercise when acting alone. However, both the 50-year lease extension available to leaseholders of houses under the 1967 Act and the 90-year extension available to leaseholders of flats under the 1993 Act are too short to provide adequate security of tenure.

The principle of a right to an extension of a considerably longer time is therefore the right one. As the Minister argued, it will particularly help to protect those leaseholders with short remaining lease terms at the point at which the extension is secured, and will avoid the need for a second extension to be sought and secured in short order. We also feel that the choice of a standard 990-year lease is the right one. Once the principle of a very long lease extension has been accepted, the case for taking the additional period as close to 999 years is watertight. A more modest extension, which the Law Commission did consider, would provide only temporary relief and would require many leaseholders to make a second claim in relatively quick succession. The proposed 990-year lease extension right will avoid the need for further lease extension claims in the future, will provide leaseholders with a substantially enhanced interest in their homes and will bring leaseholders extremely close to outright freehold ownership.

It is also right that we legislate to introduce a uniform right applicable and available to both leaseholders of houses and leaseholders of flats, so we support the alignment of the lease extension rights for which the clause provides. There is no justification for maintaining the discrepancy in the law as it stands, where the right to a lease extension for a house is considerably less favourable than the equivalent right to a lease extension for a flat. In sum, we fully support leaseholders who qualify for a lease extension under the 1967 or 1993 Act being given the right, on payment of an appropriate premium, to extend their lease and in so doing to secure a peppercorn rent.

I have five questions for the Minister about these important clauses. The first relates to redevelopment. In recommending that an additional period of 990 years should be added to the remaining term of the existing lease in the cases of both houses and flats, the Law Commission also proposed that redevelopment break rights should be maintained. These are rights accorded to a landlord to terminate a lease that has been extended and to regain possession of the property in order to carry out redevelopment work. The Law Commission recommended that they should be maintained during the last 12 months of the term of the original lease or the last five years of each period of 90 years after the commencement of the extended term.

We fully appreciate that many leaseholders will find the very notion of such break rights problematic, and the Law Commission recognises that maintaining rolling break rights, as under the 1967 Act, would create unnecessary uncertainty. However, difficulties relating to the lifespan of buildings are an issue we have to grapple with, not least because they will become more pressing over time when lease extensions become significantly longer by default. As the Law Commission’s recommendation on development break rights has not made it into the Bill, I would be grateful if the Minister explained the Government’s determination to omit it. Some would argue that there is a strong case, in a world in which 990-year lease extensions are the default, for the sensible provision of development break rights.

My second question concerns when the rights provided by clauses 7 and 8 will come into effect. The clauses present leaseholders who have recently obtained a lease extension, or who will be compelled to obtain one—for the purposes of moving home or mortgaging, say—before the commencement date, with a real dilemma, because the only way they will benefit from a 990-year extension and a peppercorn ground rent in instances where that is not already the case is by making a further extension claim in short order. The fact that any such leaseholders will have recently extended their lease with, in all likelihood, a peppercorn ground rent will mean that the premium payable will be low, but there will still be a cost.

I would be grateful if the Minister made it clear whether the Government have given any consideration to how to ensure that the premium in such cases is as low as possible, to avoid some leaseholders facing costs that others will not face, simply as a result of the sharp transition from one set of arrangements to another. Better still, could he outline precisely how commencement will operate in respect of the clauses? Will he tell us whether the Government might consider amending the Bill to ensure that the new rights come into force on, or very soon after, Royal Assent, so that they can be enjoyed by leaseholders confronting the need for an extension as quickly as possible?

My third question relates to ground rents. We will explore the issue in considerable detail when we consider clause 21, but I would be grateful if the Minister told us, in relation specifically to lease extensions, how clauses 7 and 8 will operate if the Government’s response to the consultation “Modern leasehold: restricting ground rent for existing leases”, which closed last week, is, as per the Secretary of State’s declared preference, to table amendments to enact option 1, namely capping ground rent at a peppercorn for all existing leases from a given date.

All we want to know is whether the ground rent provisions in clause 8 would be rendered irrelevant. In other words, are they unnecessary? If so, will the Government have to make further amendments to the clause to ensure that, in conjunction with clause 7, it provides only for a 990-year lease extension and does not make changes to ground rent provisions in any way? Presumably they will need to be abolished by further Government amendments that will potentially abolish ground rents for all existing leases.

My fourth question concerns the technical matter of who the competent landlord is for the purpose of lease extensions under the 1993 Act. The provisions within clauses 7 and 8 will mean that even in circumstances where there is a head lease of 999 years at a peppercorn rent, which is a fairly common occurrence, the owner will be entitled to all of the premium. Nevertheless, it is the freeholder, not the head lessee, who will have to handle the claim. That raises the obvious question of why a freeholder should engage with the process at all, given that it will leave them out of pocket.

Schedule 1 to the 1967 Act includes provisions designed to overcome the problem by providing that a long head lessee is the reversioner. Will the Minister tell us why a similar set of provisions is not being introduced to the 1993 Act to provide that a very long head lessee in a block of flats is to be regarded as the competent landlord, not the freeholder? If there is no justification for that omission, might the Government go away and consider whether it is necessary to overcome that problem?

My fifth and final question concerns the Government’s commitment to use the Bill to legislate for a ban on new leasehold houses. The Government amendments providing for such a ban have still not been tabled, so we cannot engage with the detail. However, given that it is the Government’s stated intention effectively to do away with leasehold houses, I would like to probe the Minister on the reasoning behind providing, by means of clauses 7 and 8, leaseholders in houses with a right to a 990-year lease extension at a peppercorn rent, for which the premium will be the same as if it were a freehold enfranchisement. Is this—I am being generous to the Minister—an example of muddled thinking on the Government’s part that might require review? I look forward to hearing the Minister’s response.

Richard Fuller (Conservative, North East Bedfordshire)

I want to speak briefly in support of the third point made by the shadow Minister, the hon. Member for Greenwich and Woolwich, in which he addressed the interaction of the Bill with the Government’s ground rent consultation. If I heard him correctly, he was asking the Government at least to be clear as to how those recommendations will affect the Bill. He was asking the Government to be clear on their position; I will not go as far as that, because I think the Government have the discretion to decide when they want to announce that or not.

However, there is another issue that the Minister could perhaps consider: the impact assessment on the valuation, which we, as Members of Parliament, are being asked to address in this Bill. As we heard in the evidence sessions, the current impact assessment may potentially omit a significant amount of value that will be taken into account as part of the ground rent reform. If it is the Government’s intention to introduce amendments on that, as the shadow spokesman was asking, it would be useful to have clarity from the Minister on that, but we should also ask the Minister whether an updated impact assessment can be presented to incorporate what the value of those recommendations would be.

Rachel Maclean (Conservative, Redditch)

I rise briefly to add my support for some of the comments and, most importantly, for the ability of leaseholders to extend their leases. As we know, this is one of the most egregious features of the current system: people buy properties that they then find have short leases, after which they are whacked with massive charges coming out of the blue; they do not understand how those charges are calculated, and they end up having to pay them because they have no choice. They are completely over a barrel. I know that leaseholders will massively welcome this change, which is one of the most important parts of the whole Bill.

Having said that, it is vital that we understand when we will see the Government’s response on the ground rent consultation, as my hon. Friend the Member for North East Bedfordshire and the shadow spokesperson, the hon. Member for Greenwich and Woolwich, have said. It will, of course, affect the calculations.

I also want to raise with the Committee the number of people who have sat in front of me and asked, “When will you bring this forward? I don’t know whether to extend my lease now or wait another year or for another consultation”. It is a huge number of people. I want to make this point to everybody: if we get this right, it will affect a lot of people very beneficially.

Barry Gardiner (Labour, Brent North)

I am glad that co-operation is breaking out across the aisle. It seems that this change is one of the really big issues of the Bill. Looking through the Bill, yes, there was disappointment that it does not go far enough and there is no commonhold, but this is a real change. It is something that Members on both sides of the Committee have welcomed, and we heard evidence from our witnesses about just how important it is. It is strange, therefore, that we do not now see the meat of it in the Bill. I will not go so far as to say that it is more than strange, as my hon. Friend the Member for Greenwich and Woolwich suggested, but we do need it.

This provision will liberate a whole group of people who fear what we call the ground rent grazers. They are the ones—the freeholders—who have created a rentier structure over the past 15 years. It did not even exist 25 years ago. What people used to do 25 years ago, when the ground rent was payable, was write a cheque to the freeholder, and the freeholder would bin it. Then, three weeks later, the freeholder would send a lawyer’s letter to the tenant, saying that because they had not paid their ground rent on time, they were now being charged £625 for their legal fees in having to chase it, including the £25 ground rent. That is a bad practice that has evolved and the Government need to clamp down on it and get it sorted.

Lee Rowley (Conservative, North East Derbyshire)

I thank hon. Members for their questions and comments, which I will try to address. There is obviously a desire to understand the interaction of the two clauses with the outcome of the consultation that closed last week. We saw to some extent in our deliberations last week, on the first two days in Committee, when we took evidence, that this is a contested area. As a result and notwithstanding the fact that by convention in this place we have the ability to speak freely, I hope the Committee will understand that I will limit my remarks.

I understand the eagerness, enthusiasm and legitimate desire of the Committee to understand the position that we will seek to provide. We will provide that to the Committee, and publicly, as soon as possible. It will not be possible for me to answer all the questions that were asked today. I accept the point made by my hon. Friend the Member for North East Bedfordshire that there is a difference between process and decision, but some elements of the process could be impacted by the decision and it will therefore be difficult to engage in hypotheticals at this stage. However, we will respond to the legitimate points that the Committee has made as soon as we are able to do so.

I agree with the points made by the hon. Member for Greenwich and Woolwich and by my hon. Friend the Member for Redditch about the importance of clarifying how quickly the provisions will come into force. Again, that is a difficult one to answer because we need to get through this process. We have no idea what the other place might or might not do or how quickly the process will go. Although we are all grateful for the confirmation from my Labour colleagues that we are seeking to move this as quickly as possible, it is difficult to be able to answer the question at this stage, but I hope to say more in due course.

On the fourth question posed by the hon. Member for Greenwich and Woolwich, about the competent landlord, my understanding is that we are not changing the law in that regard.

Richard Fuller (Conservative, North East Bedfordshire)

I am listening carefully to the Minister and sort of accept what he says, but may I make a couple of points? First, he has talked about how the Bill has to go through the House of Lords, but we are the democratically elected Chamber. The interaction of the two provisions represents substantial transfers in value between different parts of our community—rightly or wrongly. Decisions should correctly be made with the full information by this House. We should not go through a procedure when information is presented in the unelected House, which then comes back to the Commons. With our remit as Back-Bench Members of Parliament, we are very restricted in what we can do to amend that.

Secondly, the Minister talked about how the points about value are hypothetical. That is the case only because the Government have not made a decision. Once they make a decision, those points of value can be forecast. They are no longer hypothetical but judgmental, so it really is within the Minister’s remit to be able to move from hypothetical to his own forecast. Having said that, I fully accept what the Minister has said so far.

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to my hon. Friend for his legitimate points. He is absolutely right that it is important that right hon. and hon. Members have an opportunity to debate at the earliest possible opportunity the complex interaction of what we may or may not choose to do with the consultation. I take his point about hypotheticals. My point was simply that there are a number of different options in the Bill. Some of them are substantially different, as my hon. Friend indicated in some of his questions last week. To go through all the elements of the potential outcomes in all of those different options would be a substantial amount of work and potentially not necessary on the basis that we are likely to choose some rather than all of them. None the less, where I have missed anything out, I will—

Eddie Hughes (Conservative, Walsall North)

The point being made is one of proportion. We are talking about a couple of a billion pounds versus up to £25 billion, £27 billion, which is a significant amount of money for the Government to be considering transferring, as my hon. Friend says, from one party to another. The size of the costs that might be incurred from one party to another makes it important for us to know as soon as possible.

Lee Rowley (Conservative, North East Derbyshire)

I absolutely accept the potential significance of the quantum involved, which is why we all seek to be as clear as we can at the earliest opportunity.

Barry Gardiner (Labour, Brent North)

I am conscious that we are talking about the transfer of value as if it were neutral, but leaseholders have been telling us for a long time that this value has been unjustly acquired from them in the first place. The Government seek simply to remediate the position that the law has got itself into. When we consider this, we must understand the injustice that has been perpetrated on people who live in leasehold houses, and have been paying ground rents that have been racked up in an unconscionable way for far too long.

Lee Rowley (Conservative, North East Derbyshire)

The hon. Gentleman is articulating his argument with passion, as he did last week on a similar point in some of the witness sessions. I reconfirm to the Committee that we seek to process the outcome of that consultation as quickly as we are able, and to provide hon. Members and the public with clarity at the earliest opportunity. None the less, while recognising the important interaction of clauses 7 and 8 with the consultation, I hope that underneath there is general consent for clauses 7 and 8. I hope I have covered most of the questions asked. I will write to the Committee in response to the question from the hon. Member for Greenwich and Woolwich about redevelopment, because I need to obtain clarity on that.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I welcome the Minister’s response. He did not address—perhaps he will find time on another occasion—the Government’s potential inconsistency in, on the one hand, extending lease extension terms at peppercorn for houses, under the 1967 Act, and, on the other, seeking to ban leasehold houses in their entirety. The Government might want to explore that, to ensure the package as whole is consistent and working as intended. He is welcome to write to me on that point, as well as on redevelopment rights.

I take the Minister’s point on the competent landlord. My point was not whether the Bill is fine as drafted; it is the fact that we need to change the 1993Act to account for the set of circumstances I outlined. There is provision in the 1967 Act to cover that problem. As far as we can tell, this Bill does not amend the 1993 Act to account for it. I encourage him to look at that.

On the two substantive issues, there is inherent uncertainty about commencement. Of course, we want the Bill to progress and apply to as many leaseholders as possible. I was trying to stress to the Minister the need to look at the point at which the Bill kicks in. In some Bills, certain provisions come into force at First Reading. We are worried, as the Bill goes through Parliament, about a set of leaseholders being left out of these rights unfairly, given the time we have spent progressing the Law Commission’s recommendations. I encourage him to give some thought to that.

On ground rents, I understand entirely that the matter is commercially sensitive. I am not asking for an opinion from the Minister on the consultation, although we do need an indication of the Government’s thinking as soon as possible. We also need to understand, as I will come to when we debate clause 21, whether the Government intend to enact any recommendations from that consultation, via this Bill.

What I am looking for is clarity, which he should be able to give us at this stage, on this hypothetical point. If any proposals from that consultation are enacted, clauses 7, 8 and 21 are potentially redundant. We simply need to know whether the Government will further overhaul those clauses, if they take forward any of those recommendations. That is hypothetical, but the Minister should be able to answer. The Government have presumably thought, “Yes: if that scenario occurs and we take forward one of the five options, we will or will not have to revise the Bill.” That is the answer that I am simply looking for from the Minister. If he wants to take this opportunity to clarify that, I would welcome it.

