Leasehold and Freehold Reform Bill (Sixth sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 23rd January 2024 Public Bill Committees

[The Minister for Housing, Planning and Building Safety (Lee Rowley)]

This Bill reforms the valuation process for leaseholders when they buy their freehold or extend their lease. It does this by repealing parts of existing legislation and setting out a new valuation scheme that leaseholders and landlords must follow. We are debating a large group of measures, so I am afraid—and I apologise to the Committee in advance—that my comments may be slightly longer than normal, in order to cover all of those.

Clause 9 amends the Leasehold Reform Act 1967, which deals with lease extensions and freehold acquisitions of houses. Subsections (1) to (3) make necessary changes to sections 8 and 9 of the 1967 Act in relation to freehold acquisitions. It mandates the use of clause 11, which sets out the new valuation scheme for calculating the price payable. Subsection (4) applies that to lease extensions for houses. I will shortly come on to that new valuation scheme covered in clause 11, the detail of which is contained in schedule 2. However, these changes introduce the valuation reforms contained in the Bill. I commend clause 9 to the Committee.

Clause 10 makes the necessary changes to the Leasehold Reform, Housing and Urban Development Act 1993, which deals with flats. The clause amends sections 32 and 56, and repeals schedules 6 and 13 of the 1993 Act, which deal with the freehold acquisition of a block of flats and lease extensions of a flat. In a similar way to clause 9, clause 10 mandates the use of clause 11 in determining the price payable for enfranchisement transactions—in relation to flats, rather than houses—and sets out the new valuation scheme for calculating the price payable. I commend clause 10 to the Committee.

Clause 11 provides the basis of the new valuation scheme that must be used to determine the price payable when exercising any of the four enfranchisement rights, which are acquiring the freehold of a house, extending the lease of a house, acquiring the freehold of a block of flats and extending the lease of a flat. The clause sets out that the premium is comprised of two elements: first, the market value, which is to be calculated in accordance with schedule 2; and, secondly, any other compensation, which is to be calculated in accordance with schedule 3.

Schedule 2 details the steps for calculating the price payable for lease extensions and freehold acquisitions. It also contains key reforms to the valuation process, including the removal of marriage value and hope value, capping ground rent at 0.1% of the freehold value in the valuation calculation, and providing the Secretary of State with a power to prescribe two rates used to calculate the premium.

[Richard Fuller (North East Bedfordshire) (Con)]

The Minister just mentioned that schedule 2 eliminates marriage value. He will be aware, from the impact assessment, that there is a financial value associated with marriage value. Can the Minister tell me whether the Government think that marriage value is a real value—that it has intrinsic value—or is it just a number that has no material value at all? Is there something behind what marriage value is, and what is the rationale for eliminating it?

[Lee Rowley]

That is an interesting philosophical question to debate straight after lunch. The Government recognise that marriage value is utilised in a number of transactions. Therefore, some people in the market—some individuals, some economic actors—must deem that there is some form of additional value by marrying the lease and the freehold up within a shorter period of time. How that works, what exactly that is, and how expansive it is, is for others and for the market to determine, in a traditional and—something that I think we both would support—a wholly capitalist way. However, there does seem to be something to it, hence why we are making some of the reforms that we are making, given the feedback that we have been given.

[Richard Fuller]

I am grateful to the Minister for his summary, which I think is very accurate. Given that the Government have assessed that there is something real there, and decided that they want to eliminate the marriage value—obviously, a lot of work has gone into the preparation for that—what representations has he received about the legal underpinnings of this particular aspect of the legislation for those from whom that value is being taken?

[Lee Rowley]

The Government remain confident that the proposals being put forward are compliant with their responsibilities. I have only been in post for a short period of time, and my hon. Friend the Member for Redditch may wish to comment on this. The conversations I have had with the people who—I say this without breaking their confidence, given that some of them might be in camera—have come to me to represent their position have not focused on that as the main issue.

Schedule 2 also sets out how to divide the premium into shares, where multiple landlords are entitled to receive a share—for example, where there are intermediate landlords. We will go through that in further detail when we consider schedules 2 and 3. I commend clause 11 to the Committee.

I now turn to amendment 59, which is in my name. This amendment exempts business tenancies which qualify for enfranchisement rights under the Leasehold Reform Act 1967 from the standard valuation method. It is not our intention for the standard valuation method—especially the rent cap—to apply to any business rent, and this amendment closes off that possibility for a relatively rare type of lease where it might otherwise have existed. I commend this amendment to the Committee.

Turning to amendments 62, 63 and 64, which are in my name. Amendment 62 makes minor technical changes to assumption 1 in schedule 2 so that the clause operates as intended. The change to sub-paragraph 15(2)(a) makes the phrasing clear that the clause is about freehold acquisitions. The change to sub-paragraph 15(2)(b) is a minor and technical correction so that where a lease extension is granted by someone other than the freeholder, such as a head lessee, the assumption of merger with the interest of the person granting the extended lease still takes place for the purposes of the valuation methodology for intermediate leases. Amendments 63 and 64 fix typographical errors, by changing the word “property” to “premises”, as the latter is defined.

