Leasehold and Freehold Reform Bill

Baroness Thornhill Excerpts

Committee stage
Wednesday 24th April 2024 Lords Chamber

[Lord Best (CB)]

My Lords, I support Amendments 23 and 24 in the name of the noble Baroness, Lady Andrews. I can imagine the anguish that must be felt by leaseholders in blocks of flats who are facing the disruption of one or even two new storeys being built on the roof of their flats. With freeholders now having permitted development rights for upward extensions, residents face the disruption, noise and hassle of builders, lorries, cranes, skips, scaffolding and so on for months—and now they face the prospect of being unable to buy the freehold of the block because development, or the possibility of upward development, adds to the value of the block and can make enfranchisement prohibitively expensive. The extra value of adding new storeys, or the compensation demanded for not developing where there is potential to add them, generates additional freeholder profits but makes enfranchisement unaffordable, yet the Leasehold and Freehold Reform Bill is all about giving leaseholders a better deal and easier access to enfranchisement.

I note that the previous Secretary of State promised to fix this specific problem through a clause in the Bill enabling leaseholders in a block to agree together that no upward extension should take place. In this way, they remove the extra value for the freeholder. It seems that in the drafting of the Bill the promised new clause, originally an option proposed by the Law Commission, has got lost. So, on behalf of the 2 million-plus lease- holders who could be affected, I strongly support the amendments from the noble Baroness, Lady Andrews, which would fulfil the Government’s earlier promise.

[Baroness Thornhill (LD)]

My Lords, I suppose I could say “#UsToo”. I support these amendments, which are simple in purpose, in the name of the noble Baroness, Lady Andrews, who summed them up thoroughly, clearly and personally. As things stand under PDR, a freeholder can add two storeys to their existing building as a matter of right, with no planning permission needed: as I look round Watford, I can see evidence of that with my own eyes. But I also know that that can have very serious consequences. As well as the inconvenience of the building work going on for as long as it takes, you also discover that the top-floor flat that you paid a premium for is now worth less as you are a middle-floor flat. Then there is the pressure on communal space and amenities, including the dreaded bin store and the state thereof.

Adding two more storeys to a presumably well-planned block of flats, for a set number of residents, is not consequence-free. But the consequences are absolutely trivial compared with the knock-on effects of such development on the Government’s own stated aim, which is to encourage more leaseholders to buy their freehold. This is an additional and often insurmountable obstacle. It significantly raises the cost of enfranchisement, as has been said. The value of the block will have gone up. The leaseholders are now required to pay more for their freehold. In many parts of the country, this takes it way out of reach, as in the noble Baroness’s case.

The noble Baroness, Lady Andrews, very thoroughly cited a positive trail of support: all the right noises from the Secretary of State in 2021, the Government’s complete recognition of the dilemma and a real promise of the ability to look into some restriction.

It is clear that there is a policy conflict here: the need for more homes, which we all agree on, versus the enfranchisement of leaseholders. As things stand, the homes policy is top trumps. Can the Minister advise on whether there will be a review of PDRs in general, including focusing on unintended consequences such as this and whether there is a way to sort this out in the leaseholder’s favour in the Bill? At the moment, it feels as if the freeholders are still very much holding all the aces and current residents have no voice at all in this significant change to their environment and, possibly, their life chances and finances.

[Baroness Taylor of Stevenage (Lab)]

My Lords, I am very grateful to my noble friend Lady Andrews for the collaborative way in which she has prepared and worked on her amendment, and drawn the attention of the House to what seems to be an omission from the Bill. We believe this needs to be rectified and my noble friend has not only set out, with her usual thorough approach and eloquence, exactly what the issue is, but has also proposed a straightforward and elegant solution, which we support.

My noble friend describes the Law Commission report as adopted by the Government in January 2021. Indeed, the government press release of January 2021 indicated that the Bill would strongly take account of this government commitment to release leaseholders from the straitjacket of hope of future development value. I quote from that press release:

“Leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying ‘development value’”.