Lee Rowley (Conservative, North East Derbyshire)

The hon. Gentleman tempts me to go into hypotheticals. Let me at least dip my toe into that for a moment. Let us take some of the potential outcomes of the consultation discussed today, for example, and the question of whether they potentially will make redundant some of the clauses. In one of the instances, where there is a fear, concern or question, it would still be the case that potentially amendments to clause 8 would need to be introduced, for example, on ground rents, so depending on the scenario it would not make that entirely redundant. I will not go into hypotheticals to their logical and total extent, but I hope that that gives some assurance that consultation has been held and we will bring forward what is appropriate in due course.

Clause 9 - LRA 1967: determining price payable for freehold or lease extension

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss the following:

Clauses 10 and 11 stand part.

Government amendments 59, 62 to 65, 67 and 68.

Schedules 2 to 4.

Government amendment 72.

Schedule 5.

Lee Rowley (Conservative, North East Derbyshire)

This Bill reforms the valuation process for leaseholders when they buy their freehold or extend their lease. It does this by repealing parts of existing legislation and setting out a new valuation scheme that leaseholders and landlords must follow. We are debating a large group of measures, so I am afraid—and I apologise to the Committee in advance—that my comments may be slightly longer than normal, in order to cover all of those.

Clause 9 amends the Leasehold Reform Act 1967, which deals with lease extensions and freehold acquisitions of houses. Subsections (1) to (3) make necessary changes to sections 8 and 9 of the 1967 Act in relation to freehold acquisitions. It mandates the use of clause 11, which sets out the new valuation scheme for calculating the price payable. Subsection (4) applies that to lease extensions for houses. I will shortly come on to that new valuation scheme covered in clause 11, the detail of which is contained in schedule 2. However, these changes introduce the valuation reforms contained in the Bill. I commend clause 9 to the Committee.

Clause 10 makes the necessary changes to the Leasehold Reform, Housing and Urban Development Act 1993, which deals with flats. The clause amends sections 32 and 56, and repeals schedules 6 and 13 of the 1993 Act, which deal with the freehold acquisition of a block of flats and lease extensions of a flat. In a similar way to clause 9, clause 10 mandates the use of clause 11 in determining the price payable for enfranchisement transactions—in relation to flats, rather than houses—and sets out the new valuation scheme for calculating the price payable. I commend clause 10 to the Committee.

Clause 11 provides the basis of the new valuation scheme that must be used to determine the price payable when exercising any of the four enfranchisement rights, which are acquiring the freehold of a house, extending the lease of a house, acquiring the freehold of a block of flats and extending the lease of a flat. The clause sets out that the premium is comprised of two elements: first, the market value, which is to be calculated in accordance with schedule 2; and, secondly, any other compensation, which is to be calculated in accordance with schedule 3.

Schedule 2 details the steps for calculating the price payable for lease extensions and freehold acquisitions. It also contains key reforms to the valuation process, including the removal of marriage value and hope value, capping ground rent at 0.1% of the freehold value in the valuation calculation, and providing the Secretary of State with a power to prescribe two rates used to calculate the premium.

Richard Fuller (Conservative, North East Bedfordshire)

The Minister just mentioned that schedule 2 eliminates marriage value. He will be aware, from the impact assessment, that there is a financial value associated with marriage value. Can the Minister tell me whether the Government think that marriage value is a real value—that it has intrinsic value—or is it just a number that has no material value at all? Is there something behind what marriage value is, and what is the rationale for eliminating it?

Lee Rowley (Conservative, North East Derbyshire)

That is an interesting philosophical question to debate straight after lunch. The Government recognise that marriage value is utilised in a number of transactions. Therefore, some people in the market—some individuals, some economic actors—must deem that there is some form of additional value by marrying the lease and the freehold up within a shorter period of time. How that works, what exactly that is, and how expansive it is, is for others and for the market to determine, in a traditional and—something that I think we both would support—a wholly capitalist way. However, there does seem to be something to it, hence why we are making some of the reforms that we are making, given the feedback that we have been given.

Richard Fuller (Conservative, North East Bedfordshire)

I am grateful to the Minister for his summary, which I think is very accurate. Given that the Government have assessed that there is something real there, and decided that they want to eliminate the marriage value—obviously, a lot of work has gone into the preparation for that—what representations has he received about the legal underpinnings of this particular aspect of the legislation for those from whom that value is being taken?

Lee Rowley (Conservative, North East Derbyshire)

The Government remain confident that the proposals being put forward are compliant with their responsibilities. I have only been in post for a short period of time, and my hon. Friend the Member for Redditch may wish to comment on this. The conversations I have had with the people who—I say this without breaking their confidence, given that some of them might be in camera—have come to me to represent their position have not focused on that as the main issue.

Schedule 2 also sets out how to divide the premium into shares, where multiple landlords are entitled to receive a share—for example, where there are intermediate landlords. We will go through that in further detail when we consider schedules 2 and 3. I commend clause 11 to the Committee.

I now turn to amendment 59, which is in my name. This amendment exempts business tenancies which qualify for enfranchisement rights under the Leasehold Reform Act 1967 from the standard valuation method. It is not our intention for the standard valuation method—especially the rent cap—to apply to any business rent, and this amendment closes off that possibility for a relatively rare type of lease where it might otherwise have existed. I commend this amendment to the Committee.

Turning to amendments 62, 63 and 64, which are in my name. Amendment 62 makes minor technical changes to assumption 1 in schedule 2 so that the clause operates as intended. The change to sub-paragraph 15(2)(a) makes the phrasing clear that the clause is about freehold acquisitions. The change to sub-paragraph 15(2)(b) is a minor and technical correction so that where a lease extension is granted by someone other than the freeholder, such as a head lessee, the assumption of merger with the interest of the person granting the extended lease still takes place for the purposes of the valuation methodology for intermediate leases. Amendments 63 and 64 fix typographical errors, by changing the word “property” to “premises”, as the latter is defined.

Turning to amendments 65, 67 and 68 in my name, these make small changes in schedule 2 so that the provision works as it was intended. Amendment 65 clarifies the valuation of the market value of a flat as it is to be used for the purposes of identifying the ground rent cap in the calculation of the term value. Amendment 67 makes a change to ensure that the definition of what is being valued is clear. Amendment 68 clarifies the valuation of the market value of a flat as it is to be used for calculating the reversion.

These amendments are intended to avoid any mis-interpretation of the standard valuation method. Some may mistakenly interpret the schedule as requiring a valuation of a flat as if it were a flying freehold which could cause it to be undervalued. Amendment 68 clarifies the meaning so that what is being valued is the share of the value of the freehold of the whole building and appurtenant property that is attributable to the flat. The amended text will make sure that the standard valuation method is interpreted as we intend it to be. I commend these amendments to the Committee.

Schedule 2 sets out how to apply the new standard methodology when calculating the premium that leaseholders of houses and flats need to pay to extend their lease or acquire their freehold. This includes fundamental reforms to the valuation process, including the removal of marriage value—which we have just discussed—and the capping of ground rent at 0.1% in the valuation calculation. These changes help to fulfil the Government’s aim to make it cheaper and easier for leaseholders to extend their lease or buy their freehold. The schedule is extensive and broken into seven parts.

Part 1 introduces schedule 2 and requires that this schedule must be followed when calculating the market value of the premium for lease extensions and freehold acquisitions for houses and flats. It also sets out how to divide the premium into shares where loss is suffered by multiple landlords. Part 1 also makes clear three definitions for the purposes of this schedule: that of “collective enfranchisement”, “freehold enfranchisement” and “lease extension”.

Part 2 of 7 sets out the basis of the market value for freehold acquisitions and lease extensions. Paragraph 2 does this for freehold acquisitions. It sets out that the market value of the freehold used in calculating the premium is the value of the freehold as if sold on the open market by a willing seller. Paragraph 3 does this for lease extensions. It sets out that the market value of the lease extension used in calculating the premium is the value of the 990-year extended lease, at peppercorn ground rent, as if sold on the open market by a willing seller. Paragraph 4 states that the premium for both acquisitions and extensions is to be determined in accordance with part 3 and on the basis of the assumptions set out in part 4.

Part 3 of schedule 2 sets out that while in general the standard valuation method must be used to determine the value of acquiring a freehold or extending a lease, there are some exceptions. The specific exceptions are set out in paragraphs 6 to 8 and include where the lease has five years or less remaining, where the property is subject to a home finance plan lease and where the lease is a market rack rent lease. For these purposes, a market rack rent lease is where the leaseholder has either paid no premium or a very low price for the lease in return for paying a high rent.

Paragraphs 9 to 11 set out some further detailed exceptions, including where there has been a pre-commencement lease extension of a house for 50 years at a modern ground rent. These paragraphs also explain that the standard valuation method only applies to a relevant flat in collective enfranchisements, where relevant flat excludes, for example, flats with shared ownership leases. Paragraph 12 provides that the standard valuation method can still be used to determine the value of the relevant freehold acquisition or lease extension, even when it is not compulsory to do so. Paragraph 13 makes it clear that the standard valuation method is to be used if either part 3 requires it to be used or where it is used on a voluntary basis in relation to the property being valued.

Part 4 of schedule 2 sets out the assumptions on which the valuation of freehold acquisitions or lease extensions are to be based, whether or not the standard valuation method is being used. Assumption 1 is that intermediate leases and freehold interests are treated as merged for the purposes of valuation where they are acquired in a freehold acquisition or where they are affected by the lease extension claim. The effect of assumption 1 is to simplify the process and lead to savings in process costs and premiums in some cases. This does not apply to intermediate leases that are not acquired. Assumption 2 is that the leaseholder is not, and never will be, in the enfranchisement market, nor will the leasehold and freehold interests by other means be married. The effect of assumption 2 is that no marriage or hope value is payable for either a lease extension or freehold acquisition. This will reduce premiums where leases have 80 years or fewer remaining and remove the cliff edge that leaseholders currently face.

Assumption 3 is that the relevant property is assumed to be in good repair and has not been improved under the current lease. The effect of assumption 3 is to prevent the premium being either decreased in favour of the leaseholder, due to the property being held in disrepair, or increased in favour of the landlord, due to the leaseholder having made improvements. The latter case would result in the leaseholders having paid for the improvements twice. In the case of a freehold house acquisition, assumption 3 will only apply to the current lease, removing the ability to chain together multiple long leases.

Assumption 4 is that where leasebacks are taken, their value is deducted from the freehold value, reducing the premium. Other assumptions can still be made when determining the market value, as long as they are consistent with assumptions 3 and 4 as well as the other provisions of schedule 2. The remaining paragraphs cover circumstances where the premium may have to vary, including to account for burdens or benefits on the title, differing terms in extended leases, leases with five years or fewer remaining, and where leaseholders own their immediately superior intermediate lease.

Part 5 sets out the standard valuation method, which is made up of three steps for lease extensions and freehold acquisitions. Combined with the assumptions set out in part 4, the resulting premium for many leaseholders will be lower than it otherwise would have been where they have leases with 80 years or fewer remaining, or high or escalating ground rents. The first step is to determine the term value, which is the capitalised value of the ground rent payable over the term of the lease. In other words, the landlord is compensated with a lump sum, instead of continuing to receive future ground rent for the remainder of the lease term. Part 7 must be used to determine the capitalised value.

In calculating the term value, a ground rent cap will now apply so that the valuation calculation will cap the ground rent at 0.1% of the freehold value. There are two exceptions. The first is where the leaseholder has paid no premium for the lease. The second is where the lease was purchased for a low premium in exchange for a high rent. In step two, the reversion value is determined. The reversion value compensates the landlord for the loss of the reversion at the expiry of the lease in the case of freehold acquisition and for the delayed reversion in the case of a lease extension.

For freehold acquisitions, the reversion value is the market value of the freehold at the expiry of the lease, discounted at the deferment rate. In a collective enfranchisement, this is calculated for each qualifying leaseholder’s lease. For lease extensions, the reversion value is the market value of a 990-year lease at peppercorn ground rent on the same terms as the new, extended lease and beginning at the end of the term of the current lease, discounted by the deferment rate.

Step 3 requires that the market value of the property determined by the standard evaluation method is found by adding the term and the reversion values in steps 1 and 2, and in collective acquisitions all the relevant term reversion values subject to any adjustments, as provided for in other parts. Part 5 gives powers to the Secretary of State to specify the deferment rate used to calculate the reversion value and includes a requirement to review the rate every 10 years.

Richard Fuller (Conservative, North East Bedfordshire)

Will the Minister explain why it is right to give the decision on those rates to the Secretary of State?

Lee Rowley (Conservative, North East Derbyshire)

It is ultimately a balance, as we discussed this morning when talking about the fundamentals in clause 3, I think. We believe that it is proportionate to allow the Secretary of State to make a decision here, but I will be clear now and as we go through the Bill that that should be done only on an occasional basis, hence the reference to the 10-year review period.

Richard Fuller (Conservative, North East Bedfordshire)

Does the Minister accept that the absence of knowing what will be in the Secretary of State’s mind about what rate he or she may set affects the analysis of what is being done economically with the Bill quite significantly? What thought has he given to the legal challenge risks of holding back what is in the Secretary of State’s mind about what the rates would be?

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to my hon. Friend for his comments. I accept the point that we need to get as much of that information to members of the Committee, the House and the public as quickly as we are able to do so. I know that he and other Members recognise that we have a process that we need to go through in that period, and I hope that we give enough information about the process and changes, although I accept the interaction that he indicates. My hon. Friend is an experienced Member; it is not my intention in any way, but forgive me if I say anything that he knows.

Obviously we must get through the process of working through the legal risk. It is a very contested area—we can see that already. There have already been indications that people will look at it extremely closely, so it would not surprise me if it was looked at extremely closely in most ways. There are potential legal issues on both sides, in that whatever we come out with, any public policy change often or always creates a group of people who do not like it, and they have an ability through due process and the law to see if there is anything in there that they dislike. I guess this is no different, but equally the Government are cognisant that it creates a challenge in this domain. We must go through the process of having the consultation, which only closed quite recently, and giving enough time for that to be considered and transacted on before we come to a conclusion; otherwise, there is potential legal risk there as well.

Part 6 sets out how a premium determined under parts 1 to 5 should be divided among multiple parties, such as intermediate landlords and freeholders. That creates a saving in process costs for leaseholders, as the work of dividing the premium is picked up by the affected parties. The part specifies that the division is made according to how each person’s interest has been devalued or lost by the claim, termed as “loss”. It sets a formula that takes the market value, provided for in parts 1 to 5, multiplies it by that person’s loss and divides it by the total losses of all the parties. Loss cannot include marriage value or hope value, which we are preventing from forming part of the premium.

Finally, part 7 of seven sets out how to calculate the term value—that is, the capitalised value of the ground rent payable for the remainder of the term of the lease. That is a component of the premium, as explained in part 5, under different rent review clauses. Depending on the lease, the ground rent payable may not be subject to review; or it may be subject to review such that the rent payable after the review is known; or it may be subject to a review that makes reference to price inflation, for example, or the capital or rental value of the property. Part 7 is entirely technical and sets out the formulae that apply in each case. The inputs into the formulae are the rent payable, the term for which it is payable and the capitalisation rate. In all cases, where the rent payable exceeds 0.1% of the freehold value of the property, the ground rent cap applies, so that the rent payable is treated as if it is only 0.1% of the freehold value. Part 7 gives a power for the Secretary of State to specify the capitalisation rate used to calculate the term value, and includes a requirement to review that rate every 10 years. I commend the schedule to the Committee.