Turning to amendments 65, 67 and 68 in my name, these make small changes in schedule 2 so that the provision works as it was intended. Amendment 65 clarifies the valuation of the market value of a flat as it is to be used for the purposes of identifying the ground rent cap in the calculation of the term value. Amendment 67 makes a change to ensure that the definition of what is being valued is clear. Amendment 68 clarifies the valuation of the market value of a flat as it is to be used for calculating the reversion.

These amendments are intended to avoid any mis-interpretation of the standard valuation method. Some may mistakenly interpret the schedule as requiring a valuation of a flat as if it were a flying freehold which could cause it to be undervalued. Amendment 68 clarifies the meaning so that what is being valued is the share of the value of the freehold of the whole building and appurtenant property that is attributable to the flat. The amended text will make sure that the standard valuation method is interpreted as we intend it to be. I commend these amendments to the Committee.

Schedule 2 sets out how to apply the new standard methodology when calculating the premium that leaseholders of houses and flats need to pay to extend their lease or acquire their freehold. This includes fundamental reforms to the valuation process, including the removal of marriage value—which we have just discussed—and the capping of ground rent at 0.1% in the valuation calculation. These changes help to fulfil the Government’s aim to make it cheaper and easier for leaseholders to extend their lease or buy their freehold. The schedule is extensive and broken into seven parts.

Part 1 introduces schedule 2 and requires that this schedule must be followed when calculating the market value of the premium for lease extensions and freehold acquisitions for houses and flats. It also sets out how to divide the premium into shares where loss is suffered by multiple landlords. Part 1 also makes clear three definitions for the purposes of this schedule: that of “collective enfranchisement”, “freehold enfranchisement” and “lease extension”.

Part 2 of 7 sets out the basis of the market value for freehold acquisitions and lease extensions. Paragraph 2 does this for freehold acquisitions. It sets out that the market value of the freehold used in calculating the premium is the value of the freehold as if sold on the open market by a willing seller. Paragraph 3 does this for lease extensions. It sets out that the market value of the lease extension used in calculating the premium is the value of the 990-year extended lease, at peppercorn ground rent, as if sold on the open market by a willing seller. Paragraph 4 states that the premium for both acquisitions and extensions is to be determined in accordance with part 3 and on the basis of the assumptions set out in part 4.

Part 3 of schedule 2 sets out that while in general the standard valuation method must be used to determine the value of acquiring a freehold or extending a lease, there are some exceptions. The specific exceptions are set out in paragraphs 6 to 8 and include where the lease has five years or less remaining, where the property is subject to a home finance plan lease and where the lease is a market rack rent lease. For these purposes, a market rack rent lease is where the leaseholder has either paid no premium or a very low price for the lease in return for paying a high rent.

Paragraphs 9 to 11 set out some further detailed exceptions, including where there has been a pre-commencement lease extension of a house for 50 years at a modern ground rent. These paragraphs also explain that the standard valuation method only applies to a relevant flat in collective enfranchisements, where relevant flat excludes, for example, flats with shared ownership leases. Paragraph 12 provides that the standard valuation method can still be used to determine the value of the relevant freehold acquisition or lease extension, even when it is not compulsory to do so. Paragraph 13 makes it clear that the standard valuation method is to be used if either part 3 requires it to be used or where it is used on a voluntary basis in relation to the property being valued.

Part 4 of schedule 2 sets out the assumptions on which the valuation of freehold acquisitions or lease extensions are to be based, whether or not the standard valuation method is being used. Assumption 1 is that intermediate leases and freehold interests are treated as merged for the purposes of valuation where they are acquired in a freehold acquisition or where they are affected by the lease extension claim. The effect of assumption 1 is to simplify the process and lead to savings in process costs and premiums in some cases. This does not apply to intermediate leases that are not acquired. Assumption 2 is that the leaseholder is not, and never will be, in the enfranchisement market, nor will the leasehold and freehold interests by other means be married. The effect of assumption 2 is that no marriage or hope value is payable for either a lease extension or freehold acquisition. This will reduce premiums where leases have 80 years or fewer remaining and remove the cliff edge that leaseholders currently face.

Assumption 3 is that the relevant property is assumed to be in good repair and has not been improved under the current lease. The effect of assumption 3 is to prevent the premium being either decreased in favour of the leaseholder, due to the property being held in disrepair, or increased in favour of the landlord, due to the leaseholder having made improvements. The latter case would result in the leaseholders having paid for the improvements twice. In the case of a freehold house acquisition, assumption 3 will only apply to the current lease, removing the ability to chain together multiple long leases.

Assumption 4 is that where leasebacks are taken, their value is deducted from the freehold value, reducing the premium. Other assumptions can still be made when determining the market value, as long as they are consistent with assumptions 3 and 4 as well as the other provisions of schedule 2. The remaining paragraphs cover circumstances where the premium may have to vary, including to account for burdens or benefits on the title, differing terms in extended leases, leases with five years or fewer remaining, and where leaseholders own their immediately superior intermediate lease.

