Leasehold and Freehold Reform Bill

Baroness Pinnock Excerpts

Committee stage
Wednesday 24th April 2024 Lords Chamber

[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.

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There is one last point here, which has been made already. This is a matter of confidence in the system that we have: do we have a rules-based system or do we not? What would happen to our wider reputation as a country where investment in property and this sort of thing can be made? What else might be taken away at a moment’s notice? I fear for that. If we are not to have greater reticence and a response to risk in terms of short-termism and a degree of hedging of bets—which, in valuation terms, leads to higher costs and lower values—we need to be very careful about what we are doing. On that point, I will sit down.

[Baroness Pinnock (LD)]

My Lords, the debate on this group of amendments has taken an interesting turn. I was not expecting to be discussing expropriation or to hear reference to the European Court of Human Rights, particularly from those who have in the past criticised it. I was not expecting the debate to hinge on the rule of law, of which I had thought we had a good example in previous days.

[Lord Moylan (Con)]

I am very grateful to the noble Baroness for giving way. If there is any suggestion that I have been critical of the European Convention on Human Rights, if that remark was addressed to me, I should be glad to know when that was the case because I have never said that we should withdraw from that convention. I do not know whether the remark was addressed to my noble friend Lord Howard of Rising and not me. If that was the case, I apologise for intervening.

[Baroness Pinnock (LD)]

There was, of course, no mention of or reference to any noble Lord in this Chamber. It was a general reference to criticisms of that court under the human rights legislation. We have heard in debates in your Lordships’ House over the past weeks that have hinged on the rule of law. So it is most interesting, for those of us who have felt that the rule of law had been breached in the decisions that have been made, that it is now being raised in defence of these amendments. The debate has become emotive on this issue.

I hope that we can draw back from that rather, because what we have here is the Government’s intention to rebalance the rights of leaseholders as against the rights of freeholders. From these Benches, we support the rebalancing of those rights. In many cases, we think that the Government are not going far enough, but there ought to be a rebalancing of those rights. That is not referencing in this case the fact that there seems to be an argument among those who have moved or supported the amendment, that the loss of value can be defined as an expropriation. I find that difficult to accept because all along, in changes to legislation on major infrastructure projects, property is infringed and property holders feel abused. But it is for the state to make those decisions. So I am not sure why we are going to the barricades on this issue.

[Lord Moylan (Con)]

I am grateful to the noble Baroness for giving way. In the case of infrastructure, it is certainly true that private property owners can have their property taken away from them to allow infrastructure to be built. But this is under a compulsory purchase regime whereby they receive something approaching the market value, normally plus a premium of so many per cent on top. My amendment would ensure that those expropriated of their marriage value would receive that. Is the noble Baroness, in fact, swinging in behind my amendment? There is a clear difference between what is proposed today and the compulsory purchase regime.

[Baroness Pinnock (LD)]

I thank the noble Lord for his intervention. To me, the issue here is quite simple. We expect leaseholders to fund the enfranchisement of their lease—to pay the costs of the enfranchisement—and then to share the increased value of the lease with the freeholder, who has made no financial input to the extension of the lease. From a leaseholder’s point of view—although I do not have a leasehold myself—that seems to me to be the wrong balance. This is what the proposals in the Bill are attempting to put right. From that perspective, we would want to agree with that.

We are constantly warned that no investments can be regarded as safeguarded for all time. That must be true for property as it is for any other investments. We have heard arguments this afternoon about protecting freeholders, seemingly for ever. I accept the argument of the noble Baroness, Lady Deech, that phasing might be an answer to freeholders’ difficulties, but you cannot keep things in aspic for ever. Change is on the move and the Government are right to try to provide a better balance of rights and responsibilities between freeholders and leaseholders.

We on these Benches would prefer to move entirely to commonhold—but that argument has yet to be completed. I accept that the situation is very complex. Whenever we have a substantial change in legal rights, there is a loss on one side and arguments about that, and benefits on the other. Nobody can be absolutely clear and certain how the balance will be reset.