I turn to schedule 3. As stated in debate on clause 11, schedule 3 sets out when, and to whom, “other compensation” must be paid by enfranchising leaseholders. “Other compensation” is a concept in law; it acts as a top-up payment that landlords and other parties can claim if an enfranchisement claim impacts on their interest. The schedule permits other “reasonable” compensation to be paid in two types of cases. Although it continues an existing practice, it works to ensure that the top-up cannot be used to claim for values already covered by the standard valuation method in part 5.

First, other compensation is available where the enfranchisement claim causes a devaluing of property outside the premises subject to the claim. Secondly, other compensation is available where loss is caused to other property not subject to the claim, but only to the extent that it is referable to a person’s ownership of any interest in other property. If, for example, a landlord owns an unbroken parade of terraced houses and there is a freehold acquisition of one house, the landlord might claim for other compensation if they can demonstrate that the value of the whole parade has been diminished due to one of the houses enfranchising. The schedule sets out that it does not matter whether the landlord had other options, such as leasebacks, but did not take them. It also sets out definitions, such as the meaning of development value. I commend the schedule to the Committee.

I turn to schedule 4, which defines many of the terms used in schedules 2 and 3 that determine the make-up of an enfranchisement premium. It points to different parts of the schedules to demonstrate the meaning of those terms. For instance, the meanings of “term value” and “reversion value” are as described in schedule 2. I commend the schedule to the Committee.

I turn to amendment 72 in my name, which corrects a typographical error in schedule 5 so that the provision works as intended. As a result of the amendment, Paragraph 7(3)(b) of that schedule will require the tenant, not the competent landlord, to pay into the tribunal the whole price payable. That is a new protection that could be used, for instance, where there are valid concerns about the conduct of a landlord handling the claim on behalf of others. I comment the amendment to the Committee.

Schedule 5 makes necessary consequential amendments that help to plug into existing law the new valuation methodology set out in clause 11 and schedule 2. It makes amendments to support the new valuation process in enfranchisement claims that involve multiple landlords, such as intermediate landlords and freeholders. That includes a fallback power, which enables leaseholders to require the transfer of property or grant of a lease, even if the landlords have not yet settled on how to divide the premium. That would be useful, for instance, if multiple landlords were in dispute with each other and it was threatening to hold up the claim.

The provisions also require the premium to be paid to the landlord handling the claim on behalf of the other landlords. They prevent landlords from requiring leaseholders to pay their share directly, as that would undermine the new valuation process where it involves intermediate leases. However, a new protection has been added that permits an individual landlord to require the whole price to be paid into the tribunal. That could be used, for example, where there are valid concerns about the conduct of a landlord handling the claim on behalf of others. With huge gratitude for allowing me to go through all of that, I commend schedule 5 to the Committee.

Matthew Pennycook (Labour, Greenwich and Woolwich)

The Minister made a commendable effort to explain the various Government amendments and schedules in this part of the Bill. Briefly, for purposes of clarity, let me say that we have a lot to say about valuation, but we will do so when we debate schedule 2.

Rachel Maclean (Conservative, Redditch)

I add my words of appreciation to those of the shadow Front-Bench spokesman for the Minister’s explanation. I want to add one brief point of clarity on marriage value, which was alluded to by my hon. Friend the Member for North East Bedfordshire. It is fair to say that marriage value is seen as one of the outdated, feudal and predatory practices of freeholders. It prevents people who have bought a house or flat in good faith from enjoying their property as we would expect them to do in a free country such as the UK.

I will not detain the Committee, but I recommend that anybody watching these proceedings or interested in the subject reads an absolutely fantastic article on leaseholdknowledge.com. That is a leaseholders’ charity that has done a superb and detailed work on this topic. An article by a gentleman called Linz Darlington explains that marriage value is particularly unfair, because people pay not only their own fees, but the freeholder’s fees, and there is a concept of hypothetical profit. The whole thing is just a massive racket—I am not qualified to explain it any better than that, so I leave my comments there. Many people have told me that marriage value should go. It is part of an outdated system. Read the article on the website. I commend the Government for bringing forward this very important part of the overall package of reforms.

Richard Fuller (Conservative, North East Bedfordshire)

It is a good to see you in the Chair, Dame Caroline. We are blessed on this Committee to have three people who have been Housing Ministers, the great experience and expertise of the hon. Member for Brent North, and the good graces of the shadow Minister, the hon. Member for Greenwich and Woolwich. I was recently speaking about the Bill to my right hon. Friend the Member for Ashford (Damian Green), who pointed out that there were discussions about some of the measures in the Bill when he was the adviser to Sir John Major in No. 10 in the 1990s.

Barry Gardiner (Labour, Brent North)

Does the hon. Gentleman suspect that the reason why my hon. Friend the Member for Greenwich and Woolwich allowed such a grouping is that we hope that after the next general election, Parliament will be presented with a new Bill that does away with this nonsense altogether?

Richard Fuller (Conservative, North East Bedfordshire)

Well, maybe. I am not a mind reader, either of the mind of the shadow spokesperson or the mind of the great British public. They will make their decision at the next election and, I hope, return a Conservative Government for a fifth consecutive term, but that is not the import of my points today.

My first point was that the public should beware when they see such circumstances, not because anything is necessarily wrong, but because it is a leading indication that consensus is overwhelming scrutiny.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I rise to make two points. The first is that I will speak in great detail about valuation when we come to schedule 2, as I have indicated, because the meat of the Opposition’s concern relates to the deferment rate, which we will come to. Secondly, does the hon. Gentleman broadly agree that one of the reasons why this or any Committee would struggle to properly scrutinise this large group of schedules and clauses is that none of us has relevant expertise as professional valuers? One of the reasons why the Levelling Up, Housing and Communities Committee asked to undertake pre-legislative scrutiny of the Bill was precisely that it is so complex in certain areas, this area being a case in point.

Richard Fuller (Conservative, North East Bedfordshire)

It is a fair point, but I think we can get our heads around most of it. The general principles in this Bill are no different from those of others. There are some formula there; and when we see a formula such as one over one minus c to the power of n with a deferment rate of theta, we get worried that we do not understand. It takes us back to doing calculus at school. However, we can understand it—though within it there are some important things. The shadow Minister makes a good point, but there are amendments to schedule 2: the Government’s, his, and mine. I will make the point—and if I am wrong the Clerks will correct me, through the Chair—that we are debating the overall principle of schedule 2, not just the detail, though it is fair to raise some points about that.

I will come on to calculations of particular discount rates later, when we debate schedule 2. I thought the Minister gave an excellent answer about the legal challenge and this being a hotly contested area. That is what I want to draw the Committee’s attention to. On all sides, whatever our views, we want to ensure that we pass the Bill in a way that most minimises the chances of legal challenge. I want to do that from a Conservative perspective. I believe in property rights, competition, and freedom of choice.

I want to go through some of the issues raised by schedule 2 that we heard about in the evidence sessions, and in written evidence that the Committee received. The first is the recognition that, of necessity, the Bill deals with existing contracts that a buyer and a seller, for want of better phrases, have entered into. We can read into the circumstances in which a contract was undertaken. We have evidence that people did not know what they were getting into, and about the imbalance of power in some circumstances. My question is: what aspects of the buyer-seller contract and the imbalance of power are a particular matter for change? There have been good arguments on that so far. In my view, it is an open question. In dealing with existing contracts that, because of their terms, require certain other actions, have the Government in this Bill struck the right balance between extending freedom of choice and rebalancing rights on the one hand, and transfer of value on the other? I am not entirely sure that they have. Perhaps later we can discuss that a bit more. The first stage of dealing with existing contracts involves the question of whether the exchange of value has been a short-cut for expansion of freedom of choice. I do not know what the answer is, because I am not as smart as some of the people here.

Given that we are dealing with existing contracts, the second point is that a political decision has been made to redistribute. That word seems to have power beyond my intention; it seems perhaps that somehow I regard redistribution as evil. It is not, necessarily, but the point is that this is a political decision, and it involves redistribution. Schedule 2 determines the overall basis for that.

When we make a political decision, it is important to have the facts and figures in front of us. If we do not have them, what we are determining may have unintended consequences, or may overreach our intention. What we may believe is right in principle might in practice turn out to be a horrendous mistake. It is clear that, as a point of principle, people feel that we should make some changes, and I have no qualms about that, but in the absence of full facts and figures, there is a risk that we are making a decision in the context of trying to minimise legal challenge. The Secretary—the Minister, but he should be a Secretary of State—responded to two points about this.

First, there is the issue of the lack of full knowledge. We do not know what discount rate will be applied by the Secretary of State. Anyone who does any evaluation of any business or anything in finance will understand that a huge amount of value sway goes with what discount rate is used. We do not know what it is, so we will not know ultimately what it encompasses.

Secondly, we know from the impact assessment that there is line after line of transfers—not benefits—in the Bill. Colleagues can go to the impact assessment if they wish, and see line after line of transfers that are non-monetised. Frankly, most of these are pretty reasonable and probably minimal, but I do not know—maybe other Committees do and can tell me clearly—what the economic value of each of them was. “Non-monetised” is not the same as having no monetary value. The Committee ought to know whether they are non-monetised because it was too hard to monetise them, or because they were of no monetary value. I do not expect the Minister to respond on each one because, trust me, there are a lot of lines, but this adds to our lack of knowledge about the financial consequences of the political decision to redistribute.

Thirdly, we have a pending—it may now be finished—public consultation on ground rents. The Secretary of State will have the responses to analyse, and he was pretty clear about his intention at the start, which hon. Members mentioned, so I think it is important that that information comes forward. It is a pity that the information is not here right now for us to evaluate in Committee and come to a clear consensus on. The hon. Member for Brent North and I could shake hands across the aisle and agree on it. We do not have the information to reach that conclusion. For those three important reasons, we are a little in the dark when it comes to this political decision to redistribute. Perhaps the Minister can assist me on that.

This is important, because in schedule 2 we are eliminating completely value, which is a real thing. We know that. We are expunging it completely for a political reason. We have inadequate analysis on who that value is being taken. We have good insight into who they might be, but we do not know who they are. It is important to understand that that these are real values—values that have been subject to abuse. That goes to the political underpinning and political imperative for making these changes, which is, as I understand it—again, I am very naive on these issues—that there has been abuse in the system. I have listened to the evidence about the sources of that abuse, and it is clear that the abuses are real. The Government are not acting blindly on the basis of no facts, and the Opposition are supporting them because they see that there are some wrongs to be corrected.

Andy Carter (Conservative, Warrington South)

Not only have the Government accepted that, but this follows a very detailed investigation by the Competition and Markets Authority, which concluded that there were significant wrongs. It came to my constituency, interviewed my constituents and assessed that there were problems with mis-selling. That is why this is such an important issue for so many people. They put their hard-earned money into what they thought was going to be their property, but discovered that that was not the case.

Richard Fuller (Conservative, North East Bedfordshire)

My hon. Friend is absolutely right. That is why we are passing this legislation. I want to be clear about that, because there will be circumstances in freeholder-leaseholder relationships where the performance has been inadequate or poor. There may be circumstances where the performance has been perfectly reasonable.

Matthew Pennycook (Labour, Greenwich and Woolwich)

In some ways, I am doing the Government’s job, but I would just probe the hon. Gentleman on the Government’s intention, specifically in relation to value. At least on the basis of my understanding, it is not to right an abuse in the system. It is to remove payments, which are very real for leaseholders, that are based on a hypothetical profit that some would argue should not exist in a fair market. It is not about righting specific wrongs but a systemic wrong in the valuation process, from the Government’s point of view.

The hon. Gentleman may take issue with that, perhaps because he does not agree with one of the main objectives of the Bill—to make the enfranchisement process cheaper for leaseholders—or maybe he just takes issue with the fact that we do not know the prescribed figures that the Secretary of State will set, so we do not have a real sense of the values. The clause is attempting to right a systemic wrong as regards marriage value and other components of the existing valuation method. It is not just dealing with specific abuses in the system by bad faith actors.

Richard Fuller (Conservative, North East Bedfordshire)

I agree with the shadow Minister. I am not trying to undermine the intentions of the Bill—I agree with them—but I want them to be legally secure, and I want to probe and understand them. He said that these are hypothetical profits, but they are not quite hypothetical. They would only be hypothetical if they were not real, but as we have already heard, they are. They are calculated profits, and it is a matter of how that calculation is determined that is at issue, not whether they are hypothetical or real.

Matthew Pennycook (Labour, Greenwich and Woolwich)

The hon. Member tempts me to engage in the philosophical debate that the Minister alluded to, and I think it is debatable whether they are real. Let me put it to him like this. If I own a vase, is the value of a second vase increased by the fact that I own the first one? That is what marriage value is doing; it is the hypothetical profit from the joining of the leases. I think it is at least debatable as to whether it is real in the sense that he advances, although it is very real for leaseholders who have to pay it if they seek to enfranchise under the current system.

Richard Fuller (Conservative, North East Bedfordshire)

Somebody had to mention the vase.

Eddie Hughes (Conservative, Walsall North)

Or the cup and saucer?

Richard Fuller (Conservative, North East Bedfordshire)

I am just so glad it was not me. The Minister and shadow Minister are far more experienced than I am on this matter, so I am drawing on a much more limited data set than they are. But, to date, I have not heard loud and clear that there is no such thing as marriage value. I have heard that there are questions about how it is calculated and that we do not think it should apply, which is a political point of view. If the shadow Minister is trying to say that there is something else he wants, between the issues of calculation and of making a political decision to transfer it, that is interesting to me. I do not think that he has been trying to make that point, and I certainly do not think we have heard that evidenced.

It is a crucial point. The idea that we are expunging values that relate to something real, which is under contract, is a material point in trying to make this legislation bulletproof or, as the Minister rightly says, to ensure that, in a hotly contested area, the Government get it right. In circumstances where there are real values —although perhaps massively overemphasised—where performance has been exemplary or to contract, where there has been no question of the performance required under contract, and, finally, where there has not been price gouging, or this automatic doubling every two years, and the rents have remained the same, what is the reason to apply legislation retrospectively?

Rachel Maclean (Conservative, Redditch)

Does my hon. Friend not agree that the concept of ground rent itself is “gouging”, to use his word, because it is a payment for nothing? Clearly, the freeholders are receiving payment through service charges and the price of buying and selling a lease. The ground rent is a payment for nothing. Whether it is, in his words, a reasonable one and not gouging but is kept low and so on, still, in my mind and certainly that of many leaseholders, the Competition and Markets Authority, the Government and the analysis, it is a payment for nothing and so, fundamentally, it is wrong and unfair. I wonder what my hon. Friend thinks about that.

