Leasehold and Freehold Reform Bill

Baroness Scott of Bybrook Excerpts

Committee stage
Wednesday 24th April 2024 Lords Chamber

We strongly support my noble friend’s amendment. As the noble Lord, Lord Best, has said, 2 million leaseholders may be affected. We support it on their behalf and not least because it meets the overall aim of the reform to leasehold as stated by the Government and in the Bill: that it should reduce enfranchisement premiums while maintaining sufficient compensation for landlords. It also sets out a clear and practical route map for the implementation of such a scheme. We look forward to hearing from the Minister about how she might make the necessary progress on this issue.

[The Parliamentary Under-Secretary of State, Department for Levelling Up, Housing & Communities (Baroness Scott of Bybrook) (Con)]

My Lords, I thank the noble Baroness, Lady Andrews, for her Amendments 23 and 24 on development value. I also thank her very much for meeting me on this subject.

The amendments would introduce a scheme where enfranchising leaseholders would not pay development value if they guaranteed that they would not develop for a period of 10 years. Under the current law, lease- holders are sometimes required to pay development value when collectively enfranchising a block of flats. This is the value of the potential future development of the property, such as through adding another storey to the building, as we have heard. We recognise that development value can make the cost of enfranchisement prohibitively high.

We are committed to bringing forward a workable scheme and are exploring this area further. It is, as we have found, however, an area fraught with loopholes and technical detail. To be honest, it will take us time to get this right.

Before I finish, I want to bring up permitted development, because all noble Lords have brought this up. As noble Lords probably know, the Government have recently consulted on making changes to various permitted development rights. The consultation ran for eight weeks from 13 February to 9 April. We are considering the responses and I am sure we will have a debate on those in this House in due course.

The noble Baroness, Lady Andrews, is right about this issue. We know about it and we support her, but it is difficult. I would like to meet her again, and anybody else who would like to come, to go through her amendments in detail and take things forward in that way.

[Baroness Pinnock (LD)]

Could the Minister tell the Committee whether the problem that the noble Baroness, Lady Andrews, has defined could be resolved by removing permitted development rights altogether on these blocks of flats? This goes back to what was the case. If any development was proposed, it had to go through the normal application to the local planning authority.

[Baroness Scott of Bybrook (Con)]

I do not think that would be a sensible solution, because there might be times when permitted development might be the correct thing to do and everybody might be happy about it, including those leaseholders who have enfranchised. We need to take this steadily because it is fraught with complexity.

[Baroness Andrews (Lab)]

I am extremely grateful to everyone who has supported the amendment, especially the noble Baroness on my Front Bench. I am also particularly grateful to the Minister. I understood her to say that the Government are committed to bringing forward a workable scheme to deal with this problem, which is exactly what I wanted to hear. I know it must be fraught with difficulties. There are lots of rights and planning issues involved. There is a whole nest of issues that would have to be addressed. The important thing is that it be in line with the timetable for the Bill. Perhaps she will be able to say more about this when we meet, but I hope that it will be either aligned in the timetable, so that there is no more confusion and we can get this tracked as soon as possible, or, if it requires legislation, in the Bill. I take the point, and I would be very happy to meet her—and to take in with me an army, and its advisers.

I have one further reflection on the PDR review. I did my homework—I did what the Minister said, and I saw whether I could use the current PDR review as a way of raising this, but it does not allow me to do that; it is too narrow in scope. Therefore, in fact we need a proper review of PDR, because the implications are so varied and wide. If the Government could commit to that, there would be a lot of political capital in it. In the meantime, I am happy to leave this amendment, and we will see and wait on progress.

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Moved by

[Baroness Scott of Bybrook]

25: Schedule 4, page 157, line 35, at end insert—
“(1A) If section 3(3) of the LRA 1967 applies to the current lease (successive leases treated as a single lease), sub-paragraph (1) is to apply only if the one of those leases which is in effect at the valuation date is a market rack rent lease.”Member's explanatory statement
This modifies the application of paragraph 8 where successive leases are “chained” to constitute a long lease under the LRA 1967.