Part 5 sets out the standard valuation method, which is made up of three steps for lease extensions and freehold acquisitions. Combined with the assumptions set out in part 4, the resulting premium for many leaseholders will be lower than it otherwise would have been where they have leases with 80 years or fewer remaining, or high or escalating ground rents. The first step is to determine the term value, which is the capitalised value of the ground rent payable over the term of the lease. In other words, the landlord is compensated with a lump sum, instead of continuing to receive future ground rent for the remainder of the lease term. Part 7 must be used to determine the capitalised value.

In calculating the term value, a ground rent cap will now apply so that the valuation calculation will cap the ground rent at 0.1% of the freehold value. There are two exceptions. The first is where the leaseholder has paid no premium for the lease. The second is where the lease was purchased for a low premium in exchange for a high rent. In step two, the reversion value is determined. The reversion value compensates the landlord for the loss of the reversion at the expiry of the lease in the case of freehold acquisition and for the delayed reversion in the case of a lease extension.

For freehold acquisitions, the reversion value is the market value of the freehold at the expiry of the lease, discounted at the deferment rate. In a collective enfranchisement, this is calculated for each qualifying leaseholder’s lease. For lease extensions, the reversion value is the market value of a 990-year lease at peppercorn ground rent on the same terms as the new, extended lease and beginning at the end of the term of the current lease, discounted by the deferment rate.

Step 3 requires that the market value of the property determined by the standard evaluation method is found by adding the term and the reversion values in steps 1 and 2, and in collective acquisitions all the relevant term reversion values subject to any adjustments, as provided for in other parts. Part 5 gives powers to the Secretary of State to specify the deferment rate used to calculate the reversion value and includes a requirement to review the rate every 10 years.

[Richard Fuller]

Will the Minister explain why it is right to give the decision on those rates to the Secretary of State?

[Lee Rowley]

It is ultimately a balance, as we discussed this morning when talking about the fundamentals in clause 3, I think. We believe that it is proportionate to allow the Secretary of State to make a decision here, but I will be clear now and as we go through the Bill that that should be done only on an occasional basis, hence the reference to the 10-year review period.

[Richard Fuller]

Does the Minister accept that the absence of knowing what will be in the Secretary of State’s mind about what rate he or she may set affects the analysis of what is being done economically with the Bill quite significantly? What thought has he given to the legal challenge risks of holding back what is in the Secretary of State’s mind about what the rates would be?

[Lee Rowley]

I am grateful to my hon. Friend for his comments. I accept the point that we need to get as much of that information to members of the Committee, the House and the public as quickly as we are able to do so. I know that he and other Members recognise that we have a process that we need to go through in that period, and I hope that we give enough information about the process and changes, although I accept the interaction that he indicates. My hon. Friend is an experienced Member; it is not my intention in any way, but forgive me if I say anything that he knows.

Obviously we must get through the process of working through the legal risk. It is a very contested area—we can see that already. There have already been indications that people will look at it extremely closely, so it would not surprise me if it was looked at extremely closely in most ways. There are potential legal issues on both sides, in that whatever we come out with, any public policy change often or always creates a group of people who do not like it, and they have an ability through due process and the law to see if there is anything in there that they dislike. I guess this is no different, but equally the Government are cognisant that it creates a challenge in this domain. We must go through the process of having the consultation, which only closed quite recently, and giving enough time for that to be considered and transacted on before we come to a conclusion; otherwise, there is potential legal risk there as well.

Part 6 sets out how a premium determined under parts 1 to 5 should be divided among multiple parties, such as intermediate landlords and freeholders. That creates a saving in process costs for leaseholders, as the work of dividing the premium is picked up by the affected parties. The part specifies that the division is made according to how each person’s interest has been devalued or lost by the claim, termed as “loss”. It sets a formula that takes the market value, provided for in parts 1 to 5, multiplies it by that person’s loss and divides it by the total losses of all the parties. Loss cannot include marriage value or hope value, which we are preventing from forming part of the premium.

Finally, part 7 of seven sets out how to calculate the term value—that is, the capitalised value of the ground rent payable for the remainder of the term of the lease. That is a component of the premium, as explained in part 5, under different rent review clauses. Depending on the lease, the ground rent payable may not be subject to review; or it may be subject to review such that the rent payable after the review is known; or it may be subject to a review that makes reference to price inflation, for example, or the capital or rental value of the property. Part 7 is entirely technical and sets out the formulae that apply in each case. The inputs into the formulae are the rent payable, the term for which it is payable and the capitalisation rate. In all cases, where the rent payable exceeds 0.1% of the freehold value of the property, the ground rent cap applies, so that the rent payable is treated as if it is only 0.1% of the freehold value. Part 7 gives a power for the Secretary of State to specify the capitalisation rate used to calculate the term value, and includes a requirement to review that rate every 10 years. I commend the schedule to the Committee.

I turn to schedule 3. As stated in debate on clause 11, schedule 3 sets out when, and to whom, “other compensation” must be paid by enfranchising leaseholders. “Other compensation” is a concept in law; it acts as a top-up payment that landlords and other parties can claim if an enfranchisement claim impacts on their interest. The schedule permits other “reasonable” compensation to be paid in two types of cases. Although it continues an existing practice, it works to ensure that the top-up cannot be used to claim for values already covered by the standard valuation method in part 5.