This is based on a Law Commission suggestion, which clearly indicates the direction of travel and which we believe the Government have accepted. To quote from the Law Commission recommendation:

“Premiums would be reduced at the date of the freehold acquisition claim. If leaseholders subsequently decided that they wanted to develop, they would pay a portion of any profit received on a subsequent development to the landlord, rather than (as at present) having to pay development value in respect of a speculative future possibility of development”.


The Law Commission also set out clearly the principle that leaseholders should not need to have to negotiate on a piecemeal basis for this restriction but should be granted it by right. The commission refers to leaseholders of flats acquiring the freehold to their block and states that,

“as they would not be required to pay the landlord an additional sum to reflect the potential to develop their properties, leaseholders would no longer be required to negotiate with the landlord to create such a restriction; rather, they would be entitled to demand such a restriction be included”

and

“disputes, negotiation and litigation about development value would be reduced”.

The Law Commission clearly believed that the election to take a restriction on development outweighed the disadvantages put forward by other consultees and that such an election was eminently possible to implement where there was agreement among leaseholders.

I also point out that this issue arises, in part, from yet another unintended consequence of the permitted development regime—a point mentioned by the noble Baroness, Lady Thornhill—on which I have made my views clear in your Lordships’ House in the past. I am not an unequivocal fan of PD. Permitted development removes the step of local accountability through the planning system, often the contribution to local community infrastructure and almost always the contribution to local affordable housing which would be required through traditional planning applications.

At its worst, permitted development drives a coach and horses through local plans, resulting in residential property in inappropriate areas and buildings, and in taking buildings out of commercial use where it may not be appropriate to do so. In the case of the subject of this amendment, its very existence can create an added financial pressure on those wishing to exercise their enfranchisement rights. That is another reason why we believe that the solution proposed by my noble friend Lady Andrews delivers an equal and justifiable right to leaseholders.

--- Later in debate ---

[Baroness Taylor of Stevenage (Lab)]

My Lords, we welcome the new costs regime provided for by provisions in the Bill, because, as things stand, there is no balance of power: the playing field is tilted very much in favour of landlords rather than leaseholders, and that needs to be addressed. Under the current law, leaseholders are required to pay for certain non-litigation costs incurred by their landlord when responding to an enfranchisement or lease extension claim. That obviously does not reflect normal practice in residential conveyancing, where each party bears their own costs. I hope that noble Lords will forgive me for explaining our rationale for this amendment in a bit more detail than is customary for me, but it is a point of real principle, and some technical detail is warranted.

Noble Lords will remember that I quoted from a letter I had received from elderly leaseholders on the first day of Committee. I have received further representations in relation to excessive charges for non-litigation costs, which I will read out as they are a perfect illustration of the problem these amendments seek to address. I appreciate that this example relates to a ground rent dispute, but it would be the same issue for an enfranchisement or extension claim.

“After the Freeholder asks a ridiculous sum in increased ground rent with their ground rent review (every 4 years) this causes the leaseholder to then employ both a Solicitor and Surveyor to counter this high valuation which incidentally had no calculations to back it up. Therefore so far this year having paid £3,000 for a surveyor to dispute this figure and a lawyer costing so far £3,600, the freeholders haven’t even tried to justify their huge increase and valuation. Now after 4 months having passed and the 3-month negotiation ended and the Freeholders have made no effort to take part, negotiate or even contact our surveyor they now say this increase is NOT agreed …


If we lose with the third-party surveyor’s estimate and the increase is even only minimal we still have to pay the third-party surveyor’s fees plus the freeholder’s lawyer’s fees and our own lawyer’s fees, therefore it could end up costing as much as £15,000. Plus if they look to backdate the increase over the past 6 years’ Ground Rent charges this could amount to who knows what?


Even if we win we still lose a great amount of costs and fees plus we cannot look forward to a reduction in Ground Rent as the lease states an ‘Upward Only Revision’. Therefore freeholders know they can put in totally unrealistic figures for rent increase of whatever they want as the leaseholders are on a hiding to nothing … until they throw in the towel.