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[Lord Khan of Burnley (Lab)]

My Lords, this has been a more wide-ranging debate than was anticipated at the beginning of the group. The noble Lords, Lord Howard and Lord Moylan, made some interesting points in introducing their amendments, and it is for the Minister to clarify and address her noble friends’ concerns. All three amendments in this group attempt to make changes to Schedule 4, which is where the market- value element of the premium for any enfranchisement claim is determined.

I listened to the noble Baroness, Lady Fox of Buckley, in relation to the European Convention on Human Rights. Although we have differing views on that, it is interesting how legislation and the regard for international law are debated in different debates in this House—without pinpointing any noble Lord in particular.

The noble Baroness, Lady Deech, laid out and stipulated the complexity of the issue as a teacher in property law, while the noble Lord, Lord Thurlow, as a student of property law, made some interesting points about complexity and about working and bringing change in a fair manner.

In conclusion, I ask the Minister what consideration the Government have given to the principles of grandfathering for leases of various lengths and other conditions when developing the Bill? For example, in the instance of a lease of a very short length, when the Bill becomes law, what are the ramifications of the Bill as it is written? Do the Government think that some shorter leases are going to be treated in a way that may be fairer on wider principle but do not seem appropriate, given the shorter lengths? If so, did they consider any mitigation?

I finish by referring to my noble friend Lord Truscott, who advocated in a diligent manner the ending of marriage value and talked about the wider unfairness in leasehold properties. I look forward to the Minister’s response.

[Baroness Scott of Bybrook (Con)]

My Lords, I thank my noble friends Lord Howard and Lord Moylan for their amendments in this group. Amendments 26 and 27 would require marriage value or possible hope value to be payable by a leaseholder who has fewer than 80 years remaining on their lease on the passage of the Act.

The Government’s stated objective is to make it cheaper and easier for leaseholders to extend their lease or acquire their freehold. We want them to attain greater security of tenure. The amendments are directly counter to our objective. In particular, they would prevent us from helping the trapped leaseholder—that is, a leaseholder with a short lease who is unable to afford to extend because of the prohibitive marriage value payable, and so is trapped with an asset of diminishing value.

We do not believe that the leaseholder should have to pay marriage value. For the freeholder, the marriage value that is payable under the current law is a windfall created by the freehold and leasehold interests being married earlier than they otherwise would have been—namely, at the end of the lease. It is a sum that the freeholder would not receive if the lease ran its course. Parliament has previously determined that the value should be split equally and the leaseholder should pay half of it to the freeholder on enfranchisement, but we do not believe that freeholders should continue to receive that windfall.

The leaseholder needs to enfranchise, because by its very nature a lease is a wasting asset. Without either extending their lease or buying their freehold, they will suffer financial loss as the lease runs down or lose possession when it has fully run down. Nor has the lease- holder meaningfully chosen to enter such an arrangement, since leasehold is very often the only available form of tenure outside the rented sector at certain price points or in certain locations. The lease- holder’s need to enfranchise is born out of their insecurity of tenure; that is, out of the inherent injustice of the leasehold system. Our objective is to enable them to obtain greater security and to address that inherent injustice. By not having to pay marriage value to the freeholder, the leaseholder’s ability to obtain security of tenure is much improved.

A third party who bought the landowner’s interest would not pay marriage value, and we do not think it is right that the leaseholder should pay more than that same interest. Requiring leaseholders to pay more than a third party—or, in other words, enabling the freeholder to profit from the sale to a leaseholder by comparison to a third party—is to punish the leaseholder for their need to enfranchise, and therefore to affirm the very injustice we are trying to address.

The noble Earl, Lord Lytton, and many other noble Lords brought up compensation. Under our valuation scheme, the freeholder is compensated as if the lease simply ran its course. We believe that this is adequate compensation; it is sufficient to reflect their legitimate property interests.