[The Earl of Lytton (CB)]

I take the noble Baroness’s point about things changing, but I ask her to cast her mind back—although she was not there at the time, any more than I was—to the great reforms in the Law of Property Act 1925. There was a big discussion about all sorts of matters to do with tenure and getting rid of things such as entails, and modernising the system. If we are to make a seismic change—and I think this Bill will produce something of a wobble—there ought to have been that big discussion about the fundamentals of property law. Does the noble Baroness not agree that, instead of tinkering around piecemeal with this and trying to shoehorn it into the unfortunate focal point of leasehold reform and the balance between leasehold and freehold, that discussion should have taken place first?

[Baroness Pinnock (LD)]

I thank the noble Earl for that intervention, because he is right in many cases. I am not a lawyer, but I know that the 1925 property Act made a huge change away from the old system, which was feudal at that point, and modernised property legislation. This Bill may do the same. In some instances, as we have heard this afternoon, it will have big consequences—for freeholders, in the context of this set of amendments. I accept that maybe there ought to have been—as we heard on Monday from the noble Lord, Lord Young of Cookham—a draft Bill on commonhold. Maybe it requires an in-depth, cross-House, cross-party committee to get into the detail, rather than the 300 or so pages of the Bill that we have in front of us, in order to get to grips with the consequences of what is being proposed.

I go back to the principle, and the principle has to be right. We are trying to rebalance the rights between freehold and leasehold. There is frequent talk on the Conservative Benches that the basis of Conservative philosophy is a property-owning democracy, but leaseholders will not be full participants in that until these changes are made. So it will be interesting to hear what the Minister has to say with regard to this very challenging debate.

[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.

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[The Earl of Lytton (CB)]

I believe it means that it cannot be disposed of away from the purposes of the charity. I am not a lawyer and I am afraid I do not know exactly, but I understood it to be the term contained in the Minister’s letter to the right reverend Prelate, which is why I used it.

I want to make it clear that the organisation of a charity is necessarily of a commercial nature but devoted, ultimately, to its charitable purposes. It cannot be otherwise; it must use its assets optimally, and it is required to do so. I can see no discernible difference between something like the National Trust and an organisation such as the Church of England. Any such charity acquires, disposes and otherwise deals with its land assets as a matter of course. It is required to do so if it is disposing according to a set of rules, with which I am familiar, under the Charity Commission: CC 28, which state that you have to get best value for the asset, or words to that effect.

I am concerned about the potential hybridity aspect of the Bill, to which the right reverend Prelate did not refer, but it is implicit in what he is asking. It is a question that needs to be raised and is a procedural one for this House. I would very much like to know the answer, and if the Minister, who has not had any warning, cannot give it today perhaps she would be kind enough to write and copy in other noble Lords who are listening.

[Baroness Pinnock (LD)]

My Lords, I thank the right reverend Prelate the Bishop of Manchester for drawing our attention to the fact that when you make complex changes, the consequences cannot always be predicted and may not be ones we would wish to support.

The issue is one I hope the Minister will be able to help us resolve. The right reverend Prelate cited the balance between justice and simplicity. He said to always come down on the side of justice, and so would I. However, in this case, we have competing justices. The principle being advocated throughout the Bill is the justice of rebalancing the rights and responsibilities between freeholders and leaseholders to the benefit of leaseholders—a principle most of us support. The difficulty is that the justice we support has a consequence we would not support: reducing the funds available to charities whose income is based on freehold property. So, there is a conundrum for us.

The right reverend Prelate listed the charities that he thought were affected by these changes. I noted they were all London-based, no doubt because of land values in London. It is important for us to know whether this is a more extensive problem, or a London-based one. The first question we need to ask is, what other charities will be affected?

