Leasehold and Freehold Reform Bill

Lord Howard of Rising Excerpts

Committee stage
Wednesday 24th April 2024 Lords Chamber

Moved by

[Lord Howard of Rising]

26: Schedule 4, page 160, line 27, at end insert “, but see sub-paragraph (3A).”

[Lord Howard of Rising (Con)]

I speak to Amendments 26 and 27 in my name, focusing on the measures in this Bill relating to marriage value which, as it stands, would allow leaseholders with leases of 80 years or fewer to acquire freeholder rights without paying a fair share of the marriage value to the existing freeholder.

Marriage value, in relation to leasehold enfranchisement, is set out in the Leasehold Reform, Housing and Urban Development Act 1993, and defined as the financial benefit that results from merging the freeholders’ and leaseholders’ interests in a residential property. Under the 1993 Act, and reaffirmed in the Commonhold and Leasehold Reform Act 2002, 50% of the marriage value is payable by the leaseholder to the freeholder when the unexpired term of an existing lease is under 80 years.

Handing over the full benefit of marriage value to leaseholders without due compensation will have wide-ranging effects, but the most damaging and significant is the threat to property rights. Our economy is built on property rights. If the ownership of property is no longer secure, because it can be taken away without compensation, where does that leave us? If the Bill goes through unamended, it will set a dangerous precedent for Governments to transfer wealth arbitrarily. What we are looking at today could be the thin end of the wedge. I am not suggesting that government actions would escalate immediately, but any power given to government will be used to its full extent sooner or later, however benign the original intention. Do not forget that income tax started out as a temporary measure at 2.5p in the pound, and has reached as high as 100%

On top of the principled concerns that I have set out, there are a number of practical ones. The assets set to be transferred as a result of these measures have a value of £7.1 billion, and it is likely that some of that value is being used as security for loans. Do His Majesty’s Government know how much of the affected property is tied up in this way, and do they know how the banking regulatory authority feels about, what would become, unsecured loans, or the possible consequent impact on banks’ capital requirements?

The Government’s impact assessment states there are 4.8 million leasehold properties in England, of which only 385,400 have leases under 80 years. Of those 385,400 leases, the bulk of the value is located in London and the south-east. Despite the Government’s noble ambition to support aspirational home owners, I understand that in London, 60% of leaseholders benefiting from this change in policy would be private investors, of which 10% to 25% are based overseas. At the same time, many of the freeholders whose assets would be removed are charities or pension funds which have invested to cover their long-term liabilities.

There is also a significant impact on the Exchequer. Under the status quo, any financial gain made by freeholders when leases are sold is taxable. If all the financial gain is given to the leaseholder, a good proportion of the tax that would have been due will be sheltered by the exemption of disposal of a principal private residence. The loss to the Exchequer under this consequence alone has been calculated at £l billion.

Finally, there is the problem with human rights legislation. One of the founding principles of the European Convention on Human Rights is the protection of property. The lack of compensation for freeholders under the processes set out in the Bill challenges the expectation that parties should be fairly compensated for losses resulting from expropriation or state control of use. Whatever government lawyers say, there is bound to be a difference of opinion. In fact, the Government’s own legal advice described it as “finely balanced”. Do your Lordships imagine for a moment that this arbitrary transfer of property without proper compensation being paid will not be fought through the courts to the highest level? It will cost the Government a small fortune and freeze the market in leasehold properties, as present leaseholders will be reluctant to sell while there is a chance of greater value in the future.

My amendments are simple. They preserve the existing arrangements only for leases with an unexpired term under 80 years, leaving the 95% of leaseholders who have leases of more than 80 years to benefit from the Government’s proposals, even when their term drops below 80 years. This is a fair balance. I hope my noble friend the Minister will consider my amendments carefully and from a point of principle. I would welcome further discussions to fine-tune the details so that we can ensure that this policy works for everyone. I beg to move.

[Baroness Deech (CB)]

My Lords, I am pleased to lend my support to the noble Lord, Lord Howard, and have put my name to these amendments. I have three short points to make. One is that phasing out in this area must be right. The second is that we should treat retrospective legislation very suspiciously. Thirdly, it cannot be right to deprive people of their property without compensation.

--- Later in debate ---

[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—

[Baroness Fox of Buckley (Non-Afl)]

I suggest that one of the problems is that those who buy cars under hire purchase do not think that they are buying the car to own it. One clarification that has emerged only recently is that most people did not know when they bought a home, advertised as being sold to them, that the lease was a hire-purchase arrangement. I hope that is one of the things being clarified by this law.

--- Later in debate ---

[Lord Howard of Rising (Con)]

Sorry, but when you buy a car under hire purchase, you buy it that way: that is why it is called purchase. You are just deferring your payment over a period. That is what happened when I was in the motor industry.

I thank all those who have supported my amendment. I hope that, as the Minister said, we can return to discuss this further. In the meantime, I withdraw my amendment.

Amendment 26 withdrawn.