First, other compensation is available where the enfranchisement claim causes a devaluing of property outside the premises subject to the claim. Secondly, other compensation is available where loss is caused to other property not subject to the claim, but only to the extent that it is referable to a person’s ownership of any interest in other property. If, for example, a landlord owns an unbroken parade of terraced houses and there is a freehold acquisition of one house, the landlord might claim for other compensation if they can demonstrate that the value of the whole parade has been diminished due to one of the houses enfranchising. The schedule sets out that it does not matter whether the landlord had other options, such as leasebacks, but did not take them. It also sets out definitions, such as the meaning of development value. I commend the schedule to the Committee.

I turn to schedule 4, which defines many of the terms used in schedules 2 and 3 that determine the make-up of an enfranchisement premium. It points to different parts of the schedules to demonstrate the meaning of those terms. For instance, the meanings of “term value” and “reversion value” are as described in schedule 2. I commend the schedule to the Committee.

I turn to amendment 72 in my name, which corrects a typographical error in schedule 5 so that the provision works as intended. As a result of the amendment, Paragraph 7(3)(b) of that schedule will require the tenant, not the competent landlord, to pay into the tribunal the whole price payable. That is a new protection that could be used, for instance, where there are valid concerns about the conduct of a landlord handling the claim on behalf of others. I comment the amendment to the Committee.

Schedule 5 makes necessary consequential amendments that help to plug into existing law the new valuation methodology set out in clause 11 and schedule 2. It makes amendments to support the new valuation process in enfranchisement claims that involve multiple landlords, such as intermediate landlords and freeholders. That includes a fallback power, which enables leaseholders to require the transfer of property or grant of a lease, even if the landlords have not yet settled on how to divide the premium. That would be useful, for instance, if multiple landlords were in dispute with each other and it was threatening to hold up the claim.

The provisions also require the premium to be paid to the landlord handling the claim on behalf of the other landlords. They prevent landlords from requiring leaseholders to pay their share directly, as that would undermine the new valuation process where it involves intermediate leases. However, a new protection has been added that permits an individual landlord to require the whole price to be paid into the tribunal. That could be used, for example, where there are valid concerns about the conduct of a landlord handling the claim on behalf of others. With huge gratitude for allowing me to go through all of that, I commend schedule 5 to the Committee.

[Rachel Maclean (Redditch) (Con)]

I add my words of appreciation to those of the shadow Front-Bench spokesman for the Minister’s explanation. I want to add one brief point of clarity on marriage value, which was alluded to by my hon. Friend the Member for North East Bedfordshire. It is fair to say that marriage value is seen as one of the outdated, feudal and predatory practices of freeholders. It prevents people who have bought a house or flat in good faith from enjoying their property as we would expect them to do in a free country such as the UK.

I will not detain the Committee, but I recommend that anybody watching these proceedings or interested in the subject reads an absolutely fantastic article on leaseholdknowledge.com. That is a leaseholders’ charity that has done a superb and detailed work on this topic. An article by a gentleman called Linz Darlington explains that marriage value is particularly unfair, because people pay not only their own fees, but the freeholder’s fees, and there is a concept of hypothetical profit. The whole thing is just a massive racket—I am not qualified to explain it any better than that, so I leave my comments there. Many people have told me that marriage value should go. It is part of an outdated system. Read the article on the website. I commend the Government for bringing forward this very important part of the overall package of reforms.

[Richard Fuller]

It is a good to see you in the Chair, Dame Caroline. We are blessed on this Committee to have three people who have been Housing Ministers, the great experience and expertise of the hon. Member for Brent North, and the good graces of the shadow Minister, the hon. Member for Greenwich and Woolwich. I was recently speaking about the Bill to my right hon. Friend the Member for Ashford (Damian Green), who pointed out that there were discussions about some of the measures in the Bill when he was the adviser to Sir John Major in No. 10 in the 1990s.

I have none of the expertise or experience of any of the people I have just mentioned, so it is with humility that I rise to make some observations. My first observation, which is not specific to the Bill, is that whenever there is a clear consensus between Government and Opposition, problems usually arise subsequently. We have just spoken about 29 pages of schedules and two pages of clauses —31 pages of a 130-page Bill—and I heard one or two sentences from the shadow Minister. [Interruption.] Oh, the shadow Minister is coming back in later; good. I am encouraged. I was called to speak straight after my hon. Friend the Member for Redditch, rather than us bouncing between Government and Opposition Members, so I was worried. My first concern was that we were going through a very large proportion of the Bill very quickly. Grouping so much of the Bill together is a choice. It is perfectly within the ambit of the Opposition to say, in the Programming Sub-Committee, “We will do clause 9 stand part, then clauses 10 and clause 11, and then schedule 2 separately,” but in the planning done by the Government and Opposition Whips, we decided to put all the provisions together, so that we brush past them very quickly, hoping that no one will notice. I notice a twinkle in the eye of the hon. Member for Brent North.

[Barry Gardiner (Brent North) (Lab)]

Does the hon. Gentleman suspect that the reason why my hon. Friend the Member for Greenwich and Woolwich allowed such a grouping is that we hope that after the next general election, Parliament will be presented with a new Bill that does away with this nonsense altogether?