I do not have an answer to the next question: is there a workaround that mitigates the effect of the principal changes the Bill seeks to implement? I am sure the bright young things in the department could come up with a way of mitigating the outcome, so that charities do not lose their income, which is in nobody’s interest. I am confident that somebody will come up with a great way of overcoming this problem, while retaining the other justice: fairness towards leaseholders.

So, there are questions but no answers, and I look forward to hearing what the Government might be able to do.

[Baroness Taylor of Stevenage (Lab)]

My Lords, this debate has again outlined what a huge benefit it would be to have proper, detailed pre-legislative scrutiny of Bills such as this. I hope that will take place when we get a commonhold Bill, whoever brings it forward.

In principle, I am in much of the same mind as my noble friend Lord Truscott when it comes to special pleading on marriage value. I fear that the amendments in the name of the right reverend Prelate the Bishop of Manchester are in danger of being an almighty sledge- hammer to crack not a very big nut, and my comments are made on that basis.

First, I thank the right reverend Prelate and Lynne Guyton, from John Lyon’s Charity, for meeting me yesterday to explain the issue in more detail. The issues set out by the right reverend Prelate affect a very small number of charities, such as the ones in central London that he has outlined. They have been in place for centuries and, as was explained to me, use marriage value on lease extensions as a critical contribution to the funding of their charitable work. The leaseholders of these properties are largely offshore companies or non-residential wealthy owners, so the argument put forward by the charities is that, in this case, the benefit of marriage value has what the right reverend Prelate described as the “reverse Robin Hood effect”. The benefit currently accrues to the beneficiaries of the charity, such as youth clubs, arts projects, emotional well-being initiatives, supplementary schools, parental support schemes, sports programmes, academic bursaries and similar projects. I thank the noble Lord, Lord Bailey, for his personal testimony in this respect.

The fear is that, after the Bill has passed, the benefits will then accrue to the said wealthy offshore companies and leaseholders. I believe the Government have been in conversation with the charities concerned and have promised to look at what can be done to ensure that a very limited exception is considered. However, it is our understanding that this has not been forthcoming, and I hope the Minister will tell us where the Government have got to. Have the Government carried out any impact assessment of the way the Bill will affect charities that have long-standing property endowments solely for the purpose of enabling their charitable aims?

However, as with group 2, these amendments would amend Schedule 4, which is where the market value element of the premium for any enfranchisement claim is determined. The second amendment tabled by the right reverend Prelate the Bishop of Manchester has also applied it to the later section on loss suffered, in paragraph 32, which refers back to assumption 2. Straightforwardly, these amendments would disapply assumption 2 for charities, and thereby include marriage and hope values in determining market value.

As I said during the first Committee sitting on the Bill, we genuinely appreciate the intention behind supporting what is argued to be the unique circumstances of this small group of charities. However—and it is a big “however”—the amendment as drafted is almost certainly far too broad to encompass only their very unusual circumstances. Perhaps the Government will continue to work with right reverend Prelate and the charities concerned to see what can be done to support them; otherwise, we fear that a general amendment such as the one tabled could open a big Pandora’s box and encourage those wishing to avoid the new system of enfranchisement—which we support, of course—and there may be plenty who wish to do so, to misuse charitable status for that purpose.

The noble Earl, Lord Lytton, referred to exemptions created for the National Trust, which the Government felt were justified. Presumably, the Government feel that some exemptions are justified.

While we do not feel that the amendment as tabled would avoid some of the obvious pitfalls of creating a loophole in the stated aims of the Bill—with which we agree—I look forward to the response of the Minister about whether any progress can be made in this respect.

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[Lord Young of Cookham (Con)]

My Lords, I am grateful to my noble friend Lord Borwick for allowing what I hope will be a short debate on the deferment rate. I am conscious that I am a very inadequate substitute for the noble Lord, Lord Forsyth.