Amendments 26 and 27 would also further complicate an already complex system. They would create a new two-tier system, with different rules for leases that were under 80 years at the time of the Act and those that fell under 80 years thereafter. This is undesirable, as it runs contrary to our stated aim to simplify this complex tenure.

Before I move on to Amendment 29, I will answer one or two specifics. First, the issue of human rights has been brought up by a number of noble Lords. The Government consider that all provisions in the Bill are compatible with the relevant convention rights and that in the case of the provisions engaging Article 8 and A1P1 any interference is justified and proportionate. There is a GOV.UK page where noble Lords can read further information on that should they wish.

The noble Baroness, Lady Deech, also brought up phasing, which is important. Following Royal Assent, we will allow time for a smooth transition to a new system, while making sure that leaseholders and freehold home owners on private and mixed-tenure estates— which is an issue—can benefit from it as soon as reasonably possible. We will also support leaseholders, freeholders, landlords and agents to adjust to and understand the new rules. We will work with delivery partners to make sure that the necessary support is in place, including through the publication of appropriate guidance.

[Baroness Deech (CB)]

I am grateful to the Minister for those comments. It reminds me that in the case of the 1925 legislation, the centenary of which approaches us, there were six different statutes with a long lead-in time. Apparently, many solicitors gave up practice entirely because they could not cope with the new law, so it is good to know this will be gently introduced.

On human rights, I am all in favour of the European convention; I would not want to drop it. I just find it rather dismaying that if the possible claimant were a hedge fund manager or a rich freeholder then we should not worry about them. The point about the European Convention on Human Rights is, whether you like the claimant or not, the thing must be taken as a whole; we cannot pick and choose. I would like some disassociation from the notion that hedge fund managers and rich freeholders should not have their rights considered under that convention.

[Baroness Scott of Bybrook (Con)]

I do not think that I will comment on that from the Dispatch Box, but the noble Baroness is absolutely right: we will make sure that it is phased in and that everybody understands it. Let us hope we do not lose too many solicitors in that journey.

Amendment 29, tabled by my noble friend Lord Moylan, would address the removal of marriage value far beyond that of a specific carve-out for charities, for example, which we are going to address specifically in the next group. The amendment would transfer the requirement to pay marriage value to freeholders in all enfranchisement claims on to the public purse. That would be unfair to hard-working taxpayers.

For the reasons I have outlined, I hope that my noble friends Lord Howard of Rising and Lord Moylan will withdraw or not press their amendments. Of course, I am always happy to meet noble Lords to discuss this further before Report.

[Lord Howard of Rising (Con)]

I thank the Minister for her comments. On human rights, I neither supported nor did not support them; I commented that human rights will prove a fortune for lawyers, as they argue for years and years over whether assets have been expropriated fairly or unfairly. The Minister referred to complexity; that really will bring complexity to what is at present a relatively simple situation.

When everybody is talking about this and how unfair it is on leaseholders, we should also remember that all a leasehold is is a discount on the freehold value. Somebody has paid less for that asset than they would have done had it been a freehold. If you take that logic to its full extension, why not go to the motor car industry, for example, and say that everybody who has bought their car on hire purchase should be able to have it without having to pay any more? They bought it under certain terms, as the leaseholder did—

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Moved by

[Baroness Scott of Bybrook]

30: Schedule 4, page 161, line 24, leave out from “of” to “a” in line 27 and insert “—
(a) the relevant freehold on the transfer of a freehold house under the LRA 1967, or(b) the notional lease on”Member's explanatory statement
This amendment would correct the references in paragraph 18 to what is being valued under Schedule 4.

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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; therefore, it must be put in the Bill. I hope the Minister will give due consideration to our amendment, and I look forward to her response.

[Baroness Scott of Bybrook (Con)]

My Lords, I thank the noble Baroness, Lady Taylor, and my noble friend Lord Borwick for Amendments 41 to 45 in this group. I turn first to the series of amendments tabled by my noble friend, and I thank him for his constructive engagement with me and for the time he spent in trying to address this vital matter.

