My Lords, I apologise in advance for the length of my response. This is a large group so I might go on for quite a long time. I apologise for that, but I think it is important that I respond to all the amendments.
I thank the noble Lord, Lord Khan of Burnley, who spoke to the amendments from the noble Baroness, Lady Taylor. Amendment 67 seeks to give the right to challenge the reasonableness of a service charge to leaseholders who pay a fixed service charge. I recognise that leaseholders who pay fixed service charges do not have the same right to challenge the reasonableness of their service charges as leaseholders who pay a variable service charge. However, there are good reasons for that. The main sectors where fixed service charges exist are the retirement and social housing sectors, where households are often on limited or fixed incomes; certainty over bills is paramount for these homeowners. Leaseholders, especially on low incomes, who pay a fixed service charge have more certainty over the amount of their service charge compared with those who pay a variable service charge. They will know about and understand the level of the charge before they enter into an agreement.
Landlords benefit from not having to consider tribunal applications, but in return they have a clear imperative to provide value for money: if they underestimate the costs, they will have to fund the difference themselves. They will still need to provide the quality of service as set out in the lease since, if they do not, they may be taken to court for breach of that lease.
By giving the right to challenge fixed service charges in a similar way to how variable service charges can be challenged, there would likely be operational and practical
challenges. For example, if landlords underestimate costs in one year but overestimate them in another, it is feasible and reasonable to be able to challenge the unreasonableness only in the year when costs are overestimated. It is not proposed to give the landlord an equivalent right to apply to seek to recover the balance of an underestimated cost on the basis that it would be reasonable to do so. There is a possibility that landlords may move to variable service charges, and that could have unintended and undesirable consequences for leaseholders with a fixed income who benefit from the certainty of fixed service charges.
Through the Bill, leaseholders who pay a fixed service charge will be given additional rights. Landlords will be required to provide the minimum prescribed information to all leaseholders. I consider that the additional rights given to leaseholders who pay fixed service charges will allow them to better understand what their service charges pay for, and to hold their landlord to account. I hope that, with that reassurance, the noble Lord will not move the noble Baroness’s amendments.
I thank the noble Lord for Amendment 69 in the name of the noble Baroness, Lady Taylor, which seeks to remove the provision that enables the appropriate authority to exempt certain categories of landlords from the requirement to provide a standardised service charge demand form to the leaseholder. I recognise the importance of all leaseholders receiving sufficient information from their landlord to enable them to understand what they are paying for through their service charge. Requiring landlords to provide leaseholders with a standardised service charge demand form contributes to increased understanding. However, I am aware that there could be instances now or in the future where it is necessary to exempt landlords from that requirement. It could be too costly or disproportionate to expect certain categories of landlords to provide that level of information. As the Minister for Housing mentioned in the other place, one example might be the Tyneside leases.
Prior to any exemptions being agreed, we will consult with stakeholders to determine whether an exemption is justified. I emphasise that the list of exemptions is expected to be small—if it is needed at all, in fact—and full justification will be required for any agreed exemptions. I note the noble Baroness’s concerns but I hope that, with this reassurance, the noble Lord will not move the amendment.
I also thank the noble Lord, Lord Khan of Burnley, for Amendment 76, which would create a power for the appropriate authority to prescribe the maximum costs that landlords may pass on to leaseholders for providing information. I recognise that leaseholders can face increasing service charge costs and that not capping costs for providing information could drive landlords to charge unreasonable amounts.
5 pm
However, introducing a cap would be difficult, as landlords will incur varying costs that are dependent on the information requested and the difficulty of obtaining it. By law, service charges must be reasonable, and measures within the Bill strengthen the requirement for costs included within the service charge demand to
be transparent. I consider that these provide sufficient protections for leaseholders to ensure that landlords do not charge excessive amounts and that the costs are reasonable. I hope that, with this reassurance, the noble Lord will not move Amendment 76.
Amendment 77 tabled by the noble Baroness, Lady Thornhill, would allow the First-tier Tribunal in England or the leasehold valuation tribunal in Wales to award damages against landlords at the point that leaseholders buy the freehold of their blocks. We do not think that this amendment is appropriate, and we also think that it is unworkable. Clause 56 expressly refers to consequences for failure to provide information. These damages are awarded following an application to the appropriate tribunal and on the basis of the information available. Therefore, it is not appropriate or consistent with judicial proceedings to delay any award. Any poor behaviour by the landlord during enfranchisement is best dealt with through the normal process for doing so.