The deferment rate is very important, as my noble friend Lord Moylan explained. It is the current value of the vacant possession of a flat when the lease expires. According to what deferment rate you choose, it affects the premium that is paid by the leaseholder. My understanding is that the current deferment rate was set in a Court of Appeal case in 2007—the so-called Sportelli case—which ended up with the two rates that I think my noble friend Lord Moylan referred to: 4.75% for houses and 5% for flats. That was fixed nearly 20 years ago. There was a recent appeal decision in a Welsh court—I have the name in front of me but, like many Welsh names, it has a large number of consonants and very few vowels, so I am afraid that I cannot pronounce it. The appeal failed because the land valuer was not an economist, but it opened the way to an appeal to alter the rate. My noble friend Lord Moylan touched on my first question: when will the Secretary of State come to a decision? It affects what leaseholders do at the moment: whether they should wait for a preferential rate, which might be fixed by the Secretary of State, or whether they should try now, in case it moves the wrong way.

I want to raise a totally different point. At the moment, there already is a deferment rate set by the Government under the personal damages Act 1996. Using exactly the same basis as a deferment rate for leasehold, the Lord Chancellor sets the deferment rate for personal injury damages. Unlike what is proposed in this Bill, that rate changes quite often. In 2017, the rate was changed, and it was a negative rate for some time. It was changed again in 2019, and then again in 2023. It is now 0.5% for short-term cases and 3% for long-term cases. My question for the Government is: will we have two separate Secretaries of State fixing deferment rates at different times and coming up with different rates, or is there a case for rationalising the Government’s view as to what is an appropriate deferment rate?

One opportunity would be for the Secretary of State simply to replicate what the Lord Chancellor does. The Lord Chancellor has recently had a consultation on how to fix deferment rates and has come up with a short-term rate and a long-term rate. It seems odd to me to have two totally separate systems in the Government for basically coming to the same decision—that is, deciding what the long-term rate is on a risk-free investment. I wonder whether my noble friend the Minister has had discussions with the Lord Chancellor’s department to see whether we can have a common approach to this important issue.

[Baroness Pinnock (LD)]

My Lords, for me, this is a very technical set of amendments, but they are very important. As we have heard, this issue can have significant implications.

I always go back to first principles. One of the aims of the Bill is to make enfranchisement cheaper than it is currently, and so more readily available. However, as we have heard, that will entirely depend on the deferment rate and how it is set. My understanding was that the current deferment rate was set by the Court of Appeal in 2007, as the noble Lord, Lord Young of Cookham, said. The debate is around whether it is right for that to continue; whether another process should be used, such as that proposed by the noble Lord, Lord Borwick, in his amendment about using the bank rate as a base for setting a deferment rate; or whether, as in the Bill, the responsibility is passed to the Secretary of State to determine the deferment rate. I have to agree with the noble Lords, Lord Moylan and Lord Young of Cookham, that the latter does not seem right.

When I was investigating the deferment rate issue, I noticed that Homehold Services Ltd gave evidence to the Commons Public Bill Committee that was very telling. It criticised the fact that the “applicable deferment rate” was referenced throughout the Bill

“without specifying what this will be”.

It provided an example of what effect a change in the deferment rate could have on the cost of enfranchisement. It said:

“A lease extension … on a £200k flat with 80 years unexpired and no ground rent would be c. £4,000”.


That is the example given by Homehold Services Ltd; as it is one of the experts, I thought it might be right. It continues:

“If the deferment rate was reduced from 5% to 4%, the premium would increase to c. £8,500. At 3.5% it would be … £12,000”.


Those small changes in percentages have very high consequences for the leaseholders. This is important—that is what the evidence told me when I read it.

The argument from Homehold Services Ltd was that the deferment rate must be set no lower than that set by the appeal judgment in 2007. Otherwise, the consequence is that the rate can escalate considerably, as the noble Lord, Lord Moylan, pointed out. The cost of enfranchisement would increase, removing the ability of many leaseholders to continue with the process—contrary to one of the objectives of the Bill. Can the Minister say what consideration the Government have given to the deferment rate?