Amendments 41 and 43 to 45 would seek to replace the current provisions in the Bill, which will allow the Secretary of State to set the deferment rate used in enfranchisement valuation calculations, as well as removing a requirement to review these rates every 10 years. Instead, these amendments would require the deferment rate to be prescribed by a formula, which would be based on the Bank of England’s base rate plus 5%. The specific deferment rate would then be calculated based on the date of the leaseholder’s enfranchisement claim.

As I have discussed with my noble friend Lord Borwick, this is one potential solution for setting the deferment rate, but it is not the only one. I am aware of the importance of the deferment rate to both leaseholders and freeholders, and it is important that we take the time to take this decision carefully. There are serious consequences with any attempt to prescribe the methodology for setting the deferment rate in the Bill; this would tie the hands of this Government, and successive ones, in terms of adapting the approach if the need were to arise. It is also important that the Government retain their role in providing balance between market stability and the need to review the rates. It is the Government’s view that the proposals in the Bill enable this balance, and it would therefore be inappropriate, at this stage, to prescribe in the Bill the methodology for setting the deferment rate.

These deferment rates are a really important part of the Bill. At the moment, it is difficult for leaseholders to understand how much they may have to pay to the landlord when they enfranchise. Different rates are used across the country and across the industry on a case-by-case basis. The deferment rate is used to calculate the reversion value, and this provides the landlord with the compensation for the value of the freehold property with vacant possession in the future; that is, at the end of the lease. Prescribing these rates and using them to develop an online calculator, which will help leaseholders understand what they may have to pay, is also important. These rates will be prescribed at a market value to ensure that the amount that landlords are compensated reflects their legitimate property interests. These are important decisions.

The noble Lord, Lord Moylan, asked about the timing; this could take years and years, but we do expect the majority of these reforms to come into effect in 2025-26, as set out in the Bill’s impact assessment. Obviously, this may change, but that is what we expect. We will continue to carefully review all the information and views shared on the setting of rates, and I welcome any further thoughts that the Committee has on this matter.

[Lord Moylan (Con)]

Does my noble friend the Minister have a moment to give a response to my query about whether the Government regard the deferment rate as a real interest rate or one that incorporates inflation? I ask because the calculation, as I understand it, assumes zero inflation in the value of the asset over the time to the point at which it is being valued, and that a real interest rate is therefore appropriate. Is that her assumption or is she assuming an inflation-based interest rate, which, I suggest, would have consequences for how the asset is valued at the end of the term during which it is assessed? Does she have any comments on that?

[Baroness Scott of Bybrook (Con)]

I reiterate that this is why we would like the Secretary of State to be involved because it is complex and there needs to be a balance. I will come back to the noble Lord with any further comments, but this is why we would prefer the Secretary of State to have this role, to make sure that we are balancing the market at the time with leaseholders’ representation.

I turn to Amendment 42 from the noble Baroness, Lady Taylor, which would require the Secretary of State, when prescribing the deferment rate used in the enfranchisement valuation calculations, to set this at a level that would encourage

“leaseholders to acquire their freehold at the lowest possible cost”.

I assure the noble Baroness and the Committee that the Government are committed to making enfranchisement cheaper and easier and that these reforms will achieve that aim.

I understand how vital setting rates is for enfranchisement premiums. This very proposal was discussed in the other place, and I reiterate the importance of not constraining the Secretary of State via the Bill when making such important decisions. We have been clear that we will set the rates at the market value and recognise that many different elements need to be considered when setting them, as I have just reflected to my noble friend. We continue to have conversations with all relevant stakeholders. As I said, I welcome members of the Committee sharing their views on this matter so that the Government can take them into consideration when making a final decision. For these reasons, I ask my noble friend—

[Lord Borwick (Con)]

I am sorry to interrupt my noble friend again. One of the problems I see with this is the great difficulty in making a change except through statutory instruments, and the amount of time this takes. Whenever the Secretary of State decides that a change must happen, it must happen more quickly than through the route laid down in the Bill. At present, the amount of time doing the statutory instrument, and the fact that we cannot debate its details or change it, makes the whole thing very unfortunate.