[Richard Fuller]

Well, maybe. I am not a mind reader, either of the mind of the shadow spokesperson or the mind of the great British public. They will make their decision at the next election and, I hope, return a Conservative Government for a fifth consecutive term, but that is not the import of my points today.

My first point was that the public should beware when they see such circumstances, not because anything is necessarily wrong, but because it is a leading indication that consensus is overwhelming scrutiny.

[Matthew Pennycook]

I rise to make two points. The first is that I will speak in great detail about valuation when we come to schedule 2, as I have indicated, because the meat of the Opposition’s concern relates to the deferment rate, which we will come to. Secondly, does the hon. Gentleman broadly agree that one of the reasons why this or any Committee would struggle to properly scrutinise this large group of schedules and clauses is that none of us has relevant expertise as professional valuers? One of the reasons why the Levelling Up, Housing and Communities Committee asked to undertake pre-legislative scrutiny of the Bill was precisely that it is so complex in certain areas, this area being a case in point.

[Richard Fuller]

It is a fair point, but I think we can get our heads around most of it. The general principles in this Bill are no different from those of others. There are some formula there; and when we see a formula such as one over one minus c to the power of n with a deferment rate of theta, we get worried that we do not understand. It takes us back to doing calculus at school. However, we can understand it—though within it there are some important things. The shadow Minister makes a good point, but there are amendments to schedule 2: the Government’s, his, and mine. I will make the point—and if I am wrong the Clerks will correct me, through the Chair—that we are debating the overall principle of schedule 2, not just the detail, though it is fair to raise some points about that.

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[Richard Fuller]

My hon. Friend is absolutely right. That is why we are passing this legislation. I want to be clear about that, because there will be circumstances in freeholder-leaseholder relationships where the performance has been inadequate or poor. There may be circumstances where the performance has been perfectly reasonable.

[Matthew Pennycook]

In some ways, I am doing the Government’s job, but I would just probe the hon. Gentleman on the Government’s intention, specifically in relation to value. At least on the basis of my understanding, it is not to right an abuse in the system. It is to remove payments, which are very real for leaseholders, that are based on a hypothetical profit that some would argue should not exist in a fair market. It is not about righting specific wrongs but a systemic wrong in the valuation process, from the Government’s point of view.

The hon. Gentleman may take issue with that, perhaps because he does not agree with one of the main objectives of the Bill—to make the enfranchisement process cheaper for leaseholders—or maybe he just takes issue with the fact that we do not know the prescribed figures that the Secretary of State will set, so we do not have a real sense of the values. The clause is attempting to right a systemic wrong as regards marriage value and other components of the existing valuation method. It is not just dealing with specific abuses in the system by bad faith actors.

[Richard Fuller]

I agree with the shadow Minister. I am not trying to undermine the intentions of the Bill—I agree with them—but I want them to be legally secure, and I want to probe and understand them. He said that these are hypothetical profits, but they are not quite hypothetical. They would only be hypothetical if they were not real, but as we have already heard, they are. They are calculated profits, and it is a matter of how that calculation is determined that is at issue, not whether they are hypothetical or real.

[Matthew Pennycook]

The hon. Member tempts me to engage in the philosophical debate that the Minister alluded to, and I think it is debatable whether they are real. Let me put it to him like this. If I own a vase, is the value of a second vase increased by the fact that I own the first one? That is what marriage value is doing; it is the hypothetical profit from the joining of the leases. I think it is at least debatable as to whether it is real in the sense that he advances, although it is very real for leaseholders who have to pay it if they seek to enfranchise under the current system.

[Richard Fuller]

Somebody had to mention the vase.

[Eddie Hughes (Walsall North) (Con)]

Or the cup and saucer?

[Richard Fuller]

I am just so glad it was not me. The Minister and shadow Minister are far more experienced than I am on this matter, so I am drawing on a much more limited data set than they are. But, to date, I have not heard loud and clear that there is no such thing as marriage value. I have heard that there are questions about how it is calculated and that we do not think it should apply, which is a political point of view. If the shadow Minister is trying to say that there is something else he wants, between the issues of calculation and of making a political decision to transfer it, that is interesting to me. I do not think that he has been trying to make that point, and I certainly do not think we have heard that evidenced.

It is a crucial point. The idea that we are expunging values that relate to something real, which is under contract, is a material point in trying to make this legislation bulletproof or, as the Minister rightly says, to ensure that, in a hotly contested area, the Government get it right. In circumstances where there are real values —although perhaps massively overemphasised—where performance has been exemplary or to contract, where there has been no question of the performance required under contract, and, finally, where there has not been price gouging, or this automatic doubling every two years, and the rents have remained the same, what is the reason to apply legislation retrospectively?

[Rachel Maclean]

Does my hon. Friend not agree that the concept of ground rent itself is “gouging”, to use his word, because it is a payment for nothing? Clearly, the freeholders are receiving payment through service charges and the price of buying and selling a lease. The ground rent is a payment for nothing. Whether it is, in his words, a reasonable one and not gouging but is kept low and so on, still, in my mind and certainly that of many leaseholders, the Competition and Markets Authority, the Government and the analysis, it is a payment for nothing and so, fundamentally, it is wrong and unfair. I wonder what my hon. Friend thinks about that.