Richard Fuller (Conservative, North East Bedfordshire)

The former Minister makes an excellent point. She knows much more about this than I do and therefore I am very wary about falling into the trap of answering her question directly. What I will say is that, for the purposes of my speech today, what I think is not important. What is important is this: what will the courts find, and how have we ensured that the Bill is robust in those circumstances? I will say, without answering my hon. Friend’s question, that people sometimes sign contracts for things that they do not use or that have no value, but there is an argument that they signed a contract and it had these line items in it. People may sign a contract that gives them access to a swimming pool or gym and they may not use it. I do not mean to be pejorative, because these are very important issues. I am just saying that the principle is that, whether ground rent is real or not, it is still subject to the fact that it was part of a contract that was signed, and that will have weight in any legal challenge to the Bill.

Barry Gardiner (Labour, Brent North)

rose—

Richard Fuller (Conservative, North East Bedfordshire)

I do not know whether the hon. Member for Brent North wants to intervene and give me some more knowledge.

Barry Gardiner (Labour, Brent North)

The hon. Member’s colleague, the hon. Member for Redditch, made a pertinent intervention in relation to ground rent, but I wanted to try to address what philosophical issues he is having with marriage value. Marriage value is an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values. That is why the cup and saucer and the vase analogies are apposite. He seems to me to be seeking to say, “Well, if this exists, if people are actually paying this, it’s real; it’s not a fiction.” Let me set out my understanding of what the Government are trying to do and, indeed, what Parliament has tried to do on many occasions, going back to 1967, after we passed the legislation to right what had happened in the Custins v. Hearts of Oak case, where marriage value had been introduced against the will of Parliament. The point is this. If someone is the leaseholder, the person who owns that lease to the home, it is much more important to them than to anybody else in the world that they get the freehold together with it. That is the other vase; that is the saucer that goes with the cup. To them, that is important and it has a value that it does not have for the rest of the world. That is why they are constrained, and that is the constraint that Parliament has repeatedly tried to free people from, because they are not simply a willing seller in a free market with a willing buyer in a free market. This person, as the leaseholder, is a buyer under special measures.

Caroline Dinenage (Conservative, Gosport)

Order. May I interrupt you and point out very gently that this is quite a lengthy intervention, Mr Gardiner?

Barry Gardiner (Labour, Brent North)

I am happy to be guided by you, Dame Caroline. I think I have made the point and I hope that the hon. Member for North East Bedfordshire will be able to take it on board, because it does go to what I think he would recognise from a free market point of view as the essence of why this is important.

Richard Fuller (Conservative, North East Bedfordshire)

Dame Caroline, you were not in Committee when I made a point of order on the hon. Member for Brent North, perhaps inadvisably, but this time I thought his intervention was very helpful, so I would like to commend him. That point is very helpful to my understanding, and I appreciate his building my understanding further. We will have to see.

My purpose in making these points is to look at the possibilities of legal challenge. I am not a lawyer so I am probably one of the first to do that anyway, but the principles behind schedule 2 relate to existing contracts and make a political decision to redistribute value to full or some extent. In Committee, however, we are doing this where we do not have complete financial information about the extent to which we open ourselves to the charge that our decision will have unintended consequences. We are putting a lot of faith in the Government to get that right.

We are dealing with different situations: where, in a relationship between a freeholder and a leaseholder, freeholders are providing poor service or have been price gouging; or where other freeholders have entered into contracts, done all the right things under that contract and behaved in a very excellent way, but we are now retrospectively going to change all their contracts. I want to put on the record some of my concerns about doing so. I understand that the intention of the House as a whole is to move forward, but I am interested in whether the Minister has any comment on that—he does not need to—or has something interesting to add.

Eddie Hughes (Conservative, Walsall North)

It is a pleasure to serve under your chairmanship, Dame Caroline. I was triggered to speak by some of the references to limiting ground rents to 0.1% of the property value, and am feeling nostalgic about my ten-minute rule Bill from June 2019, the Ground Rents (Leasehold Properties) Bill. That is an issue that I have been interested in and concerned about since I got to Parliament.

In my ten-minute rule Bill, I suggested that we limit ground rents to 0.1% of the property value, or £250, depending on which was the higher. In the evidence session, we heard that in some parts of the country, ground rents can very quickly become onerous for existing or prospective mortgage lenders. I want to ensure, however, that we do not let certain elements of our discussion of the clauses of the Bill pass by without celebrating the great things that are going on in it.

To some people, this might be a dry exchange, with some technical data about calculations—as a civil engineer, I love a bit of differential calculus, but it might not be to everyone’s liking—but some great stuff is going on in the Bill. We should be enthusiastic about that and celebrating it, because it will genuinely make a difference to the lives of people who are listening. It has also made a great difference to my life, because I feel as if I am seeing my ten-minute rule Bill slowly come back to life in this Committee.

Lee Rowley (Conservative, North East Derbyshire)

It is as if we have all the emotions in an all-encompassing and unexpectedly interesting post-lunch debate. Let me try to summarise as quickly as I can. I am grateful for everyone’s contributions.

Turning to the substantive points made by my hon. Friend the Member for North East Bedfordshire, I, like him, start from the principle that if there is consensus, we should look at things in more detail without casting any aspersions on our colleagues on the other side of the aisle. I think there is consensus not because I have suddenly converted to social democracy or socialism—that is absolutely not the case—but because even from different angles we can see that there is a challenge. I will try to argue this a little from Conservative principles for a moment.

I recognise the absolutely reasonable points made by my hon. Friend about the additional information that is needed, which we have talked about on multiple occasions, and I recognise that there are always inherent dangers and unintended consequences in any change, which is why things need to be thought through in the manner in which he indicated. In the limited time I have had experience of this matter, however, I have been convinced that the proposal is proportionate, and that is why I am in Committee today on behalf of the Government.

My hon. Friend rightly made the point about how property rights and contract law are the absolute bedrock of our functioning as a society. In particular as Conservatives—to speak just for those on this side of the aisle for a moment—we seek not to move them around, change them, or amend them on a regular basis, because certainty and clarity are at the heart of a functioning and robust democracy. As Conservatives and from the centre-right, however, we also have a deep aversion to rent-seeking and middlemen, and we have a deep and avowed, if imperfect, commitment to free and more perfect markets.

There is a challenge with all manner of things, whether that is marriage value or the percentage used in ground rent. If we were dealing with a market in widgets, with very low barriers to entry, a plethora of supply, and the ability for people to come in and out on a regular basis, I would potentially draw a different conclusion, but the reality is that the housing market is severely constrained by a number of factors, and it has been for many decades. It is not a perfect market. Therefore, it is proportionate to regulate in the ways we are talking about.

On the point about rent-seeking and middlemen, we must be cautious about legislating via anecdote, which we should not do. We must absolutely do the kind of deep analysis that hon. Members suggested a moment ago that we should. I am led to believe that a lot of what we are seeing with ground rent and other aspects included in the Bill would not have been visible 20, 30 or 40 years ago, because it would not have happened. Effectively, a market has been created—at least in part if not wholly—because, for want of a better phrase and without being pejorative, loopholes have been exploited. That has enabled middlemen to take profit out and distort the market, making it less perfect and meaning we have ended up in the place where we are today.

I absolutely share the caution expressed by my hon. Friend the Member for North East Bedfordshire about making sure the elements are right. We may differ in the end about whether or not the changes are proportionate, but I know we share the ultimate objective that the market should be made perfect. The clauses take us in that direction. It is an absolute requirement from a Conservative perspective to smash middlemen and rent-seekers and make sure that they do not take money from people for no reason. For those reasons, I commend the clauses to the Committee.

Schedule 2 - Determining and sharing the market value

Lee Rowley (Conservative, North East Derbyshire)

I beg to move amendment 60, in schedule 2, page 90, line 28, at end insert—

“Acquisition of a freehold house under the LRA 1967: shared ownership leases

10A (1) This paragraph applies only to the transfer of a freehold house under the LRA 1967.

(2) The standard valuation method is not compulsory for any property comprised in the newly owned premises if it, or any part of it, is demised by a shared ownership lease.”

This provides that the standard valuation method is not compulsory for the freehold enfranchisement of a shared ownership lease of a house (which is only possible if the shared ownership lease does not meet the criteria in section 33B of the LRA 1967).

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss the following:

Government amendments 61, 66, 69, and 74.

Lee Rowley (Conservative, North East Derbyshire)

Amendment 60 disapplies the standard valuation method in cases where the freehold of a shared ownership house is being acquired. In general, shared ownership properties are excluded from freehold acquisition rights to prevent the shared ownership stock from being bought out, therefore undermining the policy intention, and because the freehold can be acquired once the shared ownership leaseholder has staircased to 100%. However, some shared ownership properties do qualify for acquisition rights. Generally speaking, where there are restrictions placed on whether and how the shared ownership leaseholder can staircase to 100%, they qualify. The amendment clarifies that the standard valuation method does not have to be used where the freehold of a shared ownership property can be acquired, because the standard method is not built to accommodate acquisitions of shared ownership property.

Amendment 61 is a minor and consequential amendment to paragraph 11(7) of schedule 2, as Government amendment 74 has moved the definition of “shared-ownership lease” from section 38(1) to section 101(1) of the Leasehold Reform, Housing and Urban Development Act 1993. This will allow the provisions of the Bill to operate as intended.

Amendments 66 and 69 concern the valuation of premiums for shared ownership lease extensions. Valuation involves calculating both the value of the term and the reversion in order to calculate the premium to be paid by the leaseholder. Amendment 66 provides that the rent used to calculate the term value in the premium is the rent payable for the leaseholder’s share of the property demised by the lease—that is, the ground rent— and not the rent they pay on the landlord’s share of the property. Where the rent is not clearly divided as such, it is treated as though it is all paid as rent for the landlord’s share.

Amendment 69 provides that when the reversion value is calculated as part of the premium, the full reversion value that would be calculated in the standard method is adjusted to reflect the proportion of the property which is already owned by the shared ownership leaseholder. I commend the amendments to the Committee.

Turning to Government amendment 74, we have made it clear that shared ownership leaseholders should benefit from the same statutory rights as other leaseholders to extend their lease by 990 years. A number of Government amendments to schedules 2 and 6 have been introduced to make that possible. They implement Law Commission recommendation 42, although we will create further legislative support for that recommendation with later amendments.

Amendment 74 gives shared ownership leaseholders of both houses and flats the right to a 990-year lease extension, by amending the Leasehold Reform Act 1967 and the Housing and Planning Act 1986, as related to houses, and the Leasehold Reform, Housing and Urban Development Act 1993, as related to flats. Part 1A amends the LRA 1967. It repeals the current exclusion of shared ownership leases from enfranchisement rights and enables statutory lease extensions. However, it continues to exclude shared ownership leases from freehold acquisition rights, and gives powers to the Secretary of State to exclude further types of shared ownership leases from freehold acquisition rights where they are not excluded by this measure. It is important to continue to exclude shared ownership leaseholders from freehold acquisition rights to prevent the shared ownership stock from being bought out, thus undermining policy intent. Shared ownership leaseholders can already acquire the freehold once they have staircased to 100% ownership.

Where the shared ownership provider is the freeholder, they will be able to grant a lease extension to the shared ownership leaseholder. We will introduce further amendments to the Bill at a later stage to deal with situations where the shared ownership provider owns a headlease but is not the freeholder, in order to facilitate extensions by those providers. Even after we have introduced those further amendments, in a small number of cases shared ownership leaseholders may have to claim an extension against a landlord superior to the provider—that is likely to be the freeholder. Where that is the case, and a shared owner claims a lease extension from a landlord superior to the provider, new paragraph 5E allows the landlords to apply to the tribunal for a lease variation so that future staircasing payments made by the shared ownership leaseholder are shared between the provider and freeholder or other landlords to reflect their losses. New paragraph 5F inserts the important definitions of a shared ownership lease, the landlord’s share, and the tenant’s shar”, to give necessary clarity to the lease extension right.

Matthew Pennycook (Labour, Greenwich and Woolwich)

With apologies for interrupting the Minister when he is providing a commendable explanation of this group of Government amendments, does he agree that although the Bill touches on shared ownership leases in a number of areas, it does not directly address many of the unique challenges that face shared owners? Is there a case for legislating separately to address the various challenges that shared owners face in the round? On this and a number of other issues that arose in the context of the Renters (Reform) Bill, it feels as if there is a good argument for doing so, to ensure that we are directly addressing the challenges that shared owners face.

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to the hon. Gentleman for his question. There is always a case for reform in all areas of public policy. I recognise the importance of getting it right on shared ownership. On both sides of the Committee, we share an objective to make sure that this works as best it can, given that it is giving people the opportunity of capital and a new opportunity to be able to acquire that in a way that is not available to them through other means that the market offers. In half-answering the question, which is that there are always things that can be done—obviously I cannot anticipate the great fifth Conservative election victory that is coming or what the manifesto and the outcome may be—but I will certainly take on board the hon. Gentleman’s comments, so that when that election victory comes we can accommodate his suggestion.

Part 1B amends the Leasehold Reform, Housing and Urban Development Act 1993 to make similar changes for flats. New paragraph 5I repeals the current exclusion, and 5K provides that shared ownership leaseholders are qualifying leaseholders for lease extension rights. New paragraph 5J excludes shared ownership leases from collective acquisition rights and gives a power to the Secretary of State to exclude other shared ownership leases from the same where they are not excluded by this section. New paragraph 5M requires leasebacks to the former freeholder of any shared ownership flats subject to a collective freehold acquisition if the former freeholder is the provider. New paragraph 5N deals with the sharing of staircasing premiums between relevant landlords, exactly as new paragraph 5E does for houses. Finally, new paragraph 5P inserts the necessary definitions, as new paragraph 5F did for houses. I commend the amendment to the Committee.

Richard Fuller (Conservative, North East Bedfordshire)

On a point of clarification, Dame Caroline, are we discussing the other amendments in this group?

Caroline Dinenage (Conservative, Gosport)

No, we are just speaking to amendments 60, 61, 66, 69, 70 and 74.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I beg to move amendment 2, in schedule 2, page 98, line 25, at end insert—

“(7A) In setting the deferment rate the Secretary of State must have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost.

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss the following:

Amendment 146, in schedule 2, page 98, line 25, at end insert—

“(7A) In setting the deferment rate the Secretary of State must have regard to market rates of interest.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to market rates of interest.

Amendment 3, in schedule 2, page 99, line 25, at end insert—

“(6A) In setting the deferment rate the Secretary of State must have regard to the desirability of encouraging leaseholders to extend their lease at the lowest possible cost.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to the desirability of encouraging leaseholders to extend their lease at the lowest possible cost.

Amendment 147, in schedule 2, page 99, line 25, at end insert—

“(6A) In setting the deferment rate the Secretary of State must have regard to market rates of interest.”

This amendment would ensure that when determining the applicable deferment rate, the Secretary of State would have to have regard to market rates of interest.

Amendment 148, in schedule 2, page 105, line 28, at end insert—

“(1A) In determining the applicable capitalisation rate in relation to the right to vary a long lease to replace rent with peppercorn rent, the Secretary of State must have regard to market rates of interest.”

