Leasehold and Freehold Reform Bill

Debate between Lord Gascoigne and Lord Howard of Rising

Report stage & 3rd reading
Friday 24th May 2024 Lords Chamber

[Lord Howard of Rising (Con)]

My Lords, Amendment 9 in my name would ensure that, when a building has more than 25% of commercial floorspace, the right of collective enfranchisement will not apply unless at least 50% of the participating tenants are occupying home owners. At present, for leaseholders of flats to be able to compulsorily acquire the freehold interest in a building, the amount of commercial floor area must not exceed 25%. Increasing the threshold to 50% in conjunction with compulsory lease-backs and below-market compensation will have a number of unintended consequences. This change will lead to the increased fragmentation of high streets and city centres, eroding the ability of property owners—including charities and, importantly, local authorities providing essential public services—to actively manage places.

The loss of contiguous ownership will erode the incentive that property companies have to invest beyond the buildings themselves for the needs of communities, to create attractive neighbourhoods and support broad demographics. It will also discourage investment and lead to less residential in new buildings as landlords take defensive steps to limit the impact. More broadly, it must be recognised that mixed-use buildings pose a greater management challenge than purely residential ones. Freeholders ultimately need to be active and responsive property managers, not only managing issues such as fire and building safety but responding to requests for alterations and improvements and any redevelopment of the commercial elements of the building, its common parts and residential elements. For mixed-use buildings to operate effectively, property owners must balance the continued commercial attractiveness of the offices or retail within the building with the residential occupiers’ quiet enjoyment of their homes and the attractiveness of the wider neighbourhood.

From the perspective of a freeholder looking to actively manage the commercial units within enfranchised mixed-use buildings, the key issue that arises is that the enfranchised leaseholders are held in a corporate structure, such as an offshore entity, company or trust. As many leaseholders have encountered in seeking to hold freeholders to account for building remedial works, it can be incredibly challenging to identify the ultimate decision-maker and secure consent to even modest alterations. As part of the reform, the Bill should mitigate this by introducing an additional requirement that to be a qualifying leaseholder they should be required to satisfy a residential test.

As we know, a high proportion of leasehold properties are owned by investors, including from overseas. Where leaseholders who live in their properties are likely to have regard for their surrounding neighbourhood and what happens in their building—as we have seen from other matters relevant to building management—this is not always true of investors. It is not just a case of ensuring the effective management of individual buildings but of protecting high streets of significant economic importance from being fragmented, particularly in London’s central activity zone, where we know that a high proportion of residential properties are held by investors.

The amendment would seek to pre-empt these challenges by requiring a resident test to ensure that leaseholders seeking to acquire a freehold live in the building as their main residence. It would give some assurance that they will be contactable and responsive, avoiding the negative impacts of zombie freeholders. I beg to move.

[Lord Gascoigne (Con)]

I thank my noble friend Lord Howard of Rising for Amendment 9 on enfranchisement claims in mixed-use buildings. Establishing residency and occupation is, as I understand, difficult. It can change quickly over time and can easily be manipulated. That could lead to the validity of claims being challenged successfully, years after they have been acquired. A residency test would remove the existing rights of some leaseholders and complicate the system overall, counter to the Bill’s aims, and lead to an uptick in disputes and litigation. Attempting to restrict one leaseholder in another building may well disfranchise the others. Therefore, I am afraid that we oppose the introduction of new residency tests. With the greatest respect, I kindly ask my noble friend to withdraw his amendment.

[Lord Howard of Rising (Con)]

I am not sure that what the Minister said would not apply even if my amendment did not pass. Does he have a comment on that?

[Lord Gascoigne (Con)]

With respect to my noble friend, I thought I addressed the points. Introducing this measure would introduce a huge number of complications to the Bill.

[Lord Howard of Rising (Con)]

Yes, but complications exist now, and therefore it is unnecessary to go as far as the new Bill does. That having being said, I beg leave to withdraw the amendment.

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[Lord Gascoigne (Con)]

I would certainly be happy to defend this Bill and what it does. I therefore ask my noble friend to withdraw his amendment.

[Lord Howard of Rising (Con)]

I thank all those who were kind enough to support this amendment. The Minister talked about adequate examination. I have great respect for the Minister and especially for his integrity: when he borrowed my house, I got the key back. It took some months, but it came and it is a very special key, because they stopped making them 50 years ago. I had to have them specially made, so I thought, “Oh, no, I have to go through that expense again, because I could not possibly stick a poor young politician with the cost of a key like that”. Suddenly, like magic, it flopped through the door one day.

But what credence can we give to the legal advice the Minister has had, which he referred to earlier, when the Government’s own advisers have said that the legality of this is a very fine argument? The truth of the matter is, as has already been mentioned today, that one of the main planks of the Human Rights Act is the right of property. The Government are gaily switching around bits of property at a Minister’s whim. I cannot believe that that can have been passed as solid by so many august legal entities unless they themselves had an axe to grind. Of course, there is also, as has been mentioned, the retrospective angle of the legislation.

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[Lord Gascoigne (Con)]

I thank my noble friends Lord Howard of Rising and Lord Moylan for these amendments. They lay some of the groundwork for the grandfathering amendments to marriage value, which will be discussed later—in group 7, I think—and we will debate the substantial matters then.