[Richard Fuller]

The former Minister makes an excellent point. She knows much more about this than I do and therefore I am very wary about falling into the trap of answering her question directly. What I will say is that, for the purposes of my speech today, what I think is not important. What is important is this: what will the courts find, and how have we ensured that the Bill is robust in those circumstances? I will say, without answering my hon. Friend’s question, that people sometimes sign contracts for things that they do not use or that have no value, but there is an argument that they signed a contract and it had these line items in it. People may sign a contract that gives them access to a swimming pool or gym and they may not use it. I do not mean to be pejorative, because these are very important issues. I am just saying that the principle is that, whether ground rent is real or not, it is still subject to the fact that it was part of a contract that was signed, and that will have weight in any legal challenge to the Bill.

[Barry Gardiner]

rose—

[Richard Fuller]

I do not know whether the hon. Member for Brent North wants to intervene and give me some more knowledge.

[Barry Gardiner]

The hon. Member’s colleague, the hon. Member for Redditch, made a pertinent intervention in relation to ground rent, but I wanted to try to address what philosophical issues he is having with marriage value. Marriage value is an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values. That is why the cup and saucer and the vase analogies are apposite. He seems to me to be seeking to say, “Well, if this exists, if people are actually paying this, it’s real; it’s not a fiction.” Let me set out my understanding of what the Government are trying to do and, indeed, what Parliament has tried to do on many occasions, going back to 1967, after we passed the legislation to right what had happened in the Custins v. Hearts of Oak case, where marriage value had been introduced against the will of Parliament. The point is this. If someone is the leaseholder, the person who owns that lease to the home, it is much more important to them than to anybody else in the world that they get the freehold together with it. That is the other vase; that is the saucer that goes with the cup. To them, that is important and it has a value that it does not have for the rest of the world. That is why they are constrained, and that is the constraint that Parliament has repeatedly tried to free people from, because they are not simply a willing seller in a free market with a willing buyer in a free market. This person, as the leaseholder, is a buyer under special measures.

[Barry Gardiner]

I am happy to be guided by you, Dame Caroline. I think I have made the point and I hope that the hon. Member for North East Bedfordshire will be able to take it on board, because it does go to what I think he would recognise from a free market point of view as the essence of why this is important.

[Richard Fuller]

Dame Caroline, you were not in Committee when I made a point of order on the hon. Member for Brent North, perhaps inadvisably, but this time I thought his intervention was very helpful, so I would like to commend him. That point is very helpful to my understanding, and I appreciate his building my understanding further. We will have to see.

My purpose in making these points is to look at the possibilities of legal challenge. I am not a lawyer so I am probably one of the first to do that anyway, but the principles behind schedule 2 relate to existing contracts and make a political decision to redistribute value to full or some extent. In Committee, however, we are doing this where we do not have complete financial information about the extent to which we open ourselves to the charge that our decision will have unintended consequences. We are putting a lot of faith in the Government to get that right.

We are dealing with different situations: where, in a relationship between a freeholder and a leaseholder, freeholders are providing poor service or have been price gouging; or where other freeholders have entered into contracts, done all the right things under that contract and behaved in a very excellent way, but we are now retrospectively going to change all their contracts. I want to put on the record some of my concerns about doing so. I understand that the intention of the House as a whole is to move forward, but I am interested in whether the Minister has any comment on that—he does not need to—or has something interesting to add.

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[Lee Rowley]

I am grateful to the hon. Gentleman for his question. There is always a case for reform in all areas of public policy. I recognise the importance of getting it right on shared ownership. On both sides of the Committee, we share an objective to make sure that this works as best it can, given that it is giving people the opportunity of capital and a new opportunity to be able to acquire that in a way that is not available to them through other means that the market offers. In half-answering the question, which is that there are always things that can be done—obviously I cannot anticipate the great fifth Conservative election victory that is coming or what the manifesto and the outcome may be—but I will certainly take on board the hon. Gentleman’s comments, so that when that election victory comes we can accommodate his suggestion.

Part 1B amends the Leasehold Reform, Housing and Urban Development Act 1993 to make similar changes for flats. New paragraph 5I repeals the current exclusion, and 5K provides that shared ownership leaseholders are qualifying leaseholders for lease extension rights. New paragraph 5J excludes shared ownership leases from collective acquisition rights and gives a power to the Secretary of State to exclude other shared ownership leases from the same where they are not excluded by this section. New paragraph 5M requires leasebacks to the former freeholder of any shared ownership flats subject to a collective freehold acquisition if the former freeholder is the provider. New paragraph 5N deals with the sharing of staircasing premiums between relevant landlords, exactly as new paragraph 5E does for houses. Finally, new paragraph 5P inserts the necessary definitions, as new paragraph 5F did for houses. I commend the amendment to the Committee.

[Richard Fuller]

On a point of clarification, Dame Caroline, are we discussing the other amendments in this group?

[The Chair]

No, we are just speaking to amendments 60, 61, 66, 69, 70 and 74.