Amendment 149, in schedule 2, page 105, line 28, at end insert—

“(1B) In determining the applicable capitalisation rate in relation to the right to vary a long lease to replace rent with peppercorn rent, the Secretary of State must have regard to regional variations in market conditions

Matthew Pennycook (Labour, Greenwich and Woolwich)

We have already discussed valuation in some detail, and it is right that we do so. The concerns raised by the hon. Member for North East Bedfordshire are genuine, and it is important that the Committee engages with them and the aim he has in mind to ensure that this is the most robust piece of legislation it can be.

As the Minister has demonstrated, schedule 2 is incredibly technical and complex, so I hope that members of the Committee will forgive me if in advancing my argument I set out once again what some of the provisions do. The Minister has made it clear that clauses 9 and 10 make amendments to the 1967 Act and the 1993 Act respectively to provide that the premium payable to acquire either the freehold or lease extension of either a house or flat must be calculated in accordance with clause 11. That clause provides that the premium payable when exercising any such enfranchisement rights, with the exception of premiums calculated under the preserved section (9)(1) of the 1967 Act, is to be comprised of the market value and any compensation payable. As the Minister said, schedule 3 sets out the circumstances in which other compensation is payable and how the amount is determined. Schedule 2 sets out how the market value is to be determined and, in instances where loss is suffered by certain landlords other than the landlord transferring the freehold or granting the new lease, how it is divided into shares.

The schedules, particularly schedule 2, make a number of significant changes to the two main bases of valuation currently used. First, as we have discussed, they ensure that marriage value—the hypothetical profit arising from the new lease that schedule 13 to the 1993 Act specifies must be shared equally between the parties—and hope value, which is the additional value that may arise from the potential for marriage value to be realised in the future, are no longer to be taken into account in calculating the premium payable. Secondly, aside from in exceptional circumstances, they impose a 0.1% cap on the treatment of ground rents in the valuation calculation, as the Minister detailed. Thirdly, they introduce a new standard valuation method with the aim of making the process simpler, more certain and more predictable.

In principle, we fully support the proposed new process for determining the price payable on enfranchisement or extension. There are the principled arguments in which we have engaged, and there is also the practical argument that the current valuation system has a number of flaws. The Law Commission argued in extensive detail in its 2020 report entitled “Report on options to reduce the price payable” that calculating premiums under the law as it stands is complex; has unpredictable and sometimes arbitrary outcomes; is subject to various inconsistencies and irrationalities inherent in the regime as a whole; and is affected by the artificiality of some of the statutory assumptions that valuers must work with. As I said in response to the hon. Member for North East Bedfordshire, this is not just a case of a couple of bad apples: these are systemic problems with the current valuation method. The result is that it regularly causes real difficulties for leaseholders and landlords engaged in the enfranchisement process.

In overhauling the process, however, it is important that we ensure that the new methodology not only addresses the various problems with the existing law, but reduces premiums for leaseholders across the board. That is an explicit objective of the Bill and—from memory—it is one of the terms of reference that the Government gave to the Law Commission when they asked it to produce its reports, and one that we very much share. It will be one of the tests in any litigation—I am sure litigation is to follow—but we believe it is a proportionate means of achieving a legitimate aim.

One of the most important inputs when it comes to the functioning of the proposed new standard valuation method will be the deferment rate, which I mentioned earlier. As the Committee will know, the deferment rate is the annual discount applied on a compound basis to an anticipated future receipt assessed at current prices, to arrive at its market value at an earlier date. We need not concern ourselves with the complexities of how such a rate is calculated precisely, but given its importance as an input in freehold acquisition or lease-extension claims, it is important that the Committee grapples with the implications of the Secretary of State being given the power to prescribe both that and the capitalisation rate used to calculate the value of either the freehold reversion or the new 990-year lease, because that is what schedules 2 and 3 provide for.

Rachel Maclean (Conservative, Redditch)

I am listening with interest to the shadow Minister’s comments. He is making a valid point and advancing a logical argument for the setting of these rates, which we all agree is vital. If it were not to be the case that the Secretary of State had the powers in this legislation to set these rates, what does he think is the best alternative? How would those rates be set?

Matthew Pennycook (Labour, Greenwich and Woolwich)

I thank the hon. Lady for her intervention. To be very clear, we agree with the Government’s proposal that the Secretary of State set the rate. The alternative would be, as Mr Fanshawe put to us in the evidence sessions, that we rely as a starting point on the Sportelli judgment, with its 4.75% and 5% rates respectively, and that leaseholders are free in the process of dispute to argue for more favourable rates on the grounds of particular circumstances being implied. On balance, we think that it is right that the Secretary of State sets the rate. What I am trying to drive at, which I will get to, is that how the Secretary of State sets the rate and what it should be are crucial to the outcomes for leaseholders in terms of the premium payable.

When it comes to the regulations required to bring the new valuation process into force, we obviously recognise that they are the means by which the detailed methodology for setting the applicable deferment rate will be brought forward. However, while it would not be right to pre-empt those regulations in Committee, we believe that the objective underpinning the setting of the deferment rate should be set out in the Bill. While the rate or rates will need to be set at a level that does not unfairly denude freeholders of value, we think it is important that the Bill states clearly that in determining what should be the rate or rates, the Secretary of State must have at the forefront of their mind the need to reduce premiums for leaseholders. Amendments 2 and 3 would ensure that that is the case in relation to both freehold acquisition and lease extensions. While other considerations will clearly need to be taken into account, not least how to ensure that landlords receive adequate compensation to reflect their legitimate property interests, these amendments would oblige Ministers to set a rate or rates with the overriding objective of encouraging leaseholders to acquire their freehold at the lowest possible cost.

That is important because with marriage and hope value abolished and the treatment of ground rents in the valuation calculation capped at peppercorn rates, it is the deferment rate that will be the primary driver of price to be paid by leaseholders in enfranchisement or extension claims. It is essential that reducing premiums for leaseholders is the determining factor in the process by which such a rate or rates will be set and reviewed, and it must therefore be put on the face of the Bill. On that basis, I hope the Minister will consider accepting both amendments. I look forward to his response.

Richard Fuller (Conservative, North East Bedfordshire)

I rise in support of my amendments 146 to 149, which, similarly to the shadow Minister’s amendment 2, seek to provide some framework and guidance around, and a better understanding of, how the Secretary of State will determine these very important discount rates. I go back to the point about the importance of trying to give as much clarity as possible about what we are passing into legislation and to avoid unintended consequences. The Minister will be aware that some of the businesses affected may be subject to statutory disclosures. It is very hard to make a formal statutory disclosure if one is not clear what the impact will be. My amendment seeks to provide that.

I want to explain some of the reasons why I have chosen to focus on the issues of market rates and interest, and regional trends. The shadow Minister made some very good points that I am sure the Minister will respond to. It is important to understand that it is always possible for Government to fix market rates and interest, either directly or by the courts, but interest rates do change; the world does change. We can find ourselves adrift on interest rates relatively quickly. The Sportelli judgment, I think, was made at a time when the Bank rate was 4.5%. In that context, the setting of the discount rate did not seem particularly inappropriate. Three years later, the Bank rate went to 0.5% as a consequence of quantitative easing, and stayed like that for seven years. Obviously, it is in the interests of party A for the rate to be set high and in the interests of party B for the rate to be set low, but there is a concern about the rate being fixed without certain guidance.

The shadow Minister has argued that the rate should have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost; that fits the imperative that informed the Bill. My view is that we ought to first encourage the Secretary of State to anchor his or her judgment on the market rate of interest—not a specific market rate of interest, but a set of market rates of interest. The reason is that there will be leases of certain terms: five, 10, 15, 30, 50 or 100 years. When someone buys an investment and ties up their money for a longer period of time, they pay a different rate of interest than when they do so for a shorter period of time. It is appropriate for the Government to have regard to that when setting the discount rates. That is why I have tabled this amendment. I am interested to know what the Minister has to say about it.

Amendment 149 is about regional variations in market conditions. The Minister will know that a large part of the Bill relates to London, but not all of it. The way property prices move in Bedfordshire—I see that another Bedfordshire MP, the hon. Member for Mid Bedfordshire, is here—and in other parts of the country is different from London. Market conditions vary. In order to be fair to participants, it is important that the Secretary of State has regard to regional variations. I hope the Minister can provide some encouraging words on market conditions and tying the discount rate to some form of understanding of market interest rates.

Lee Rowley (Conservative, North East Derbyshire)

I am grateful to the hon. Member for Greenwich and Woolwich and my hon. Friend the Member for North East Bedfordshire for their contributions. We effectively have two sets of amendments from different sides of the discussion, which demonstrates both the importance and the challenge of getting this right. Before I turn to their points, the question before the Committee is whether we want to put further constraints or further elements into primary legislation, or are content in principle to allow most of them to be covered by the Secretary of State of the day at the time. The Government’s view is that the latter is more proportionate and reasonable. That is why we have come forward with the current proposal. As a result, we will not be accepting the amendments, but I will add a few more comments to try to convince the hon. Gentlemen to withdraw their amendments.

The hon. Member for Greenwich and Woolwich made a number of points on consultation. Although I cannot anticipate or confirm at this stage, I think it is absolutely the case that we would need further discussion and careful consideration of the approach, as I hope we have made clear throughout the debate. On his point about the review every 10 years, the existing judgment has now stood for going on 16 years—I know he knows that, because he has referenced it—and has done so relatively successfully. However, I take his point about tribunals being able to change things. Effectively, this is coming in through a tribunal in the first instance. There is a balance to be struck.

We have put a reference to 10 years in the Bill so that there is a recognition that there would need to be a review—as opposed to an open-ended ability with no indication of when it is used—while being clear that, although it would be for the Government of the day to determine, regular reviews will have potential impacts and potential challenges to the market, and there has to be some form of consistency or clarity in order to give people the confidence to invest and make decisions on an economic basis. The reason we have approached the provision from this angle is both to provide flexibility through the ability to change not being in primary legislation, but also giving guidance that there will be reviews at least every 10 years—albeit not indicating that they should be on a more frequent basis in order not to get into a discussion about whether there is too much movement for consistency and clarity.

My hon. Friend the Member for North East Bedfordshire made a number of important points, particularly with regard to his general point about market conditions and the importance of getting that right, and also that there are regional variations. This is another detailed part of the conversation, which the Government seek to move into another discussion rather than being on the face of the Bill. I recognise that sometimes that is not ideal, but one reason we want to preserve flexibility is to give the Secretary of State of the day the ability to respond to market conditions where necessary.

On the first point that my hon. Friend raised, we have been clear from the outset—when the Government announced the reforms—that rates should be set at market value to ensure that the amount landlords are compensated reflects their legitimate property interest. It is important that landlords receive sufficient compensation. To his earlier questions about legality, this is an important safeguard to ensure compatibility with various rights-based legislation, which we talk about extensively in this place.

The Secretary of State will set the deferment rate in secondary legislation. We have been engaging, and continue to engage, with the sector to understand its position to ensure that rates are set in a way that is fair to all those whose property rights are changed and interfered with, and fair to leaseholders. Although I cannot give an indication or a guarantee around regionality, I am happy to say that we want to set the levels at market rates, but also with the recognition that many different elements need to be considered, one of which may be regionality. That is why we need to continue this conversation beyond this discussion. The proposition that the Government are now putting to the Committee is to set these elements in primary legislation and to continue the discussions that my hon. Friend and others have asked for through other means that will come forward in due course.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I welcome that response from the Minister, in particular about the review period. If I have understood him correctly, he is saying that there must be a review every 10 years at a minimum, but there may be ongoing reviews within that time period if necessary—he can correct me if I have misunderstood. That would be welcome. There is a need to keep the rate, whatever it may be ultimately, under more regular review than just once every 10 years. I welcome also the indication he gave that the rate or rates may include some regional variation.

Where I take issue with the Minister’s response is the debate about how much we need to prescribe on the face of the Bill. It may be the case that, when the methodology comes forward in regulations, it is an explicit objective of the rate-setting process that premiums for leaseholders are reduced to their lowest possible level, but we have no guarantee, and all hon. Members know the constraints under which we operate when it comes to secondary legislation and our ability to influence and scrutinise instruments. We think it important that this particular objective be put on the face of the Bill, and I will be frank with the Committee about why.

We are worried about a situation where either this Government or a future one are lobbied by vested interests to set a deferment rate that will be punitive for leaseholders—that is, lower than the Sportelli judgment rates. As things stand, that is a distinct possibility. We are not attempting to prescribe the rates; I think that there should be consultation to ensure that Parliament’s view can be sustained, have legitimacy and have public backing. As the Minister will know, post-consultation is part of a regular process, as well as what this House attempts.

We are very much minded to say that, when setting the rate, there should be a guiding principle that, yes, it has to balance a number of considerations, but chief among them must be reducing premiums for leaseholders to their lowest possible level. It is explicit in the explanatory notes—and other parts of the Bill make reference to it—that the provision is to drive down costs for leaseholders; it is not set out in this schedule. For that reason, I am minded to press amendment 2 to the vote and also amendment 3, if we were to be successful in securing amendment 2—though it does not look so, from the balance of numbers.

Lee Rowley (Conservative, North East Derbyshire)

I will take 10 seconds to try to convince the hon. Gentleman not to do that, although I might be unsuccessful.

On the ability to set these rates at a greater frequency, it is absolutely the case that “every ten years” is an indication as opposed to a limitation. Although I understand the hon. Gentleman’s point about putting things on the face of the Bill—and I fear that my exhortation will not be successful—we cannot save ourselves from each other; there will always be the ability to change things. It would be a strange Government who were elected on the certain propositions that he has indicated. There will always be a way to untangle these things. I understand the point about making things more difficult, but giving the Secretary of State the flexibility to make these decisions is paramount. We will oppose the amendment if he pushes it to a vote.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I am afraid the Minister is right in that he has failed to convince me. I fear he may misunderstand the point I am trying to make. It is not that we take issue with the Secretary of State having the flexibility to set the rate; we want instead to make very clear what must be the overriding objective in their mind when doing so, and we do think there is a strong case to put that on the face of the Bill in order to achieve the objectives that the Government have set themselves to make premiums as cheap as possible for leaseholders. For that reason, I will press amendment 2 to a vote.

Lee Rowley (Conservative, North East Derbyshire)

I beg to move amendment 70, in schedule 2, page 101, line 5, at end insert

“, or

(c) the person is the landlord under a lease which is varied under paragraph 12A of Schedule 1 to the LRA 1967 or paragraph 12 of Schedule 11 to the LRHUDA 1993 as a result of the lease extension.”

This amendment is consequential on Amendment 73.

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss Government amendments 71, 33, 34, 39, 40 and 73.

Lee Rowley (Conservative, North East Derbyshire)

These amendments will address the division between landlords of a lease extension premium following the use of a new right to commute—that is, reduce—their intermediate rents. We intend to introduce the right to commutation as part of amendment 73, when we come to schedule 6.

Amendments 70 and 71 will enable the losses incurred by a landlord affected by the right to commutation to be considered when dividing up the lease extension premium. In simple terms, it will enable the shares of a premium to be adjusted so the commutation is “paid for”. I commend the amendments to the Committee.