Amendment 78 from the noble Baroness, Lady Fox, seeks to clarify when a landlord may seek dispensation from the need to consult leaseholders when major works need to be undertaken. Currently, a landlord can make an application to the appropriate tribunal for a dispensation from the requirement to consult on major works or before entering into a qualifying long-term agreement. The tribunal will make a judgment on whether a dispensation from the consultation requirements is reasonable. This amendment would require landlords to prove that there is an urgency behind the need for dispensation from the consultation and would place the onus on the landlord. This would enhance the rights of leaseholders and empower them to have greater influence over major works.
However, there are potential unintended consequences. It might overly narrow the scope of the discretion given to the tribunal since, for example, it may be desirable to carry out works sooner rather than later, in the interests of managing the building. Furthermore, where it is unnecessary, under this amendment landlords would be required to carry out more consultation for no real benefit, and this could come at an increased cost to leaseholders. I believe that the appropriate tribunal is best placed to consider the circumstances of each application for dispensation. The tribunal is able to consider a wide range of matters when deciding whether it is reasonable to dispense with consultation requirements, and we would not want to narrow the grounds for dispensation.
There are already protections for leaseholders, in Section 19 of the Landlord and Tenant Act 1985, that ensure that service charges payable by leaseholders, whether or not they are for “major works”, must be reasonable. There are also measures in the Bill to drive up service charge transparency, including leaseholders being given greater notice of anticipated major works and being provided with more information about the major works that will be carried out on their properties.
I admire the noble Baroness’s commitment to protect leaseholders from unreasonable costs from major works, and I hope that, with this reassurance, she will not move her amendment. I shall certainly look at Hansard
tomorrow, because she brought up a number of other issues, which I would like to discuss further with her, if she is willing.
I thank my noble friend Lord Bailey for Amendment 78A, which seeks to strengthen the service charge disputes regime by introducing proposed new Sections 27B to 27E to the Landlord and Tenant Act 1985. Proposed new Section 27B would introduce a requirement for a landlord to notify all leaseholders in their block of any application under Section 27A of the Landlord and Tenant Act 1985 and to assume that all leaseholders in that block are party to the application for a determination unless they opt out.
Proposed new Section 27C would introduce a duty on landlords to reimburse leaseholders for any costs deemed to be unreasonable, if a determination made in favour of the leaseholder is made by the appropriate tribunal. The landlord must account to all leaseholders within two months of the determination. Proposed new Section 27D would introduce a power to enable the appropriate tribunal to award interest on any determination in favour of the leaseholder, when a leaseholder has made an application.
I fully agree with the intention behind the proposed scheme that there must be a robust regime in place to challenge service charges. We are aware that the existing statutory requirements to protect leaseholders do not go far enough, which is why we are introducing measures in the Bill which will enable leaseholders to account for the money they spend. However, I cannot accept the amendment as it stands.
First, this is due to the role of the tribunal itself. Decisions made in the First-tier Tribunal in England and the Leasehold Valuation Tribunal in Wales are subject to the principle that a decision of a lower tribunal is persuasive only in another application. This means that it does not bind another tribunal as an appellate tribunal decision would. Each decision must depend on its own circumstances, even when considering facts similar to those of another application.
Secondly, while in some circumstances it may be beneficial for as many leaseholders as possible to become party to a claim, it may not be appropriate to do so all the time. Leaseholders may have their own reasons not to join the proceedings, so it is not right that the default is to make all leaseholders party to a claim. There is nothing to stop neighbouring leaseholders joining together in the first place using formal means, such as a resident tenants’ association being a party to proceedings, or informal means, such as knocking on doors.
There are also risks in a leaseholder involuntarily becoming a party to proceedings. By joining, they will be bound by the decision of that tribunal and also risk being made liable to pay the landlord’s legal costs of those proceedings where the landlord wins and is permitted by the tribunal to pass on its costs. This will be the case even when the leaseholder does not play a substantive role in the proceedings. There is also a risk that this approach would slow down the system somewhat. Landlords would be required to notify all affected leaseholders, which may hinder the whole process and make tribunal case management unnecessarily cumbersome.