Amendment 60 agreed to.

Amendments made: 61, in schedule 2, page 91, line 21, leave out “38(1)” and insert “101(1)”.

This amendment is consequential on Amendment 74.

Amendment 62, in schedule 2, page 92, line 15, leave out sub-paragraph (2) and insert—

“(2) Assumption 1: it must be assumed that—

(a) in the case of a freehold enfranchisement, any lease which the claimant is acquiring as part of the enfranchisement is merged with the freehold;

(b) in the case of a lease extension, any lease which is deemed to be surrendered and regranted as part of the lease extension is merged with the interest of the person granting the lease extension.”

This amendment would ensure that where an intermediate leaseholder grants a lease extension, the lease which is deemed to be surrendered and regranted as part of that extension is assumed to be merged with the intermediate leaseholder’s lease for the purposes of valuation.

Amendment 63, in schedule 2, page 94, line 22, leave out “property” and insert “premises”.

This amendment would amend the sub-paragraph to use the correct defined term.

Amendment 64, in schedule 2, page 94, line 24, leave out “that property” and insert “those premises”.

This amendment would amend the sub-paragraph to use the correct defined term.

Amendment 65, in schedule 2, page 97, line 14, leave out from second “of” to end of line 21 and insert “the premises being valued.

(4A) The “premises being valued” are the premises that—

(a) are demised by the lease being valued, and

(b) are subject to the standard valuation method.

(4B) The “market value” of the premises being valued is—

(a) in the case of a freehold enfranchisement, or lease extension, under the LRA 1967, the amount which the freehold of the premises being valued could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date;

(b) in the case of a collective enfranchisement or lease extension under the LRHUDA 1993, the share of the relevant freehold market value which is attributable to the premises being valued.

(4C) The “relevant freehold market value” is —

(a) in the case of a collective enfranchisement, the amount which the freehold to be acquired on the collective enfranchisement could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date;

(b) in the case of a lease extension under the LRHUDA 1993, the amount which the freehold of the building and any other land which contain the premises being valued could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date.”

This amendment would clarify that where the term value of a lease of a flat and any other property is being valued under Schedule 2, the market value is a share of the freehold value of the premises which contain the flat and other property.

Amendment 66, in schedule 2, page 97, line 33, at end insert—

“(9) If the lease being valued is a shared ownership lease—

(a) the rent that is to be used for the purposes of sub-paragraph (1) and (2) is the rent that is payable under the lease in respect of the tenant’s share in the property demised by the lease;

(b) where the lease does not reserve separate rents in respect of the tenant’s share in the demised premises and the landlord’s share in the property demised by the lease, any rent reserved is to be treated as reserved in respect of the landlord’s share.”

This provides that, where there is a shared ownership lease, the rent payable in respect of the share owned by the tenant is to be taken into account when determining the term value; and deals with the case where no rent is specifically reserved in respect of the share owned by the tenant.

Amendment 67, in schedule 2, page 97, line 39, leave out “the freehold of”.

This amendment is consequential on Amendment 68.

Amendment 68, in schedule 2, page 98, line 7, leave out from first “of” to end of line 10 and insert “the premises being valued is—

(a) in the case of the transfer of a freehold house under the LRA 1967, the amount which the freehold of the premises being valued could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date;

(b) in the case of a collective enfranchisement, the share of the relevant freehold market value which is attributable to the premises being valued.

(3A) The “relevant freehold market value” is the amount which the freehold to be acquired on the collective enfranchisement could have been expected to realise if it had been sold on the open market with vacant possession by a willing seller at the valuation date.”—(Lee Rowley.)

This amendment would clarify that where the reversion value of a lease of a flat is being valued under Schedule 2 for the purposes of enfranchisement, the market value is a share of the value of the freehold being acquired on the collective enfranchisement.

--- Later in debate ---

[Matthew Pennycook]

I thank the hon. Lady for her intervention. To be very clear, we agree with the Government’s proposal that the Secretary of State set the rate. The alternative would be, as Mr Fanshawe put to us in the evidence sessions, that we rely as a starting point on the Sportelli judgment, with its 4.75% and 5% rates respectively, and that leaseholders are free in the process of dispute to argue for more favourable rates on the grounds of particular circumstances being implied. On balance, we think that it is right that the Secretary of State sets the rate. What I am trying to drive at, which I will get to, is that how the Secretary of State sets the rate and what it should be are crucial to the outcomes for leaseholders in terms of the premium payable.

When it comes to the regulations required to bring the new valuation process into force, we obviously recognise that they are the means by which the detailed methodology for setting the applicable deferment rate will be brought forward. However, while it would not be right to pre-empt those regulations in Committee, we believe that the objective underpinning the setting of the deferment rate should be set out in the Bill. While the rate or rates will need to be set at a level that does not unfairly denude freeholders of value, we think it is important that the Bill states clearly that in determining what should be the rate or rates, the Secretary of State must have at the forefront of their mind the need to reduce premiums for leaseholders. Amendments 2 and 3 would ensure that that is the case in relation to both freehold acquisition and lease extensions. While other considerations will clearly need to be taken into account, not least how to ensure that landlords receive adequate compensation to reflect their legitimate property interests, these amendments would oblige Ministers to set a rate or rates with the overriding objective of encouraging leaseholders to acquire their freehold at the lowest possible cost.