Additionally, to lodge a dispute at the 1st Tier Tribunal for any high unreasonable charges it is necessary to not pay the bill in question otherwise it is deemed you have agreed to this payment but then withholding payment runs the risk of forfeiture”,


which we will discuss later today. My correspondent goes on to plead that the issue of ground rent increases finally be resolved by the Bill, but their case illustrates the financial and legal minefield that leaseholders face.

The argument for imposing non-litigation costs has always been that, in enfranchisement or lease extension claims, a landlord is being forced to sell his or her asset, which would justify a departure from the practice in open market sales of residential property. However, when it comes to lease extensions or freehold purchases, a landlord is obviously not simply being compensated for the value of the asset they are being compelled to sell. They are instead securing, through the payable premium, a share of the profit to be made from selling to the leaseholders in question. In addition, as things stand, through capitalised ground rents, they are extracting funds from leaseholders over long periods—often decades —prior to securing that profit share, for no explicit services in return.

The valuations of lease extensions and freehold acquisitions under the existing statutory regime rely on prices agreed via an open market transaction, but those valuations do not account for the fact that leaseholders are expected to pay their landlord’s non-litigation costs. Therefore, landlords in enfranchisement or extension transactions receive the price for the asset being sold, which reflects the market rate without non-litigation costs factored in, and their reasonably incurred non-litigation costs on top.

In its 2020 final report on enfranchisement, the Law Commission is very clear that the effects of law and current market practice are that

“the landlord is over-compensated for the non-litigation costs that he or she has had to incur in order to transfer the interest to the leaseholder”.

In addition, many of those who are better resourced could use the fact that such costs are borne by leaseholders as leverage in negotiations on the price of the lease extension or freehold acquisition, confident that the expense of challenging those costs in a tribunal would dissuade many leaseholders from doing so.

The Opposition are clear that freeholders should not receive compensation in respect of non-litigation costs. A landlord selling his or her asset and receiving a share of the profit as a result is not sufficient justification for departing from an arrangement in which reasonable non-litigation costs are factored into the ultimate price. The decision to enfranchise or extend a lease is often not discretionary; it is often a requirement brought about by the fact that a lease is due to expire, because the payable premium is rising as the lease shortens, or as a result of the decision to move or remortgage.

We therefore fully support the intention in the Bill to provide for a new regime based on the principle that leaseholders are not required to pay the freeholder’s non-litigation costs in these circumstances. We note the Law Society’s concern that landlords are being asked to bear their own non-litigation costs, despite the fact that the proposed standard valuation method provided for by Schedule 2 will lead to payable premiums below full open market value because it caps the capitalisation rate. However—and this point touches on one of our previous debates—political decisions set the rules of the game for market competition. In our view, it is simply not the case that there is some kind of inherent market value for premiums entirely independent of legislation in this area. Every sale of a flat and every lease extension process relating to a flat since 1993 has been undertaken against the backdrop of the 1993 Act, which reduced ground rents to a peppercorn.

The market value for premiums is shaped by the laws that the House passes. It is right in principle that, to achieve the Bill’s objectives of making it cheaper and easier for leaseholders in houses and flats to extend their lease or buy their freehold, leaseholders do not pay non-litigation costs in addition to the payment of a premium, as determined by the new method proposed in Schedules 2 and 3. We believe that leaseholders should not be liable for these costs as a result of an enfranchisement or lease extension claim on principle, irrespective of the method by which the premium is calculated. That is why we take issue with the clause as drafted, because it does not protect all leaseholders from liability for costs incurred.

The clause as drafted entails only a selective extension of rights in this area, because it does not ensure that all leaseholders will no longer have to pay their freeholder’s costs when making a claim. Instead, it makes exceptions to the general rule, whereby the price payable for the freehold or extended lease is below an amount to be prescribed in regulations.

We understand the rationale—namely, that leaseholders should pay a freeholder’s non-litigation costs in such circumstances, so that low-value claims do not cost the freeholder money. The Minister has been very clear that the Government believe that this must happen to ensure that the process is fair for both sides. We also appreciate that there are risks in prohibiting a landlord from passing on non-litigation costs to leaseholders in cases where they would be required to spend more in carrying out the transaction than they received for the asset. The Law Commission highlighted a number of those risks, including the incentive created for landlords not to co-operate with a claim, or for them to transfer the low-value freehold into the name of a shell company and then liquidate the company.