Amendments 33 and 34 will support the introduction of a commutation. Commutation is a new right that will enable intermediate leaseholders to reduce the rent they pay to superior landlords, such as the freeholder. This will be available when a leaseholder extends their lease at a peppercorn ground rent, which reduces or extinguishes the income received by the landlords, where the landlords are intermediate leaseholders.

In homeownership, intermediate leases are the middle rungs on the ladder. Amendments to clause 14 would permit the tribunal to make determinations and orders in houses regarding the new right of commutation. Amendments 39 and 40 to clause 16 will permit the tribunal to make terminations and orders in flats regarding this new right. The provisions for the function of the new right are introduced by amendment 73 to schedule 6. The amendments implement the Law Commission’s enfranchise- ment report recommendation 100. Amendments 33 and 34 will facilitate the new right by allowing the tribunal to make decisions on any issue related to commutation. That includes the question of how much of the rent an intermediate lease receives is attributable to a specific house or flat where a lease extension is claimed.

The tribunal has powers to address situations where landlords are absent so that commutation can proceed. It can make orders about appointing persons to vary the intermediate leases in accordance with the new commutation provisions, and can order that commutation should proceed where an intermediate leaseholder’s notice is determined to have no effect but another landlord was eligible to claim commutation.

As previously discussed, amendments 39 and 40 support the introduction of the new right of commutation. Amendments to clause 16 will permit the tribunal to make determinations and orders in flats regarding commutation. They replicate the same changes for houses made by amendments 33 and 34 to clause 14. The new right of commutation will be introduced by amendment 73 to schedule 6.

Finally, Government amendment 73 will introduce a new right for landlords to commute—that is, reduce—the rent they pay following certain enfranchisement claims. It implements Law Commission recommendation 100. The new right would mean that, when a lease extension happens, landlords can elect to reduce their rent. That would prevent intermediate leases from entering a financial imbalance, which can occur when ground rent income is extinguished but the intermediate leaseholder must still pay a rent to a superior landlord. Such an imbalance may cause companies to wind up and the provision of building management to suffer. That situation would not work and would be to the detriment of leaseholders, landlords and freeholders alike.

When the new right is used, it would reduce the rent in proportion to the reduction in the ground rent related to the house or flat. In return, the superior landlord will be entitled to a share of the premium that the leaseholder has paid for their lease extension. The new right will be available to all landlords up to and including the freeholder in houses, and all landlords up to and including the competent landlord in flats. The right will not be available if a lease extension or a ground rent buy-out claim is not being undertaken. It is also not available if an intermediate lease is not required to pay rent of more than a peppercorn.

Schedule 5 - Amendments consequential on section 11 and schedules 2 to 4

Clause 12 - Costs of enfranchisement and extension under the LRA 1967

Lee Rowley (Conservative, North East Derbyshire)

I beg to move amendment 29, in clause 12, page 15, line 6, at end insert—

“(8) See also sections 20CA and 20J of the Landlord and Tenant Act 1985, which prevent costs in connection with a claim under this Part being recovered by way of a variable service charge (within the meaning of section 18 of that Act).”

This amendment is consequential on NC7.

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss the following:

Amendment 4, in clause 12, page 16, leave out from line 19 to line 12 on page 17.

This amendment would leave out the proposed new section 19C of the Leasehold Reform Act 1967, and so ensure that leaseholders are not liable to pay their landlord’s non-litigation costs in cases where a low value enfranchisement or extension claim is successful.

Clause stand part.

Government amendment 31.

Amendment 5, in clause 13, page 21, leave out from line 26 to line 12 on page 22.

This amendment would leave out the proposed new section 89C of the Leasehold Reform, Housing and Urban Development Act 1993, and so ensure that leaseholders are not liable to pay their landlord’s non-litigation costs in cases where a low value enfranchisement or extension claim is successful.

Amendment 128, in clause 13, page 22, leave out lines 13 to 39.

This amendment would leave out the proposed new section 89D of the Leasehold Reform, Housing and Urban Development Act 1993, and so ensure that leaseholders are not liable to pay their landlord’s non-litigation costs in cases where a leaseback has been granted under Chapter 1.

Clause 13 stand part.

Government amendments 45, 49 to 51 and 121 to 123.

Lee Rowley (Conservative, North East Derbyshire)

New clause 7 is a key amendment to close a loophole that landlords could potentially use to recoup process costs from tenants via variable service charges. These are costs to which they are not entitled under the new cost regime. The new clause is supported by a number of consequential amendments.

The new clause will support the new cost regime introduced in the Bill, which, as the Committee will be aware, seeks to prevent landlords from recovering process costs from leaseholders making enfranchisement or right-to-manage claims in the appropriate tribunal. In its current form, the Bill takes active steps to prevent a potential loophole by ensuring that variable service charges cannot be used by landlords as a mechanism to charge leaseholders for their litigation or process costs in connection with any of the aforementioned claims made by leaseholders.

Eddie Hughes (Conservative, Walsall North)

Can the Minister clarify whether the prescribed format would include the application of charges for insurance?

Lee Rowley (Conservative, North East Derbyshire)

I hope to clarify that issue for my hon. Friend in the next few minutes. If I am unable to do so, I will write to him.

New clause 7 seeks to go a step further in blocking the loophole by ensuring that landlords are unable to recoup costs through variable service charges issued to other tenants who are not actively participating in the claim. To be certain that the new clause is effective, we are clarifying that these costs are not defined as relevant costs that a landlord is allowed to include in service charges. We are also giving the appropriate tribunal a new power to order landlords to repay leaseholders in cases in which they have wrongly been charged for such costs.

Although we recognise that it is unlikely that landlords will seek to circumvent the intent of the Bill, it is important that our efforts to remove barriers to leaseholders bringing applications to enfranchise or to exercise the right to manage are not undermined, and that we ensure that the cost regime is watertight and fairer for leaseholders. I reiterate that new clause 7 will have the effect of preventing landlords from using service charges to obtain from leaseholders costs to which they are not entitled. This will be supported by a power for the tribunal to order landlords to repay leaseholders to whom they have incorrectly passed on such costs. I commend the new clause to the Committee.

I turn to the Government’s position on the amendments tabled to clauses 12 and 13. Amendments 4 and 5 would remove proposed new section 19C of the Leasehold Reform Act 1967 and proposed new section 89C of the Leasehold Reform, Housing and Urban Development Act 1993, which together would establish an exception to the new general rule that each side will bear its own costs in tribunal proceedings for enfranchisement and lease extension claims for flats and houses respectively. The exception exists to entitle landlords to receive a portion of their process costs from leaseholders in low-value claims—those for which the premium to be paid to the landlord by the leaseholder is less than the process costs.

I should note that I share the worthwhile desire of the hon. Member for Greenwich and Woolwich to make it cheaper for leaseholders to enfranchise or extend their leases. For too long, the balance of power has been weighted too much in favour of landlords. We have introduced changes to the cost regime because we believe that they will make it fairer, and because we wish to remove the risk and uncertainty facing leaseholders bringing such claims. While restoring balance, however, it is important that the new regime is fair for both sides when there are claims of this nature. Rightly, leaseholders have a statutory ability to enfranchise or extend when they like. In low-value claims, it is not fair for landlords to be required to incur a net financial loss at any time that leaseholders wish to exercise their rights. In claims that are not low-value, the landlord will receive sufficient compensation and will be able to use this to cover the costs incurred; in low-value claims, that is not possible, as the premium is less than the process costs.

Part of the reason why leaseholders have been liable to pay their landlord’s reasonable process costs is to ensure that landlords are protected from unfairly burdensome costs. They could face these costs at any time. In many cases, landlords have no choice but to pay out, given their duty to honour the statutory rights of leaseholders to enfranchise or extend their lease. The low-value claim cost provisions create protection. They mean that leaseholders will be liable for some of their freeholders’ costs, but their exposure to cost will not be excessive. Although it is right that the cost regime changes, we must continue to ensure that there are protections in place both for leaseholders and for landlords. I ask the hon. Member for Greenwich and Woolwich kindly not to press his amendments.

We have been clear that we want to make it cheaper and easier for leaseholders to extend their lease or buy their freehold; that is the whole point of this Bill. Clause 12 will make it cheaper for owners of leasehold houses to exercise their enfranchisement rights. It introduces a new cost regime with a general rule that, in future, both landlords and leaseholders will bear their own process costs during an enfranchisement claim. Process costs could include costs for services such as valuation, conveyancing and other legal costs. This could save a leaseholder thousands of pounds. Leaseholders will no longer be deterred from bringing a claim because of the process costs demanded by their landlord, and a leaseholder will no longer face unknown costs from their landlord, making it much simpler to buy their freehold or extend their lease.

There are some exceptions to the new rules to protect landlords in certain circumstances. Proposed new section 19A(1) lists the exceptions that protect landlords, including where a leaseholder’s claim ceases for a reason that does not count as a permitted reason, which we have sought to define clearly, and where a landlord’s non-litigation costs exceed the premium payable in low-value cases. Proposed new section 19A(4) confirms the continuing role of the tribunal to make orders on litigation costs. Proposed new section 19E makes it clear that, since there will be no general requirement for leaseholders to pay a landlord’s process costs, they will also no longer need to make a security payment.

The legislation also closes a potential loophole by preventing landlords from passing their costs to the enfranchising leaseholder via a service charge or a similar contract. The amounts to which landlords will be entitled under the exceptions will be prescribed in regulations; proposed new sections 19B(3) and 19C(3) provide powers for the Secretary of State and the Welsh Ministers to make such regulations. Together, these measures will level the playing field, making it cheaper for leaseholder owners of houses to extend their lease or buy their freehold, and removing a core barrier deterring leaseholders from enfranchising. I commend clause 12 to the Committee.

I thank the hon. Member for Brent North for tabling amendment 128. The Bill introduces a general new rule that each side will bear its own costs for enfranchisement and lease-extension claims. The hon. Gentleman’s amendment would remove proposed new section 89D of the 1993 Act, which would establish an exception to that rule with regard to process costs where a freeholder in a collective enfranchisement claim takes a 990-year leaseback of some property in a building. In such situations, freeholders will receive a portion of their process costs. I share the desire of my hon. Friends and of the hon. Member for Brent North to lower cost, risk and uncertainty for leaseholders, but it is still important that the new regime be fair for both sides. The Government will not be accepting the amendment today.

Process costs will be greater for the landlord in such cases in which there are more complicated transactions overall: a new lease will need to be granted and registered, and new terms will need to be negotiated. Those will add to the freeholder’s process costs. In addition, the price or premium payable to the freeholder will still be lower than if the leaseback were not part of a transaction, because the freeholder will be retaining a proprietary interest with a substantive value, which has the effect of reducing the premium.

As I noted in response to the proposition of removing the exception for low-value claims in amendments 4 and 5, it would not be fair for landlords to be required to incur a net financial loss if leaseholders wish to exercise their enfranchisement rights. Although it is right that we reform the cost regime, we must ensure that there are protections in place for both sides. I therefore ask the hon. Member for Brent North not to press his amendment. Having covered the detail of the clauses, I commend them to the Committee.

Finally, in reply to the question of my hon. Friend the Member for Walsall North on insurance, the answer is generally no. There is little reason why insurance should be part of the process. There may be exceptions; if there are, we will write to my hon. Friend to indicate them, but the general answer is no.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I thank the Minister for his explanation of the Government amendments and for his initial response to my amendments and the amendment tabled by my hon. Friend the Member for Brent North.

We welcome the new costs regime provided for by these provisions. The Minister is absolutely right that, as things stand, there is no balance of power: the playing field is tilted very much in favour of landlords rather than leaseholders. That needs to be addressed. Under the current law, leaseholders are required to pay for certain non-litigation costs incurred by their landlord when responding to an enfranchisement or lease extension claim. That obviously does not reflect normal practice in residential conveyancing, where each party bears their own costs.

The argument for imposing non-litigation costs has always been that in enfranchisement or lease extension claims, a landlord is being forced to sell his or her asset, and that that justifies a departure from the costs arrangements that operate in open market sales of residential property, where any valuations and final price will reflect the fact that each party must pay their own costs. However, when it comes to lease extensions or freehold purchases, a landlord is obviously not simply being compensated for the value of the asset they are being compelled to sell. They are instead securing, through the payable premium, a share of the profit to be made from selling to the leaseholders in question. In addition, as things stand, through capitalised ground rents they are extracting funds from leaseholders over long periods—often decades—prior to securing that profit share for no explicit services in return, a point that the hon. Member for Redditch made.

The valuations of lease extensions and freehold acquisitions under the existing statutory regime rely on prices agreed via an open market transaction, but those valuations do not account for the fact that leaseholders are expected to pay their landlord’s non-litigation costs. A landlord in an enfranchisement or extension transaction therefore receives both a price for the asset being sold, which reflects the market rate without non-litigation costs factored in, and their reasonably incurred non-litigation costs on top.

As the Law Commission’s 2020 final report on enfranchisement puts it, the effect of the law and current market practice is that

“the landlord is over-compensated for the non-litigation costs that he or she has to incur in order to transfer the interest to the leaseholder.”

In addition to the fact that landlords are over-compensated for non-litigation costs, many of those who are better resourced use the fact that such costs are borne by leaseholders as leverage in negotiations on the price of the lease extension or freehold acquisition, confident that the expense of challenging those costs in tribunal will dissuade many leaseholders from doing so.

The Opposition’s view is that freeholders should not receive compensation in respect of non-litigation costs. The fact that a landlord sells his or her asset and receives a share of the profit as a result is not sufficient justification for departing from an arrangement in which reasonable non-litigation costs are factored into the ultimate price. That is not least because the decision to enfranchise or extend a lease is often not discretionary; it is often a requirement brought about by the fact that a lease is due to expire, because the payable premium is rising as the lease shortens or as a result of the decision to move or re-mortgage.

We therefore fully support the intention behind clauses 12 and 13 to provide for a new regime based on the principle that leaseholders are not required to pay the freeholder’s non-litigation costs in those circumstances. We note the Law Society’s concern that landlords are being asked to bear their own non-litigation costs despite the fact that the proposed standard valuation method provided for by schedule 2, which the Committee has just considered, will lead to payable premiums below full open market value because it caps the capitalisation rate. However—this point touches on one of our previous debates—political decisions set the rules of the game for market competition. In our view, it is simply not the case that there is some kind of inherent market value for premiums that is entirely independent and autonomous of legislation in this area. Every sale of a flat and every lease extension process relating to a flat since 1993 has been undertaken against the backdrop of the 1993 Act, which reduced ground rents to a peppercorn.

The market value for premiums is shaped by the laws this House passes, and it is right in principle that, to achieve the Bill’s objectives of making it cheaper and easier for leaseholders in houses and flats to extend their lease or buy their freehold, leaseholders do not pay non-litigation costs in addition to the payment of a premium, as determined by the new method proposed in schedules 2 and 3. It is because we believe that leaseholders should not be liable for these costs as a result of an enfranchisement or lease extension claim on principle, irrespective of the method by which the premium is calculated, that we take issue with the fact that the clause as drafted does not protect all leaseholders from liability for costs incurred.