There is something to be said for the point, made by my noble friend Lord Young of Cookham, that there is a route through that is used by the Lord Chancellor. I had not appreciated that the deferment rate had so many different implications. I am sure we could call it something different for this purpose, and thus carve out the rate for property matters. But, with a delay of one year or more between a decision and taking action, it is a very difficult subject to structure using the statutory instrument route.

[Baroness Scott of Bybrook (Con)]

My noble friend is absolutely right, and that is why we have not made this decision. We want to get it right, and that is why we listened to everything everybody said in this place and the other place. We will come back to my noble friend with our deliberations. This is important, and speed will also be important: you cannot take a year to change things that need changing, because of the market. They have to be dealt with in a timely manner.

Regarding my noble friend Lord Young’s point about the Lord Chancellor, I will take it back to the department and see whether any discussions have been had on a common approach, and if not, why not, and whether we should have those discussions.

For the reasons I have given, I ask my noble friend to withdraw the amendment.

[Lord Borwick (Con)]

My Lords, I thank everybody for their constructive points and for the education that I have received through this process. I beg leave to withdraw my amendment.

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Moved by

[Baroness Scott of Bybrook]

49: Clause 41, page 51, line 10, at beginning insert “the appropriate tribunal may”
Member’s explanatory statement
This amendment would correct an error.

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Moved by

[Baroness Scott of Bybrook]

50: Schedule 8, page 196, line 17, leave out “paragraphs 11 to 15” and insert “this Part of this Schedule”
Member’s explanatory statement
This amendment is consequential on the removal of the amendment to the Housing and Planning Act 1986 in paragraph 16 of Schedule 8.

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Moved by

[Baroness Scott of Bybrook]

52: Clause 45, page 55, line 37, at end insert—
“(4) Subsection (1) does not apply in any of the following cases— (a) the tenancy was created by the grant of a lease under Part 5 of the Housing Act 1985 (a “right to buy lease”);(b) the tenancy is, by virtue of section 3(3), treated as a single tenancy with a tenancy created by the grant of a right to buy lease;(c) the tenancy is a sub-tenancy directly or indirectly derived out of a tenancy falling within paragraph (a) or (b);(d) the tenancy was granted under this Part in substitution for a tenancy or sub-tenancy falling within paragraph (a), (b) or (c).”Member’s explanatory statement
This amendment would prevent the tenants listed from exercising the right in new section 7A of the LRA 1967 to have that Act apply without the amendments in the Bill.

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Moved by

[Baroness Scott of Bybrook]

53: After Clause 45, insert the following new Clause—
“Part 2: consequential amendments to other legislationSchedule (Part 2: consequential amendments to other legislation) contains amendments to other legislation that are consequential on this Part.”Member’s explanatory statement
This new Clause would introduce the new Schedule on consequential amendments to be inserted before Schedule 9.

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[Lord Khan of Burnley (Lab)]

My Lords, I rise briefly to thank the noble Lord, Lord Young of Cookham, and my noble friend Lord Berkeley for providing the detail, with diligence and eloquence, in calling for what the noble Lord, Lord Young, called a level and equitable playing field for all leaseholders in that situation, particularly in relation to Crown land. I want to press the Minister on getting information from the Government about to what extent Crown and Duchy of Cornwall land would be affected by the amendments, and on providing clarification on the important and pertinent points that both noble Lords raised.

[Baroness Scott of Bybrook (Con)]

My Lords, I will briefly speak to the amendments in my name before turning to the amendments in the names of my noble friend Lord Young of Cookham and the noble Lord, Lord Berkeley. Government Amendment 83 is a clarificatory amendment. Clause 67 outlines that all of Sections 18 to 30P of the Landlord and Tenant Act 1985 bind the Crown, and that the relevant provisions bind the Crown whether or not they relate to Crown land.