The appropriate tribunals already have adequate case management powers to either add parties to a single set of proceedings or, in England, to direct that one or more cases be specified as a lead case. This is set out in Rule 29 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. For these reasons, while I share the underlying sentiment put forward by my noble friend, I cannot accept his proposal and therefore ask him not to move his amendment.
I thank the noble Baroness, Lady Jones of Moulsecoomb, for her amendment, which calls for a review of the municipalisation of public assets funded by leaseholders. However, I do not think these measures are necessary. As the noble Baroness is aware, the services that leaseholders must pay for are set out in their lease, alongside their expected contribution towards such costs. This may cover not only issues directly relating to buildings but, in some circumstances, may include a contribution to the common parts of the wider estate. This may also be the case in respect of social landlords.
The Landlord and Tenant Act 1985, as amended by Clause 51 of the Bill, sets out what is meant by a service charge and what it may cover. By law, the relevant costs that are taken into account in determining the amount of any service charge must be reasonably incurred and the works or services must be of a reasonable standard. Leaseholders may challenge the reasonableness of any such charges in the First-tier Tribunal in England or the Leasehold Valuation Tribunal in Wales. Furthermore, leaseholders may apply to the county court for damages where they consider that the landlord has breached the terms of the lease.
Leaseholders with social housing landlords are also able to complain to their landlord or, if unhappy with their landlord’s response, to the Housing Ombudsman Service if they have concerns about the behaviour of their landlord. This right includes complaints about the calculation, collection or communication of service charges.
Through the Bill, we are introducing measures to empower leaseholders to better scrutinise and challenge unreasonable landlord fees. We consider that these measures provide sufficient protection to ensure that service charge money is used for its intended purposes. I therefore request that the noble Baroness does not move her amendment.
I thank the noble Earl, Lord Lytton, for his Amendments 78C to 78H. Taken together, these measures would represent a total overhaul of the way in which we regulate how buildings are managed and paid for. This overhaul would also introduce in many cases a standard approach for doing so. As the noble Earl is aware, the Government have recognised that the existing statutory regime around service charges does not offer sufficient protection to leaseholders. That is why we are introducing measures to address this and to enable landlords to be better scrutinised and challenged in relation to any charges considered unreasonable.
While I am very keen to listen to ideas on how to improve the regime, I question the merit of doing so at this time. Leasehold law is complex and there are many interactions between various sections that need
to be fully understood and considered to ensure that there are no unintended consequences. I will take the amendments in turn.
Amendment 78C seeks to introduce a requirement for costs to be treated as incurred where there is an unconditional obligation to pay them. We do not think that this amendment is necessary as case law has already been established as to when relevant costs have been incurred.
Amendment 78D seeks to replace the “reasonably incurred” test of a service charge with a value for money assessment. I am not convinced that this is an appropriate judgment to make, as “reasonableness” is a well-defined term, with considerable case law, whereas value for money is a subjective term that would still be open to considerable debate on the interpretation of the given definition. The use of “reasonableness” already allows the tribunal to consider value for money when determining whether or not a relevant cost is reasonable, while also allowing for wider issues to be considered. I do not think that we should be changing one of the fundamental pillars of the service charge regime at this stage.
I have just been told that time is up. I am very happy to answer all noble Lords’ questions, which will take me another five minutes, or to sit down. I did warn noble Lords that there were a lot of questions and I think it is worth answering them all.
5.15 pm
Amendment 78E seeks to require a landlord to provide leaseholders with information and to update the information regularly. I agree that providing more information to leaseholders is vital in order to help them hold landlords more easily to account. However, this is already what Clauses 53 to 55 seek to achieve.
Amendment 78F, supported by the noble Lord, Lord Thurlow, seeks to prevent landlords entering into a contract for the provision of goods or services with a related party or connected person. The landlord is best placed to manage their building, but I do agree that any connections should be well understood. I am particularly aware that this is often an issue regarding “captive insurance”. Under Section 20 of the Landlord and Tenant Act 1985, landlords are required to notify leaseholders if a tender for a major works contract or qualifying long-term agreement is from a connected party. This amendment is therefore not necessary, as appropriate measures are already in place.
Amendment 78G seeks to prevent landlords entering into a contract that is for more than five years. Long contracts are particularly common with local authorities, which tend to procure major works programmes under public procurement legislation. There are measures in place to ensure that leaseholders are consulted in cases where contracts are over 12 months and the cost to a leaseholder exceeds £100. This measure is therefore not necessary, although I recognise the risks associated with long-term contracts.