One thing I would like to say now, so that I am not accused of ignoring it, is that the Leasehold and Freehold Reform Bill is considered by the Government to be A1P1 ECHR-compliant as introduced to both Houses. Indeed, the valuation scheme itself and constituent parts are A1P1-compliant. We will come back to that in a couple of groups.

It is worth pointing out that Amendment 16 would not only grandfather marriage value but remove such leaseholders left owing marriage value from the standard valuation method altogether. The consequences of this would be that they would not only be left owing marriage value but would not benefit from any valuation reforms, including to the treatment of ground rent rates and so on. Moreover, since there would be no specific provisions for valuing their properties outside of the standard valuation period, leaseholders and freeholders would be left to negotiate all aspects of the valuation. This would result in much greater costs, delays and litigation. I therefore kindly ask my noble friends not to press their amendments.

[Lord Howard of Rising (Con)]

I thank the Minister. We touched on this before. The Minister said that this is compliant with the European Convention on Human Rights, but the advice given to the Government was that it was a very marginal case.

I also point out to the Minister that, if you had some ground rents coming in and you had them removed by force, you would simply fight as long as you wanted, because you would continue to get them while you were fighting in the court. I envisage that the legal complications would last for several years. There are huge sums of money involved, with £7.1 billion of assets being transferred, and people will try to protect that.

If I was the Minister, I would go back and ask my legal advisers to check what was happening. Having said that, I beg leave to withdraw the amendment.

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[Lord Howard of Rising (Con)]

My Lords, I listened with great interest to the right reverend Prelate. Worthy though charities are, it should not just be charities which benefit from this. Although I would like to see them exempted, the same should happen to everybody. Under the law, all should be equal. I find it difficult sometimes to support the Church as a charity if it can bung away £100 million. Then it wanted to bung away £1 billion—it is quite difficult to keep up with the Church’s generous donations. It is hard enough supporting my wife in her endeavours with the village fête to raise £2,000 and I sometimes wonder why we do it when the Church can give away as much as it does.

The Church does fantastic work and I would like to see it getting a larger income but I think this should apply not just to specific charities but to everyone who has made an investment and is expecting something in the long term. Pension funds invest in this form of investment because they have obligations that stretch 20, 30, 40 or 50 years ahead. How do you pay for that in the days of inflation? If you buy a freehold which you expect to fall in, you are covering your future liability. If that can be suddenly taken away, maybe we should include pension funds as a special category. I come back to the thing that it should be the same for everybody. I do not know how the Government intend to work it out for pension funds. If the total sum, as I said before, is £7 billion, that is a big hole in pension funds even if they own only a percentage of that.

I look forward to hearing what the Minister says about charities and, in particular, the Church’s exemption.

[Lord Gascoigne (Con)]

I thank the right reverend Prelate the Bishop of Southwell and Nottingham for these amendments and for his very kind comments about the Minister, which I will ensure she is aware of.

The Government fully appreciate the essential work done by the charity sector and I completely understand the sector’s concerns about the deferment rate. I also understand the importance of prescribing the rates for both leaseholders and freeholders, and recognise the right reverend Prelate’s concerns. We have committed to prescribing the rates at market value and the Secretary of State will carefully take into consideration and review all the information and views shared ahead of setting the rates. We have welcomed and appreciate the contributions the Church Commissioners and charities have provided and will welcome continued engagement before the rates are set.

As I have said, we recognise the positive contributions many charities make to our society, yet attempting to create carve-outs for specific groups of landlords, including charities, would complicate a system we aim to simplify. With that and with respect, I ask the right reverend Prelate to withdraw his amendment.

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[Lord Gascoigne (Con)]

My Lords, I thank my noble friends Lord Howard of Rising and Lord Moylan for their amendments. These amendments would leave some leaseholders with wasting assets from which there is no escape. We have been unequivocally clear that the Government’s stated objective is to make it cheaper and easier for leaseholders to extend their lease or acquire their freehold. We do not believe that the leaseholder should have to pay marriage value. I know my noble friends have concerns that the removal of the requirement to pay marriage value, as I have heard previously, is expropriation. But the Government believe marriage value is a windfall that leaseholders should not have to continue to pay because of their need to enfranchise. The new valuation scheme without marriage value will provide sufficient compensation to freeholders and it is, as I have said before, the Government’s view that it is A1P1-compliant. I therefore kindly ask noble Lords not to press their amendments.

[Lord Howard of Rising (Con)]

Well, I would say to the Minister that people who have leases of under 80 years bought them. They purchased them and they got a discount on what they were buying because of the shorter period. Now you are suddenly saying, “Actually, they paid a perfectly fair price at the time, because it was cheaper than a longer lease or a freehold, but actually that is not good enough, so let them have a bit more.” So they are very lucky, but it is very unfair on those, such as the Church and pension funds, which invested for the longer term and have sold leases to people who wanted to buy leases. It was not compulsory; nobody from the Government went along and said, “Hang on, old boy, you’ve got to buy this lease whether you like it or not”. They bought them voluntarily and, as I have already said, most of these leases are in central London, where it was very much a voluntary act. If you had bought a 10-year lease in one of the more fashionable areas, it would have cost you many millions of pounds and you would have bought it knowing you could use it for 10 years. To suddenly find you can increase it to 80 years, making profits of tens of millions of pounds, seems to me absolutely absurd. It is a case of Robin Hood in reverse—robbing the poor, namely the pension fund holders and the charities, in order to give to the rich. I would be very interested to hear the Minister’s comments on that before he sits down.