As a result, Section 172(1)(a) of the Commonhold and Leasehold Reform Act 2002 will be repealed. Since subsections (4) and (7) of Section 112 of the Building Safety Act 2022 amend the 2002 Act, these subsections are no longer necessary.

I now turn to the amendments in the names of my noble friend Lord Young, and the noble Lord, Lord Berkeley. I thank my noble friend Lord Young for his Amendment 54, which seeks to bind the Crown to the enfranchisement measures in the Bill and to apply those measures to properties subject to escheat. It is a long-established principle that legislation does not bind Crown lands, including the Duchies of Lancaster and Cornwall, unless the Act expressly states so or by necessary implication. Where an Act, or a part of an Act, does not bind the Crown, the Crown can and often does agree to act in accordance with the legislation.

The current position is that most Crown leaseholders enjoy the same lease extension and enfranchisement opportunities as other leaseholders, by virtue of the Crown’s undertaking given to Parliament to act by analogy with the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, which are not directly binding on the Crown. We also expect that the Crown will agree to act by analogy with the Bill before us. The effect will be that most leaseholders of the Crown will have the same opportunity to extend their lease or buy their freehold as any other leaseholder would, except in certain special circumstances set out in an undertaking we expect to be given by the Crown. Therefore, the outcomes the Government want to see can be achieved without legislation, and the amendment is unnecessary.

I would also like to thank my noble friend for raising an important point in his amendment about properties subject to escheat. The Government recognise that when the freehold becomes ownerless, it can cause problems for some of those leaseholders. However, the amendment would not achieve its intended aim because when a property escheats to the Crown the freehold no longer exists, and the Bill is not the appropriate place for a review of the complex law surrounding ownerless land. When a property becomes ownerless the land and buildings escheat to the Crown. If a purchaser is interested, the Crown can sell it so that it goes back into private ownership.

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[Lord Berkeley (Lab)]

My Lords, I am grateful to the Minister for a very detailed reply, and I thank her for her interest in this project. I have one question: will we be able to see a draft or a copy of the undertaking from the Crown, which she has mentioned several times, before Report?

[Baroness Scott of Bybrook (Con)]

My answer is that I am not sure, but I will make sure that I let the noble Lord know. If we can do that, obviously we will.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to all noble Lords who have taken part in this short debate. I am grateful to the noble Lord, Lord Mann, for reminding us that it is often a rather one-sided battle, with leaseholders confronted by freeholders with massive resources. I am grateful to the noble Baroness, Lady Pinnock, for her support for my amendment.

As far as the noble Lord, Lord Berkeley, is concerned, I have happy memories of replying when I was on the Front Bench to his Duchy of Cornwall Bill. He spoke at somewhat greater length on that occasion about the need for major reform of the Duchy.

On the specific issue that I raised, I am not expecting any legislative change because my noble friend said, quite rightly, that the Crown is not bound by legislation, but she said on several occasions that the Crown would act by analogy with the terms of the leasehold Acts. I think that gives me what I want, so long as it covers the Crown acting as freeholder as well as the Crown acting as owner of land in escheat. At the moment, that is not the case. At the end of my remarks, I asked whether my noble friend would be good enough to get the necessary assurance from the Crown Estate and the Treasury that they would deal with escheat applications in the same way as applications for where they are the freeholder.

I am grateful to my noble friend for her sympathetic reply. I think I can build on the undertaking that she has given to make some progress. I do not want to wait until the Law Commission has gone round the course all over again, whenever that may be. The leases that I referred to are coming towards the end of their time, and each delay adds to the potential cost for the leaseholders.

I hope we can make progress without waiting for a Law Commission report. It is simply a case of the Crown acting equitably and doing exactly what my noble friend has said: acting by analogy and delivering the laws that have been passed by Parliament. On that basis, I am happy to withdraw the amendment at this stage.