However, we are concerned that exempting claims below a certain value will create a different set of practical problems. These include costly and time-consuming disputes in cases in which the price payable is close to the level of the non-litigation costs in question for low-value claims, and the potential for landlords to game the system by arguing for a price payable below the threshold in order to secure both it and associated non-litigation costs because of the burden of disputing the amount.

Taking a step back, we fail to see the logic in the Government’s position. On the one hand, they seem to be ignoring the Law Commission’s recommendations in relation to costs; they have chosen to provide for a general rule that leaseholders are not required to make a contribution to their landlord’s non-litigation costs, but have not chosen to adopt a valuation methodology that seeks to reflect open market value, which was the commission’s stated prerequisite for such a rule. On the other hand, they are following strictly the commission’s recommendations in respect of low-value claims.

Put simply, we believe that, by means of this Bill, we should take the political decision to remove any exception to the general rule that leaseholders are not required to pay the freeholder’s non- litigation costs in such circumstances. I hope the Minister will give this careful consideration; otherwise, this section of the Bill has the potential to undermine the stated aim to increase, simplify and reduce the cost of enfranchisement. I beg to move.

[Baroness Thornhill (LD)]

My Lords, when we started the debate today, I felt like I was wading in mud. I feel I am still in the mud—it has got thicker, and the fog has come down. This is a complex and complicated Bill. I have really enjoyed listening to the arguments and the debate; I have already learned a lot. Report will be a lot better—certainly for me.

I will try to keep my remarks short and my questions simple in order to seek clarification. The noble Baroness, Lady Taylor, has, in her own style, ably illustrated the issue and set out the case for her amendments in great detail. I will not repeat those—some paragraphs have already been knocked out of my speech.

The newly inserted Sections 19A and 89A set out the general rule that neither a current nor a former tenant is liable for any costs incurred by another person because of enfranchisement or a lease extension claim. However, new Sections 19C and 89C set out the exceptions to this rule. The debate is around whether these exceptions are justified. We are seeking the Government’s justification for this variance. Amendments 47 and 48 from the noble Baroness, Lady Taylor, would delete these exceptions, so that leaseholders would not be liable to pay their landlord’s non-litigation costs under any circumstances. We agree. Each side should pay its own costs; we are unsure as to why this is not the case.

When this was debated in the Commons, the Government argued that, while the main aim of the changes to the costs regime was to address the imbalance of power that has existed between the landlord and tenant, they had a desire to ensure fairness on both sides. Sections 19C and 89C prevent the landlord incurring a net financial loss when leaseholders exercise their rights to enfranchisement and lease extension, thus acknowledging that this really is a balancing act. We look forward to the Minister’s comments as to how the Government have managed to keep the scales level.

I agree with the comments made in the debates on the last two groups. Some of the problems are because much too much is being left for later regulations, in either guidance or SIs. I believe that we should have had a clear government position on issues as important as landlord costs, deferment and capitalisation rates. This is still too vague. Such uncertainty is bad, not only for the leaseholders but for us parliamentarians who would hope to scrutinise and improve the legislation. However, I note the explanation from the Minister in the last group.

The Law Commission’s report highlights that the current law means that the landlord is overcompensated for these non-litigation costs. We support the Government in saying that costs should be balanced. It has to be said that these amendments raise important questions as to whether new Sections 19C and 89C undermine this aim. The noble Baroness, Lady Taylor, has made a good case to that effect.

[Lord Gascoigne (Con)]

My Lords, I thank the noble Baroness, Lady Taylor, for her Amendments 47 and 48, which seek to remove the exception on costs arising from low-value lease extension or freehold acquisition claims. While the Bill includes a new general rule that each side will bear its own costs, we believe that there need to be exceptions in certain circumstances so that the regime is fair for both sides. The low-value cost exception entitles landlords to receive a portion of their process costs from leaseholders in low-value enfranchisement and lease extension claims for flats and houses respectively. We believe that these are necessary provisions that protect landlords from unfair costs.