Leasehold and Freehold Reform Bill

Lord Palmer of Childs Hill Excerpts

2nd reading
Wednesday 27th March 2024 Lords Chamber

[Lord Palmer of Childs Hill (LD)]

My Lords, I first thank the noble Lord, Lord Bailey, for his contribution; may it be the first of many. I declare my interest in the register as the chairman of the advisory board of the Property Redress Scheme, but I do not intend to speak on redress here today.

No one will disagree that the leasehold system has been plagued by cowboys and those seeking to exploit a broken system. The Government have sought to address these issues in the Bill. I am concerned that it does not go nearly far enough. That said, where they are acting, there are huge flaws that will fundamentally undermine our property rights and, as such, put our pension funds and economic prosperity at risk.

I draw the attention of the House to an aspect of the Leasehold and Freehold Reform Bill which has not, until this debate, received the attention I believe it warrants and very much needs. It concerns marriage value, referred to by the noble Lord, Lord Truscott, the noble Earl, Lord Lytton, and in detail by the noble Lord, Lord Howard. For those who are unfamiliar with this term, marriage value is defined as the increase in a property’s value once a lease below 80 years is extended or enfranchised. Existing legislation requires the financial benefit—or additional value—created when extending or enfranchising a lease and merging the freeholder and leaseholder interests to be shared equally by both parties, so they benefit, more or less, on equal terms.

As this House is no doubt aware, the Bill proposes to abolish marriage value. It concerns me deeply that this proposed change has not featured in public debate around ground rents and leaseholds. The change only very briefly featured in discussions during the Public Bill Committee’s scrutiny in the other House, and indeed much of that discussion, I might say, was about whether marriage value is a hypothetical concept. I can assure noble Lords, as other noble Lords have, that marriage value is certainly not hypothetical.

Furthermore, its immediate abolishment will cause a number of underassessed problems for the country. As I will outline, this is a highly inequitable measure that will disrupt investment in our property market and wider economy. Let me outline my concerns about the inequitable nature of the proposed measure.

The Government have stated that the abolition of marriage value will transfer £7.1 billion of freehold investors’ equity to leaseholders. In the broken feudal system of leasehold, this could initially be a warmly welcomed measure. However, if you scratch the surface, the assumed benefits of the measure fall apart. Of the 5.2 million leasehold properties in England and Wales, only 400,000 have leases under 80 years, the point at which marriage value is applied. As such, £7.1 billion will be transferred to just 8% of all leaseholders.

That sounds good, perhaps, but of these 400,000 properties—or 8% of all leaseholders—two-fifths are owned by private landlords. Many of these landlords would have made the decision to buy these short, and therefore cheaper, leases with the explicit intention of renting them out at proportionately high market rent, and therefore maximising the return of their investment, because they are not looking to the long-term. Worse still, four-fifths of the total value of this equity transfer will occur in London or the south-east, negatively impacting efforts to rebalance regional wealth disparities. However, what has struck me most significantly is that, of these higher-value properties, 60% of the leaseholds—and I do mean leaseholds—are held by foreign owners in central London.

Let me summarise that. Through this measure, the Government are transferring £7.1 billion of freeholder wealth to just 8% of all leaseholders. Two-fifths of these leaseholders are private landlords, four-fifths of the wealth transfer will occur in the already prosperous London and the south-east, and a huge amount of this wealth will be transferred out of the country into foreign ownership for leaseholders.

This is not the end of the inequitable consequences of immediately abolishing marriage value. Let us imagine that there are two flats next to each other at the point at which the properties have only 80 years remaining on their leases, when marriage value begins to be applied. One leaseholder did the right thing, and took money from their savings or remortgaged to be able to extend their lease and protect the value of their asset. Under this measure, those who did the right thing and protected their asset will be worse off than those who did not, who will now receive this benefit for free.

Essentially, the Government are principally transferring wealth not to those who require more support but to relatively wealthy individuals in the main, many of whom deliberately buy or remain in short-lease properties. The Government are about to deliver foreign leaseholders an enormous birthday present, while undermining the property rights that are the bedrock of UK pension funds. This is surely an unintended consequence that requires further consideration by the Government.

I move on to the wider implications for the property industry and our economy. I am sure noble Lords would agree that the UK has a world-leading reputation as a nation that respects property rights. This reputation has allowed us to build a strong domestic and foreign direct investment environment. I am concerned that retrospectively—I emphasise the word “retrospectively” —expropriating assets from property investment sends all the wrong messages to both domestic and international investors that British property rights are no longer sacrosanct. This failure to protect property rights will undermine the UK as a place to invest. Money will divert to the UK’s international competitors because of the risk that the UK Government can move the goalposts and retrospectively—I emphasise the word again—apply changes to existing investment returns. This will lead to uncertainty and a loss of confidence in the UK economy. The result will be fewer British businesses getting the investment they need, less housing being built, lower economic growth, and lower tax revenues to fund things such as the NHS and other vital public services relied on by the people of this country.

Abolishing marriage value threatens to completely undermine investor confidence in our property market and damage the wider economy. As we have seen in the media this weekend, the Treasury has intervened in the ground rents element of the Bill due to concerns about the impact on pension funds. Marriage value, although overlooked—but not today in this Chamber—bears similar risks for the Government. Additionally, it will lead to a tax-free gain for the leaseholders who are owner-occupiers, but the freeholders’ loss will in effect not be taxable, further impacting on the Treasury’s coffers. This needs to be reassessed.

Additionally, as has been mentioned in passing, the UK Supreme Court has observed that, as a minority group, landlords, although often unpopular, are entitled to protection of their so-called human rights, and the abolition of marriage value can be argued to be an unfair expropriation as it falls short of the fair balance principle. Marriage value has, quite rightly, been enshrined in law since 1993 to ensure that freeholders are fairly compensated when the lease is enfranchised or extended. This expropriation of wealth takes away an entitlement without a fair balancing aspect, which will lead possibly to an ECHR challenge—mentioned by another noble Peer—that could further saddle the taxpayer with a substantial bill.

Fortunately, there is a compromise to be made. I propose that the Bill needs a straightforward amendment which tweaks the legislation by grandfathering the current situation for those leases which have fewer than 80 years to run to reversion. If the term grandfathering is unfamiliar to some, I am referring to the well-established practice of excluding leases with fewer than 80 years remaining on the date of Royal Assent from the changes to marriage value. By grandfathering those existing leases with fewer than 80 years, where marriage value is already imputed into their reversion value, freehold investors will not suffer from the destruction of £7.1 billion of financial value. Any lease with more than 80 years remaining at the time of the Bill passing will not have marriage value included within the calculation of the premium for a lease extension or enfranchisement, now or in the future. The Government will therefore still have achieved the objective of abolishing marriage value.

To abolish marriage value would be to abolish investment confidence in our property market through a deeply inequitable measure. A grandfather clause would protect investors, thereby maintaining investor confidence in our property market. In case people do not understand the principle of marriage value and the abolition of it, I stress that this does not stop extending or enfranchising but affects purely the overvaluation or undervaluation of the property. I therefore trust that, in the course of the debates on the Bill, we might consider a grandfathering clause relating to property.