Leasehold and Freehold Reform Bill

Lord Howard of Rising Excerpts

2nd reading
Wednesday 27th March 2024 Lords Chamber

[Lord Howard of Rising (Con)]

My Lords, I want to speak about the abolition of marriage value for leases under 80 years. This will create financial and legal problems, as my noble friend Lord Moylan has alluded to.

Apart from the shocking moral issues of arbitrarily transferring wealth from one holder to another, with no compensation—from a freeholder to a leaseholder in this case—there is a danger of tampering with property values, when so much of the nation’s economic activity is based on the security of property assets.

I find it difficult to believe that His Majesty’s Government have properly considered the implications of going down this path. If assets can, on the whim of a politician, have their value dramatically changed, we will ultimately end up with a breakdown of the financial system. Noble Lords might consider someone who has put some, or possibly all, of their life savings into an investment suddenly having nothing. There will certainly be examples of this if the proposed confiscation takes place, as well as a diminution of pension fund benefits from pension funds which have invested in freehold ground rents.

There is a strong risk of litigation under the Human Rights Act, as has been mentioned. This could lead to an ECHR challenge against the Government for the unjust removal of property rights, which could result in a significant bill for the taxpayer.

There are 5.2 million leasehold properties, but only 400,000 are under 80 years. Of those, almost two-fifths are owned by professional landlords and rented out. In these cases, the transfer will be from one investor to another. The remaining three-fifths of leases are owner-occupied properties. These transfers will mean a loss for His Majesty’s Treasury, because freeholders will suffer a tax-deductible loss, but the profit to resident leaseholders will be tax free as it is their principal private residence. This would amount to a loss in today’s value of at least £1 billion to the Exchequer.

Four-fifths of the total value of all transfers will be in London and the south-east, with a reputed 60% of higher-value properties held by foreign owners in central London. This means that the Bill will lead to a significant transfer of wealth out of the United Kingdom.

By grandfathering leases under 80 years, where marriage value is already imputed into their enfranchisement or lease extension value, freeholders would not suffer from an estimated loss of more than £7 billion. If the Government give up the idea of abolishing marriage value for leases under 80 years, a substantial legal threat will be removed and a loss of significant sums to His Majesty’s Treasury will be avoided. More importantly, the long-term threat of erosion of stability in the financial system will have also been avoided. I will put down an appropriate amendment in Committee.

Queen’s Speech

Lord Howard of Rising Excerpts

Monday 17th May 2021 Lords Chamber

[Lord Howard of Rising (Con) [V]]

My Lords, I congratulate the noble Lord, Lord Coaker, on—as the noble Lord, Lord McNicol, said—such a heartfelt and moving speech. I also look forward to hearing from the noble Lord, Lord Morse, later. I declare an interest as the owner of rented accommodation and farmland.

Her Majesty’s Government plan to publish a consultation on reforming tenancy law to abolish Section 21 no-fault evictions. It is impossible to do this without introducing rent controls, which historically have never worked and would do immense damage to the rented housing market.

A recent example is Berlin, where controls were introduced in 2020 to maintain rents at 2019 levels for five years. The result was that the number of new rental properties coming on to the market fell by almost half; the scheme is ending after less than two years. There were other factors, but they do not alter the fundamental, which is that freezing rents caused the supply of rented accommodation to dry up.

To state the obvious, landlords let premises in order to get rent; it is preferable to have the income. Landlords ask tenants to leave only with very good reason because replacing a tenant is an expensive and laborious business. You have to advertise the property. There are lawyers’ fees, letting agency fees and fees to check gas and electricity. You must comply with emission rules, and there are almost always redecoration costs. The longer the same tenant stays in place—so avoiding these costs—the greater the benefit to the landlord.

It is blindingly obvious that only a tiny minority of tenants are asked to leave, even by rogue landlords. Removing Section 21 would massively reduce the value of rented properties and be a slap in the face for all those aspiring individuals who have put their savings into rented property—especially those who have taken out a buy-to-let mortgage. Some 90% of all landlords are individuals, nearly half of whom own only one property.

Before the 1988 Act, the average discount for tenanted properties was between 40% and 50% of vacant possession value. At a stroke, by introducing sitting tenancies, the capital value of the present tenanted sector will have nearly halved. In the case of landlords with buy-to-let mortgages, the security for these loans may no longer meet the loan-to-value requirement, with the consequent financial hardship.

Rented premises are well protected by law. If there are problems with the property that the landlord will not deal with, a tenant can complain to the local housing officer, who can compel a landlord to make changes. A gas certificate is needed every year. An electrical installation condition report is required every five years or for each new letting. An energy performance certificate is required. Deposits are now limited to five weeks’ rent, which is unlikely to cover a bad tenant’s damage. Given the massive incentive to prolong tenancies and the continuing drive towards improvements to rented property, it would be counterproductive to introduce a measure that will reduce the availability and quality of rented accommodation and will cause financial hardship for many.

There are many other arguments against the abolition of Section 21, for which there is no time today. I hope that Her Majesty’s Government will think carefully when reviewing the abolition of Section 21.