My Lords, I draw attention to my interests, as set out in the register, in various businesses associated with property, including long leasehold property, though, I hasten to add, not including residential ground rents. As the Minister has already made clear, this is the first part of a two-stage reform process. I am sure that this afternoon the House will hear many issues raised which relate to stage two and there will, no doubt, be a very deep debate about that stage of the reform programme before we move to it. I shall attempt to focus my comments today on stage one—the Bill before the House.
As the Minister indicated in his opening remarks, this issue has been on the Government’s agenda for some time. When I was serving in the previous Government, it was a live issue in 2018 and 2019 and some considerable time and energy was spent looking at the wider issues of leasehold reform. Residential ground rents have been around for many hundreds of years. It is fair to say that, until relatively recently, residential ground rents themselves have not been the major cause of concern. Service charges, management practices and the broader operation of the leasehold property system have occasioned some concerns, but ground rents themselves generally did not.
Unfortunately, over the last decade or two, as the previous two speakers have outlined, we have seen an increasing practice of ground rents being used not as a nominal annual payment but as a substantive and escalating one. That has been an abuse which clearly has to be tackled now; it has rendered the need for radical reform unavoidable. I note the CMA investigation into the practices of doubling ground rents. I also pose the question: where were the conveyancers of these innocent leaseholders who apparently did not understand the nature of the transaction they were entering? I hope that the relevant bodies will also be looking at whether conveyancers did their job properly during these processes.
So I accept that there needs to be reform; I accept the need for the abolition of long leasehold ground rents; and I say to the Minister that I think that the Government’s current approach of seeking to abolish ground rents rather than leasehold in its entirety—is a much more practical solution. But I want to ensure that the measure is narrowly focused and does what it intends to do.
The Government have, I think, made clear that narrow focus, and that the Bill is targeted at long leaseholds where, typically, a substantial premium is paid by the purchaser of the leasehold interest. The noble Baroness, Lady Pinnock, talked about an example where a premium of £170,000 had been paid for the property, yet there is a recurring ground rent— maybe doubling regularly—that will in future become a substantial payment to be made annually on top of the initial, substantial purchase price. The Bill will make that recurring payment a peppercorn only, so that, in effect, the premium paid for the acquisition of the lease becomes the only payment for the effective purchase of the right to use the property for the duration of the lease, with no further payments due.
The second stage of the Government’s reform programme will deal with rights to extend leases in such a way that, in practical terms, the premium paid at the outset of the lease will deliver almost the same outcome for the leasehold property occupier as the purchase price delivers to a freehold purchaser.
My purpose in intervening today is to ensure that the stated narrow intention of the Bill is delivered in the outcomes. But the Bill does not, as the Minister has already acknowledged, define ground rents, although I think in discussion we all know what is meant by them. The Bill in fact reduces all rents on long leases, whether they are ground rents or not, to a peppercorn. That was not my understanding of the Government’s intention for the Bill. So, if person A buys a freehold residential property and lets it to person B for 25 years at no premium at all but an annual rent of £5,000, that rent, as I understand it, would be reduced to a peppercorn—and that would deliver an unjust outcome. Person A would not receive the rent they legitimately expected to receive. Person B would enjoy the occupation of that residential property for 25 years without paying a single penny at any stage, either as premium or as rent. That is not, as I understood it, the intention of the Government’s legislation.
In an alternative example, a fund might invest in build-to-rent properties but not want to manage and operate them itself, so might grant a 25-year lease to an operating company that would then let the properties on assured shorthold tenancies to occupiers. But, again, unless the business lease exception in Clause 2 applies, I fear that the rent in question could be reduced to a peppercorn.
I am hoping the Minister will be able to clarify and confirm, in his winding-up speech, that where there is no substantial premium paid, and where the consideration for occupation of the property is wholly in the form of an annual, quarterly or monthly rent, it is not the intention of this legislation to abolish that rent—and I hope the Minister will be able to explain how that can be made clear to participants in the market.
There is one other point I seek to clarify: home finance leases, as the Minister has said, are excepted by Clause 2. Clause 2(8) also provides that a lease will be excepted if, inter alia,
“it meets any further conditions specified in regulations made by the Secretary of State.”
If the Government have any plans to bring forward such regulations, it would be helpful if they could publish them in draft. If they do not have such plans, it would be very helpful if the Minister could make that clear, so that any blight placed on the market by the possibility of imminent further regulations is removed.
I support this Bill and the purposes that have been stated to lie behind it. I look forward to the Minister’s clarifications on the points I have raised. Subject to it being clear that the Bill does what we have been led to believe it is intended that it should do, I will be happy to support it and engage in the substantive discussion on the second stage of reform in due course.
3.16 pm