The noble Lord, Lord Young of Cookham, said that the Chancellor’s department has had a consultation on this and come up with some figures. Why are those not being adopted in this instance to set the rate in the Bill? As we have heard, it is very important to know exactly what the deferment rate will be. I do not believe that it is satisfactory to leave the applicable deferment rate to be set by a statutory instrument some time in the future. Surely, if the Government’s intentions are as they are set out in the Bill—to make it cheaper for leaseholders to enfranchise—one of the key rates must be this one. Therefore, I would have thought that we would want to see it set during the course of this Bill, rather than wait for a statutory instrument.

I have a lot of sympathy with the arguments that have been made by the mover of the amendment and others about the need for certainty here, rather than a principle and uncertainty as to the exact figure at which the deferment rate will be set.

[Lord Khan of Burnley (Lab)]

My Lords, I will speak to Amendment 42 in the name of my noble friend Lady Taylor of Stevenage, which was well supported by my noble friend Lord Truscott in his earlier remarks.

Deferment rates are a phenomenally complex area to understand, and the standard valuation method in Schedule 4 is extremely technical. The Law Commission set out options. It did not make recommendations, but the Government have chosen to allow the Secretary of State to prescribe the applicable deferment rate. I thank the noble Lord, Lord Borwick, for his contribution and for seeking to make the process for setting the deferment rate more efficient and asking for more clarity and certainty.

Our amendment is clear and would ensure that, when determining the applicable deferment rate,

“the Secretary of State must have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost”.

We understand that the 2007 Cadogan v Sportelli judgment, which has broadly set deferment rates, was made in the context of 0.5% interest rates. If the Government are minded to remain of the view that the Secretary of State should fix the deferment rates, how best should they do that? Although it may work in London, what would need to be taken into account for other parts of the country? Is there a need to set multiple rates for different parts of the country to deal with the variations?

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[Lord Mann (Non-Afl)]

My Lords, I shall make a brief contribution to support the amendment moved by the noble Lord, Lord Young of Cookham. I want to make one additional point to add to the problems he clearly outlined for a person in this situation—to quote him unfairly—and the impact that has on them.

I have not been an elected representative for some years, but I took on many cases involving every kind of issue, and I have dealt with these issues. My files were rightly shredded some years ago when I entered this House, so I do not have the precise detail available, only my vague memories. However, I have one distinct memory. There are two types of people who have this kind of problem—those who have solicitors and are used to dealing with solicitors, and those who do not.

Occasionally those who had solicitors would come to me, normally when they were wondering whether there was a way of minimising the costs. I always used to listen for the mention of counsel’s opinion having been suggested: the thousands then started to ring up on the till instantly, because not all solicitors had quite the expertise in such matters as others might have had.

The more concerning cases were the people who came to see me who were not familiar with dealing with solicitors, and who were horrified at the predicament they were in, and the potential costs—not just the costs from the other side, but they costs that they might have to bear. The prospect was one of an unlimited amount of costs, well beyond their comprehension, their budget and their expectations. The psychological impact of that, as well as the risk, would lead to an incredible feeling of relief if someone like me, in an amateur but persistent way, was prepared to take on their case. That I remember distinctly, in precisely this kind of case. So the common sense that has been suggested is worthy not just of consideration but of enactment, by all sides of the House. I commend the amendment, which is highly appropriate.

[Baroness Pinnock (LD)]

My Lords, I congratulate the noble Lords, Lord Young of Cookham and Lord Berkeley, on exposing and exploring the exceptions to the general rule in the legislation and its application. If we live in a democracy, the rule of law should apply to everyone without heed or hindrance, so I am grateful to both noble Lords for bringing this to the attention of the House. I hope that when the Minister responds she will be able to confirm that the Bill will apply to the Crown Estate and the Duchy of Cornwall, because it ought to.

[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.