As the Minister has made clear, the clause entails only a selective extension of rights in this area, because it does not ensure—as the press release that accompanied the publication of the Bill claims it does—that all leaseholders will no longer have to pay their freeholder’s costs when making a claim. Instead, by means of proposed new section 19C, it makes exceptions to the general rule whereby the price payable for the freehold or extended lease is below an amount to be prescribed in regulations.

We understand the rationale for the proposed new section, namely that leaseholders should pay a freeholder’s non-litigation costs in such circumstances, so that low-value claims do not cost the freeholder money; the Minister has been very clear that the Government believe that that must happen to ensure that the process is fair for both sides. We also appreciate that there are risks in prohibiting a landlord from passing on non-litigation costs to leaseholders in instances in which they would be required to spend more in carrying out the transaction than they received for the asset. The Law Commission highlighted a number of those risks in its final report on enfranchisement, including the incentive created for landlords not to co-operate with a claim, or for them to transfer the low-value freehold into the name of a shell company, then liquidate the company and ensure that the lease becomes bona vacantia.

We are concerned, however, that exempting claims below a certain value will create a different set of practical problems. I hope I can get the Minister to engage with those problems, with a view to convincing him to reconsider. They include costly and time-consuming disputes in cases in which the price payable is close to the level of the non-litigation costs in question for low-value claims, and the potential for landlords to game the new system by arguing for a price payable below the threshold, in order to secure both it and associated non-litigation costs because of the burden of disputing the amount.

We appreciate that the Government have incorporated into the clause the Law Commission’s recommended remedy, namely that in low value claims for which the non-litigation costs are higher than the premium payable, the leaseholder would be required to pay the lower of the two values, one of which is to be prescribed by the Secretary of State. However, we believe that it does not entirely remove the potential for significant disputes to arise between leaseholders and freeholders, with leaseholders in a weak position to challenge them because of the cost and time required. We therefore worry that the prescribed sum, at whatever level it is ultimately set, will become the minimum sum payable to enfranchise. We are concerned that the difficulties of challenging a claim to the prescribed sum will deter some leaseholders from initiating the process of extending their lease or from acquiring their freehold altogether.

Taking a step back, we fail to see the logic in the Government’s position. On the one hand, they seem to be ignoring the Law Commission’s recommendations in relation to costs; they have chosen to provide for a general rule that leaseholders are not required to make a contribution to their landlord’s non-litigation costs, but have not chosen to adopt a valuation methodology that seeks to reflect open market value, which was the commission’s stated prerequisite for such a rule. On the other hand, they are following strictly the commission’s recommendations in respect of low-value claims.

Put simply, we believe that, by means of this Bill, we should take the political decision—it is an explicit political decision—to exempt all leaseholders from paying the costs incurred by landlords in processing enfranchisement or lease extension claims. Amendments 4 and 5 would omit proposed new section 19C of the 1967 Act and proposed new section 89C of the 1993 Act, thereby removing any exception to the general rule that leaseholders are not required to pay the freeholder’s non-litigation costs in such circumstances. Having argued my case on the basis of the practicalities, I live in hope that the Minister might reconsider.

Barry Gardiner (Labour, Brent North)

Can my hon. Friend clarify whether the proposals in his amendments 4 and 5 would cover my own amendment 128, which deals with the exactly parallel situation in which each side bears its own costs, but in relation to leasebacks?

Matthew Pennycook (Labour, Greenwich and Woolwich)

I will have to come back to my hon. Friend on that point, but my understanding is that, by deleting the relevant proposed new sections, amendments 4 and 5 would ensure that in all circumstances non-litigation costs will not be chargeable to leaseholders. That was certainly the Opposition’s intent in proposing the amendments.

Rachel Maclean (Conservative, Redditch)

I ask the Minister to clarify a couple of points. It is extremely unusual for me ever to find anything in his comments to disagree with or depart from. If I heard him correctly, however, I think he stated that he thought it was unlikely that landlords would ever seek to circumvent the intent of the Bill. Possibly I took that out of context, but I suggest strongly that, on the contrary, it is extremely likely that landlords will intend or try to circumvent the intent of the Bill, because that is what we have seen from freeholders over decades. That is why we are in the position that we are in.

We are obviously starting from the position that we want this to be fair—each side needs to see justice—but, as I think most of us have remarked, there is a massive imbalance of power. The Minister spoke powerfully about how it is not Conservative to promote a market with such imbalances of power and, in such situations, it is incumbent on us as Conservatives, who believe in free markets, to free those leaseholders—those tenants, who have bought those properties in good faith—from under the yoke of the freeholders, who hold all the power and, in particular, the threat of blocking those court actions and tribunal claims.

The difficulties that those leaseholders face are such that they often give up years of their lives to them. These people are just doing normal jobs, already working hard to pay their mortgage on the flat that they thought they had bought and owned, but instead they might have to spend hours, days or years of their life trying to familiarise themselves with incredibly dry, complex bits of legislation that we are grappling with in this Committee with great difficulty, even though we all have a reasonable degree of familiarity with it. Imagine being a flat owner who finds themselves wondering what on earth they are going to do to challenge their freeholder in a court of law. They face the stress and difficulty of mounting a claim, wondering who is going to help them, and fearing that they will be lumbered with all the costs at the end.

I have two specific questions for the Minister. First, is he confident that we have addressed to the best of our ability, with all the information and work that we have done, the statement that—I believe this; I am very cynical—landlords will seek to circumvent what we are doing? They are probably already doing so. Does the Minister feel confident that he, his excellent officials and the whole Department have scrutinised the matter to the best of our ability to prevent that?

Secondly, in the Minister’s view, are we addressing the egregious situations that we heard about in some of the evidence sessions in Committee? Groups of leaseholders have taken freeholders to court because of all sorts of spurious and seemingly tiny and insignificant things, and they have found that the freeholders have had the costs awarded to them and they are then seeking to recoup those costs through the service charges of the leaseholders. To me, that seems an absolute violation of justice. We believe in a fair market, but this cannot be one when leaseholders are operating in a dark room—they cannot see the prices, or the other buyers and sellers. It is not a free market in any shape or form. We are inching towards some degree of freedom, but I would welcome some reassurance from the Minister.

Barry Gardiner (Labour, Brent North)

Here was me thinking I was going to be helpful to the Minister with my amendment 128, that I was going with the grain of the Bill—its whole point. He was so eloquent, and said that it is absolutely right that each party should bear its own costs, and I was thinking, “Great, we’ve got one here. They’re going to support us”, and then he said that he could not accept the amendment. I urge the Minister to consider it again.

I am trying to take out that whole proposed new section 89D, because it is a new class of cost—this whole idea of a leaseback. These are new ways in which landlords will be able to increase the costs of enfranchisement, because they will engage a series of lawyers to review separately every single one of the contracts of the non-enfranchising leaseholders and, indeed, all the individual elements of the commercial premises that they are being forced to take the leaseback off. Those costs will be absolutely enormous, because they will do it on an individual basis. The hon. Member for Redditch spoke eloquently about her cynicism, and I am afraid that it is not cynicism: it is reality. It is an understanding of what is happening in the commercial world out there.

The Minister really needs to look at this again. I understand that he has a commitment not to accept the amendments put forward by my hon. Friend the Member for Greenwich and Woolwich, or, indeed, by me, but I urge him to think again and actually see what that might cost in practice—he can get his officials to look at that—for a large development where, we must remember, only 50% of the residential element may have enfranchised, meaning that 50% may not have; they will be leasebacks. The whole of the commercial element, which could be up to 50% of the development, will also be leasebacks, which will be individuated. The cost of an individual review by a landlord of every single one of those lease contracts will make it impossible for the 50% residential interest to enfranchise. It goes against the grain of the Bill. I urge the Minister to look at that again and come back at a later stage with his own amendments.

Lee Rowley (Conservative, North East Derbyshire)

I will briefly address those points. I understand the broad point made by the hon. Member for Greenwich and Woolwich. If we need to look at specific areas in more detail, I would be happy to receive those from him outside the Committee. We think that the structure will work and is effective. On the point that my hon. Friend the Member for Redditch made a moment ago, officials have spent a significant amount of time trying to make the provisions as watertight as possible. Can I guarantee on absolutely everything that there is no possibility that we have missed something? No. That is why I am happy to take further information from any colleagues on the Committee, but we think that this is a valid prospectus on which to proceed.

My hon. Friend made a point about my potential naivety, although that is not how she described it. I assure her that having dealt with freeholders from a building safety perspective now for 16 months, even though I have dealt with this sector for only a couple of months, I am under no illusions about the cynicism of part of that sector. Even when we go through legal processes—I know that colleagues in this room have had a great deal of this, particularly those who represent urban areas—and it is absolutely clear and staring us in the face that there are responsibilities and requirements to do things with regard to building safety, it is absolutely extraordinary that some freeholders continue to seek to get around their obligations and must be dragged kicking and screaming to them.

I listened to a rather erroneous and misleading discussion on the “Today” programme this morning where the BBC presenter said, “It is all terrible on building safety. An insufficient amount of progress has been made in terms of building safety a number of years on from the very sad events of Grenfell.” It is also the case that a substantial amount of work is going into dragging some of the freeholders to do the things that they are supposed to do in the first place and have the basic humanity to recognise that they need to provide buildings that are safe for people to live in.

I hope that I have assured the Committee that, if nothing else, I am absolutely cognisant of some of the challenges that were indicated by my hon. Friend the Member for Redditch. We hope that the elements that I articulated in my initial comments address some of the egregious situations. One of the reasons why we are tightening covenants is to ensure that there is not a workaround or way around some of the things that we have talked about.

I say to all three hon. Members, including the hon. Member for Brent North, that there is always a balance to be struck, but we are trying to make this as watertight as it can be. Although we cannot accept the amendment, if there is something that we genuinely think we have forgotten or missed, I will happily take further information, separately, and look at it again. We think this provision is okay, but I am always happy to take further information, if it would be helpful.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I thank the Minister for that response. Before turning to amendments 4 and 5, I have a brief note about the amendment tabled by my hon. Friend the Member for Brent North. It is a very strong idea, and there is a genuine deficiency in the law. If he is minded to press it to a vote, I would certainly support him. He may want to return to it at another date.

On amendments 4 and 5, perhaps I have misunderstood the Minister. We are not trying to make the argument that the Government have forgotten to include something in the Bill or that there is something missing; the point is that the exemption that they are providing for low-value claims will cause problems. I have taken on board what the Minister said about the Government’s position being that the exemption is essential to ensure that the new process is fair, but we are very concerned that the prescribed sum that the Secretary of State will bring forward will become the de facto minimum amount payable for those low-value claims. Because of the problems challenging that, I think that leaseholders will be deterred from taking this process forward. That is the best-case scenario.

The worst-case scenario—I fear that this is the more likely scenario, for the reasons outlined by my hon. Friend the Member for Brent North and the hon. Member for Redditch in relation to the behaviour of some freeholders —is that it will become a recipe for litigation and gaming of the low-value exemption in ways that will be detrimental to leaseholders. With that in mind, I am minded to press amendment 4 to a vote and, if that is successful, amendment 5 as well.

Barry Gardiner (Labour, Brent North)

There is a word in the clause that the Minister should pay very specific attention to. Line 29 of proposed new section 89D states that

“‘non-litigation costs’ means costs that are or could be incurred by a freeholder”—

I stress “could”. If the Minister is minded to look at this again, he should ask his officials to do some calculations about what the costs could be. I recognise the figures and have no wish to detain the Committee by pressing this to a vote. I am happy to support my hon. Friend in pressing amendment 4 to a vote, but if the Minister can give me an assurance that he will ask his officials to do that homework, I will not press the amendment.

Lee Rowley (Conservative, North East Derbyshire)

We are certainly happy to write to the hon. Member to articulate the position in more detail and to seek to reassure him on some of the points that he has made.

Clause 13 - Costs of enfranchisement and extension under the LRHUDA 1993

Clause 14 - Replacement of sections 20 and 21 of the LRA 1967

Lee Rowley (Conservative, North East Derbyshire)

I beg to move amendment 35, in clause 14, page 27, line 15, at end insert—

“21ZA Jurisdiction for other proceedings

(1) This section applies to proceedings—

(a) relating to the performance or discharge of obligations arising out of a tenant’s notice of their desire to have the freehold or an extended lease under this Part, and

(b) for which jurisdiction has not otherwise been conferred under or by virtue of this Part.

(2) Jurisdiction is conferred on the appropriate tribunal for proceedings to which this section applies.

(3) But jurisdiction is instead conferred on the court where a purpose of the proceedings is to obtain a remedy that could not be granted by the appropriate tribunal but could be granted by the court.

(4) If, in proceedings before the court to which this section applies, it appears to the court that—

(a) the remedy (or remedies) sought could be granted by the appropriate tribunal, it must by order transfer the proceedings to the appropriate tribunal;

(b) a remedy sought could be granted by the appropriate tribunal and another remedy sought could only be granted by the court, it may by order transfer the proceedings to the appropriate tribunal insofar as the proceedings relate to the remedy that could be granted by the appropriate tribunal.

(5) Following a transfer of proceedings under subsection (4)(b)—

(a) the court may dispose of all or any remaining proceedings pending the determination of the transferred proceedings by the appropriate tribunal,

(b) the appropriate tribunal may determine the transferred proceedings, and

(c) when the appropriate tribunal has done so, the court may give effect to the determination in an order of the court.

(6) Rules of court may prescribe the procedure to be followed in a court in connection with or in consequence of a transfer under this section.

(7) A reference in this Part to the jurisdiction conferred on the appropriate tribunal or the court includes that conferred by this section.

(8) This section does not prevent the bringing of proceedings in a court other than the county court where the claim is for damages or pecuniary compensation only.”

This amendment moves the provision that would have been inserted into the 1967 Act as section 21C. It also includes a new subsection (8) to clarify the effect of the new section.

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss the following:

Government amendments 36 to 38.

Clause stand part.

Clause 15 stand part.

Government amendments 41 and 42.

Clauses 16 and 17 stand part.

Government amendment 43.

Clause 18 stand part.

Lee Rowley (Conservative, North East Derbyshire)

These are minor technical amendments to support the changes that we are introducing—to the jurisdiction of the county court and the property chamber of the first-tier tribunal respectively—to simplify dispute resolution so that leasehold enfranchisement and right to manage cases sit all in one place and in the hands of experts. Amendments 35 and 38 work together to amend and replace a new section to be added to the 1967 Act, which lays out the jurisdiction of the court and the tribunal in relation to particular matters. This section will move to earlier in the Act, as following sections will rely on this provision, and so it is clearer for it to be featured earlier.

Amendment 36 changes the 1967 Act to clarify the jurisdictional boundaries of the county court and the tribunal. Specifically, it clarifies that a party cannot go to the court for an order for compliance with enfranchisement obligations unless their application is linked to other proceedings in that court, and for which the court has jurisdiction. It increases conciseness and clarity.

Amendment 37 is consequential on the amendments that I have set out and serves to ensure that both the Bill and the 1967 Act continue to make sense. These are minor and technical amendments, as opposed to material policy changes. I hope that they will not be contentious and commend them to the Committee.