Amendment 78H seeks to enable a leaseholder to undertake cosmetic work without approval from their landlord. I assume that the noble Earl is referring to works within a leaseholder’s property. Works that leaseholders may or may not carry out to their premises
are set out in their lease, and having a prescribed list may not be appropriate in all circumstances. It may also disadvantage some leaseholders and I therefore ask the noble Earl not to press the amendment.
Amendment 78I, spoken to by the noble Lord, Lord Khan of Burnley, seeks to prevent landlords passing on costs imposed on them, whether by the regulator, under a consumer redress order or following an outcome in an alternative dispute resolution, in relation to the landlord’s mismanagement of communal heating systems. Where communal central heating systems are used in leasehold buildings, the obligations of the landlord and the rights of leaseholders will be set out in the terms of individual leases. However, where fines, penalties or compensation payments are imposed on the landlord because of their mismanagement, they are already prevented from passing them on to leaseholders. This is because they are not a relevant cost within the meaning of Section 18 of the Landlord and Tenant Act 1985.
Through measures in this Bill to drive up transparency, we will make it even harder for unscrupulous landlords to pass on unjustified and unlawful costs. Furthermore, where a landlord fails to comply with obligations under the lease, the leaseholder can bring a claim for damages in the county court for the landlord’s breach of the terms of the lease. Leaseholders may also consider applying to the appropriate tribunal for a manager to be appointed in place of that failing landlord. I therefore ask the noble Lord not to press this amendment.
Amendment 78J, also spoken to by the noble Lord, Lord Khan of Burnley, seeks to enable leasehold estates to reduce their carbon emissions and increase their energy efficiency as part of the net zero targets. It would be done through introducing qualifying energy efficiency or retrofit improvements measures to buildings. These improvements would be paid for by leaseholders through the service charge. Improving energy efficiency in our homes is important for keeping homes warm, dry and cheaper to heat. Our ambition, as stated in the 2021 heat and buildings strategy, continues to be that homes should meet EPC 1 by 2035 where reasonable cost-effective practicalities allow. We have been working across government to make the ambition a reality.
I fully support the intention behind the amendment—to help improve the energy efficiency of homes—but introducing statutory improvement work provisions would require careful consideration in order to avoid unintended consequences, not least in relation to costs. While I appreciate that the amendment would enable the Government to set more detail through secondary legislation, there are a range of factors to consider, including potential caps on improvement projects, who pays for ongoing maintenance, and the mechanism through which leaseholders may challenge costs or works if they consider them unreasonable. The amendment could lead to significant additional costs being passed through to leaseholders. It would impose a significant change on all parts of the sector, and we must carefully consider the implications for landlords and managing agents, but mainly for leaseholders.
Of course, the Government support energy efficiency, as I said. Our reforms in the Bill of the right to manage and enfranchisement will empower leaseholders
and provide them with greater leverage over their buildings to make alterations in support of net zero. I therefore ask the noble Lord not to press the amendment.
Amendment 80A, tabled by the noble Earl, Lord Lytton, seeks to require that insurance proceeds are held in a separate and dedicated fund. I assure the noble Earl that the landlords’ duties to their leaseholders regarding maintenance, repair and insurance apply regardless of whether moneys are held in a separate fund or not. The amendment also aims to ensure that insurance proceeds for the destruction of or damage to a building be used to carry out repairs and maintenance on the building as soon as reasonably practical. I agree with the noble Earl’s intention to ensure that landlords fulfil their duties in a timely manner. Landlords’ obligations to repair or renew are set out in the lease, and failure to act within a reasonable period would usually amount to a breach of the lease. A leaseholder could apply to the court for an injunction requiring their landlord to perform their contractual obligations and seek damages from them for their failure to do so. However, the amendment as drafted, although well meaning, would not lead to landlords complying with their obligations more quickly.
I also thank the noble Earl, Lord Lytton, for his Amendment 80B, which aims to prevent the misuse of insurance proceeds in the event of a claim. The noble Earl may have a particular case in mind, and I agree with his intentions, but I am of the view that such misuse is already prohibited. The creation of a new statutory offence, therefore, is not necessary. The amendment as drafted, although well meaning, would not lead to rogue landlords changing their behaviour. I hope that, with these reassurances, the noble Earl will not press his amendments.