Turning to clause 14, we have been clear repeatedly today that we want to make it cheaper and easier for people to extend their lease or buy their freehold. However, it is equally important that people can effectively seek redress or launch challenges where needed. Clause 14 will move all enfranchisement disputes to the tribunal so that these matters are dealt with in one place. That will not only make the system simpler to understand but save leaseholders money. They are less likely to need legal advice just to understand the process, and it reduces cases where money is wasted because challenges are launched incorrectly.

On top of that, the new system will ensure that these complex matters are dealt with by those with the right experience, knowledge and expertise at the tribunal that is best equipped to handle these matters. The clause also gives the tribunal important new powers so that it can effectively deal with disputes in its new, expanded jurisdiction. These include requiring parties to comply with duties under the Act, such as payment of compensation to a leaseholder, appointing someone to complete a conveyance, or ordering leaseholders to pay the price due to extend their lease or acquire the freehold. Taken together, these measures simplify and strengthen the system for dispute resolution, and I commend clause 14 to the Committee.

Turning to clause 15, currently some disputes that arise during the enfranchisement process for leasehold houses can be resolved in the first-tier tribunal in England and the leasehold valuation tribunal in Wales, but others must be resolved in the court, which creates a complex situation and causes confusion and additional costs for all parties involved.

The clause addresses that problem by transferring the jurisdiction for dealing with specific matters from the courts to the tribunal. This will result in the majority of enfranchisement disputes for leasehold houses being dealt with and resolved solely by the experienced tribunal. The clause will also allow for payments that would normally be paid into court, such as the premium payable when there is a missing landlord, to be paid into the tribunal. That will mean that the process for resolving enfranchisement disputes for leasehold houses will be easier to navigate and reduce the number of claims that need to go to the courts and the tribunal, which will save time and legal costs. The measures will ensure that the process for resolving disputes is simpler, quicker and cheaper.

Amendments 41 and 42 are also minor technical amendments that support the changes we are introducing. Amendment 41 to clause 16 changes the 1993 Act to clarify the jurisdictional boundaries of the county court and tribunal. Specifically, the amendment clarifies that a party cannot go to the court for an order for compliance with enfranchisement obligations unless their application is linked to other proceedings in the court where the court has jurisdiction. Amendment 42 is consequential on amendment 41. It ensures that both the Bill and the 1993 Act continue to make sense.

Clause 16 makes changes very similar to those made by clause 14, but in relation to the Leasehold Reform, Housing and Urban Development Act 1993, which applies to flats rather than houses. The clause will move a number of matters from the county court to the tribunal so that they are all dealt with in one place. The costs rules in the tribunal, where each side bears their own costs, are also favourable to leaseholders in many cases, while in the county court the loser pays the other party’s litigation costs. The tribunal has the knowledge and experience to deal with those matters best. The clause gives the tribunal the powers it needs to deal with disputes in its new jurisdiction, such as apportioning rent in some cases and requiring parties to comply with the requirements of the amended Leasehold Reform, Housing and Urban Development Act.

Clause 17 addresses jurisdiction for disputes during the enfranchisement process for leasehold flats. It does this in a similar way to clause 15, which relates to leasehold houses. As is the case for houses, some disputes that arise during the enfranchisement process for leasehold flats can be resolved in the tribunal, but others must go to court. The clause will address that problem by transferring the jurisdiction to the tribunal. It will also allow for payments that would normally be paid into court to be paid into the tribunal.

Amendment 43 is another minor technical amendment to support the changes that we are introducing to the jurisdiction of the county court and first-tier tribunal. It simplifies dispute resolution and places things in one place, in the hands of experts. The amendment works together with amendments 35 and 38 to amend and replace a proposed new section to be added to the 1967 Act, which lays out the jurisdiction of the court and tribunal in relation to particular matters. The proposed new section will be moved to earlier in the Act, because following sections rely on it. Again, it is a minor and technical change.

Finally, I turn to clause 18. The current division of power to deal with enfranchisement disputes between different courts and the tribunal creates complexity. Furthermore, High Court cases are much more expensive than the tribunals. Leaseholders often have more limited resources than landlords, and landlords may use the threat of going to the High Court in future as a tactic to place pressure on leaseholders. The clause complements clauses 14 to 17, which shift jurisdiction for most enfranchisement matters to the first-tier tribunal and the leasehold valuation tribunal in Wales.

Clause 18 prevents parties from using the High Court as an alternative forum to the tribunals for determining enfranchisement matters in the first instance, but it does not prevent a party from appealing a decision of the tribunals or affect the jurisdiction of the High Court to consider judicial review claims in respect of the tribunals. The tribunals have the skills and expertise to deal with all aspects of an enfranchisement dispute, including complex questions of valuation, and they are well placed to take over enfranchisement claims. The measure should help to reduce costs and inconvenience, and ensure that disputes are handled by judges with specialist knowledge.

Matthew Pennycook (Labour, Greenwich and Woolwich)

We take no issue with any of the Government amendments in the group. I rise to speak briefly in relation to clauses 14 to 17, which, as the Minister has said, concern the jurisdiction of the county court and tribunals.

The current law divides the responsibility for resolving enfranchisement disputes between the county court and the tribunal, but there is considerable evidence that this creates complexity, can cause confusion and additional expense for the parties, and creates discrepancies due to the differing powers of the county court and of the tribunal to order one party to pay the other’s litigation costs. The workaround that has been attempted—namely, the increased deployment of tribunal judges as county court judges and vice versa—has not overcome the inherent tensions regarding the division of power in this area.

As the Minister has said, clauses 14 to 17 variously amend both the 1967 and 1993 Acts to transfer jurisdiction from the county court to the first-tier tribunal for a number of matters and provide the FTT with the necessary additional powers to exercise its expanded jurisdiction. We welcome these sensible clauses, which enact recommendation 82 of the Law Commission’s final report on leasehold enfranchisement. Although it is our hope that a number of measures in the Bill will have the effect of reducing the frequency with which disputes arise during enfranchisement claims, a great many still will. It is sensible to give a single body responsibility for them, and for that body to be the FTT, given its skills and expertise.

We welcome these clauses, but I want to probe the Minister on the issue of the first-tier tribunal’s ability to deal with all enfranchisement disputes. The tribunal’s present caseload is not unduly onerous, but, following the end of the pandemic, it has reported a gradual increase in its leasehold management work—in particular, challenges relating to service charge costs—as well as more applications for rent repayment orders. In addition, it now has responsibility for resolving the vast majority of disputes arising from the Building Safety Act 2022, including those concerning remediation orders and remediation contribution orders under part 5 of that Act.

The Government are proposing to increase the tribunal’s workload through the changes that they are making through the Renters (Reform) Bill, which is still making its way through the House. In particular, the new statutory procedure for increases of rent that that Bill provides for, with an expanded right for tenants to challenge, is likely to see the level of market rent referrals that the tribunal deals with rise. Now the Government are proposing, through this Bill, that the tribunal also be given responsibility for resolving all enfranchisement disputes. As I said, although we welcome the proposal to do so, the obvious risk of enacting this combination of further and expanded jurisdictions for the tribunal, in the absence of additional funding, judges and court staff, is that it will result in backlogs.

We therefore seek reassurances from the Minister that the Government are thinking seriously about how they will ensure that the first-tier tribunal will be adequately resourced to effectively and efficiently discharge all its new and proposed responsibilities, including in relation to this Bill. Could he tell us what additional resources the Government are proposing to allocate to the property tribunal, and what initiatives are being considered to ensure that it has the relevant skills and capacity to guarantee that it can do that?

Lee Rowley (Conservative, North East Derbyshire)

I welcome the support from the Opposition. As the hon. Gentleman also indicates, these are sensible approaches to take. He is right to highlight his very valid point about capacity within the first-tier tribunal; I am glad that we agree on the principle. He is absolutely right that there is a practicality element, should it survive the continuation of the processes in both this House and the other House. It would be subject to a justice impact test, which, as I understand it, includes a review of capacity, and it would be considered at that point, should it progress through to legislation.

Matthew Pennycook (Labour, Greenwich and Woolwich)

I welcome those reassurances from the Minister.

Clause 16 - Amendment of Part 1 of the LRHUDA 1993

Clause 18 - No first-instance applications to the High Court in tribunal matters

Clause 19 - Miscellaneous amendments

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss schedule 6.

Lee Rowley (Conservative, North East Derbyshire)

Clause 19 brings schedule 6 into effect, including a series of amendments that follow on from the introduction of 990-year lease extensions and statutory break rights where 990-year lease extensions occur. Those rights allow a landlord to end an extended lease at limited windows of opportunity so that they may redevelop, such as to enable the continued good use of land where a building is beyond its useable lifespan. The schedule removes defunct rules regarding staying on in properties after a lease extended by 990 years expires, and includes a definition of a shared ownership lease.

Schedule 6 assists with the introduction of 990-year lease extensions. The schedule removes provisions that prevent sub-leaseholders from having various statutory rights to security of tenure when their lease ends. The provisions are no longer relevant as we are expanding lease extension rights for sub-leaseholders. It is also unlikely buildings would still be standing in 990 years’ time—much as we would like many of them to be—and that reduces the relevance of what happens when such a lease ends.

The schedule accommodates 990-year lease extensions by adjusting the limited windows in which statutory break rights can be used by landlords to redevelop a property. In houses and flats, the rights will be available in the last 12 months of the original lease term and the last five years of each subsequent 90-year period of a 990-year lease extension.

We understand and recognise the strong concerns leaseholders have about the use of break rights by landlords. It is likely, however, that a building will not outlast the term of a 990-year extended lease. Break rights will therefore be necessary, by logic, to enable the continued good use of land over long periods of time. They can only be used where a landlord obtains a court order, and compensation must be paid to leaseholders. We hope we have made a necessary balance between enabling longer lease extensions and addressing the practicality of the lifespan of buildings.

The schedule also repeals redundant provisions on estate management schemes, which the law no longer permits to be approved. An estate management scheme allowed a landlord to retain some management control over properties, amenities and common areas where the freehold has been sold to leaseholders. The schedule inserts a new definition of “shared ownership lease” for enfranchisement law. The definition is required for the exclusion of shared ownership leaseholds from freehold acquisition rights. It will also be required for upcoming amendments, by which we will give lease extension rights to shared owners and shared ownership providers in respect of their intermediate leases.

Existing provisions on right to enfranchise companies are also repealed. The provisions were never commenced but would have set new requirements for who can be the nominee purchaser in a collective enfranchisement. The provisions have been identified as problematic and burdensome for leaseholders, and it is therefore appropriate to repeal them.

Schedule 6 - Leasehold enfranchisement and extension: miscellaneous amendments

‘Part 3 - Reduction of rent under intermediate leases

“Part 1A - Shared ownership leases and the LRA 1967 etc

Part 1B - Shared ownership leases and the LRHUDA 1993

Clause 20 - LRA 1967: preservation of existing law for certain enfranchisements

Lee Rowley (Conservative, North East Derbyshire)

Clause 20 preserves the right of leaseholders to acquire the freehold of a house using the Leasehold Reform Act 1967 as it existed prior to amendment by the Bill. This will be applicable only where the property would be valued using the valuation basis for calculating premiums under section 9(1) of the unamended 1967 Act. Claims made under the section 9(1) valuation basis will remain as a separate freehold acquisition right, independent of the new reforms. Leaseholders who do not qualify for a section 9(1) claim will still benefit from our wider reforms, which will make it cheaper and easier for existing leaseholders in houses and flats to extend their lease or buy their freehold. I commend the clause to the Committee.

Clause 21 - Right to vary long lease to replace rent with peppercorn rent

Lee Rowley (Conservative, North East Derbyshire)

I beg to move amendment 44, in clause 21, page 38, line 16, leave out

“a peppercorn rent is payable”

and substitute

“the whole or part of the rent payable becomes and will remain a peppercorn rent”.

This amendment corresponds to the change to paragraph 1(1) of Schedule 7 which would be made by Amendment 75.

Caroline Dinenage (Conservative, Gosport)

With this it will be convenient to discuss the following:

Government amendment 75.

Clause stand part.

Lee Rowley (Conservative, North East Derbyshire)

The ground rent buy-out right was recommended by the Law Commission and enables leaseholders to buy out their ground rent without extending their lease. As the buy-out is subject to the 0.1% freehold value cap, with some exceptions, the right will be especially useful for leaseholders with high or escalating rents. The right is introduced by clause 21, which introduces schedule 7, where the right is detailed. Ground rent buy-out claims can be brought by the leaseholder serving a rent variation notice on the landlord for the lease to be varied on payment of a premium, so that the rent payable is a peppercorn. The ground rent buy-out amendments, which stand in my name, mostly simplify and clarify the provisions in schedule 7.

Amendments 44 and 75 concern the nature of, and right to, a ground rent buy-out. Amendment 44 would amend clause 21, and amendment 75 would make a similar amendment to the first paragraph of schedule 7. Both have the intention of better describing the nature of the right, and I commend the amendments to the Committee.

I turn now to clause 21 itself. As I have explained, leaseholders with very long remaining leases may want to buy out their ground rent without having to extend their lease. For some leaseholders, adding further years to an already long lease might be considered unnecessary or involve additional costs. The buy-out will be useful to those leaseholders with high or escalating ground rents who find themselves in difficulty when trying to sell or remortgage their property. There is currently no statutory right for buying out ground rent without extending a lease, and a voluntary buy-out, if it could be negotiated, would not benefit from the cap. A new right for leaseholders to buy out their ground rent is therefore necessary.

Clause 21 brings schedule 7 into effect. Schedule 7 makes provision for a new right to buy out the ground rent under a lease with a remaining term of 150 years or more. As we discussed this morning, 150 years was chosen as the threshold for this right so that the term remaining is long enough for the leaseholder to be unlikely to want to extend the lease. A lower minimum term would create a risk that poorly advised leaseholders might buy out the ground rent when an extension is in their interest, only to find that they need to extend later and have to pay for two sets of transaction costs.

On the payment of a premium to the landlord, the lease is varied so that the future ground rent payable is a peppercorn. The buy-out premium is subject to a 0.1% freehold value cap, so any future ground rent payable that exceeds 0.1% of the freehold value of the property is treated in the calculation of the premium as if it is only 0.1% of the freehold value. This ensures that high or escalating ground rents, such as those that were articulated in the Committee’s discussions last week, do not make the premium unaffordable for leaseholders. As such, the ground rent buy-out right will be especially useful for leaseholders with long terms remaining who have high or escalating ground rents. I commend the clause to the Committee.

Matthew Pennycook (Labour, Greenwich and Woolwich)

For the purposes of anyone following our proceedings, there are several issues that we wish to raise in relation to clause 21 and schedule 7, but we will do so when we come specifically to debate schedule 7, which, as the Minister said, is where the right is detailed.

Rachel Maclean (Conservative, Redditch)

If it is the case that I can speak to schedule 7 at a later time, I will defer my comments till then.

Lee Rowley (Conservative, North East Derbyshire)

I look forward to hearing colleagues’ comments in due course.

Written evidence reported to the House