That is important because with marriage and hope value abolished and the treatment of ground rents in the valuation calculation capped at peppercorn rates, it is the deferment rate that will be the primary driver of price to be paid by leaseholders in enfranchisement or extension claims. It is essential that reducing premiums for leaseholders is the determining factor in the process by which such a rate or rates will be set and reviewed, and it must therefore be put on the face of the Bill. On that basis, I hope the Minister will consider accepting both amendments. I look forward to his response.

[Richard Fuller]

I rise in support of my amendments 146 to 149, which, similarly to the shadow Minister’s amendment 2, seek to provide some framework and guidance around, and a better understanding of, how the Secretary of State will determine these very important discount rates. I go back to the point about the importance of trying to give as much clarity as possible about what we are passing into legislation and to avoid unintended consequences. The Minister will be aware that some of the businesses affected may be subject to statutory disclosures. It is very hard to make a formal statutory disclosure if one is not clear what the impact will be. My amendment seeks to provide that.

I want to explain some of the reasons why I have chosen to focus on the issues of market rates and interest, and regional trends. The shadow Minister made some very good points that I am sure the Minister will respond to. It is important to understand that it is always possible for Government to fix market rates and interest, either directly or by the courts, but interest rates do change; the world does change. We can find ourselves adrift on interest rates relatively quickly. The Sportelli judgment, I think, was made at a time when the Bank rate was 4.5%. In that context, the setting of the discount rate did not seem particularly inappropriate. Three years later, the Bank rate went to 0.5% as a consequence of quantitative easing, and stayed like that for seven years. Obviously, it is in the interests of party A for the rate to be set high and in the interests of party B for the rate to be set low, but there is a concern about the rate being fixed without certain guidance.

The shadow Minister has argued that the rate should have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost; that fits the imperative that informed the Bill. My view is that we ought to first encourage the Secretary of State to anchor his or her judgment on the market rate of interest—not a specific market rate of interest, but a set of market rates of interest. The reason is that there will be leases of certain terms: five, 10, 15, 30, 50 or 100 years. When someone buys an investment and ties up their money for a longer period of time, they pay a different rate of interest than when they do so for a shorter period of time. It is appropriate for the Government to have regard to that when setting the discount rates. That is why I have tabled this amendment. I am interested to know what the Minister has to say about it.

Amendment 149 is about regional variations in market conditions. The Minister will know that a large part of the Bill relates to London, but not all of it. The way property prices move in Bedfordshire—I see that another Bedfordshire MP, the hon. Member for Mid Bedfordshire, is here—and in other parts of the country is different from London. Market conditions vary. In order to be fair to participants, it is important that the Secretary of State has regard to regional variations. I hope the Minister can provide some encouraging words on market conditions and tying the discount rate to some form of understanding of market interest rates.

[Lee Rowley]

I am grateful to the hon. Member for Greenwich and Woolwich and my hon. Friend the Member for North East Bedfordshire for their contributions. We effectively have two sets of amendments from different sides of the discussion, which demonstrates both the importance and the challenge of getting this right. Before I turn to their points, the question before the Committee is whether we want to put further constraints or further elements into primary legislation, or are content in principle to allow most of them to be covered by the Secretary of State of the day at the time. The Government’s view is that the latter is more proportionate and reasonable. That is why we have come forward with the current proposal. As a result, we will not be accepting the amendments, but I will add a few more comments to try to convince the hon. Gentlemen to withdraw their amendments.

The hon. Member for Greenwich and Woolwich made a number of points on consultation. Although I cannot anticipate or confirm at this stage, I think it is absolutely the case that we would need further discussion and careful consideration of the approach, as I hope we have made clear throughout the debate. On his point about the review every 10 years, the existing judgment has now stood for going on 16 years—I know he knows that, because he has referenced it—and has done so relatively successfully. However, I take his point about tribunals being able to change things. Effectively, this is coming in through a tribunal in the first instance. There is a balance to be struck.

We have put a reference to 10 years in the Bill so that there is a recognition that there would need to be a review—as opposed to an open-ended ability with no indication of when it is used—while being clear that, although it would be for the Government of the day to determine, regular reviews will have potential impacts and potential challenges to the market, and there has to be some form of consistency or clarity in order to give people the confidence to invest and make decisions on an economic basis. The reason we have approached the provision from this angle is both to provide flexibility through the ability to change not being in primary legislation, but also giving guidance that there will be reviews at least every 10 years—albeit not indicating that they should be on a more frequent basis in order not to get into a discussion about whether there is too much movement for consistency and clarity.

My hon. Friend the Member for North East Bedfordshire made a number of important points, particularly with regard to his general point about market conditions and the importance of getting that right, and also that there are regional variations. This is another detailed part of the conversation, which the Government seek to move into another discussion rather than being on the face of the Bill. I recognise that sometimes that is not ideal, but one reason we want to preserve flexibility is to give the Secretary of State of the day the ability to respond to market conditions where necessary.

On the first point that my hon. Friend raised, we have been clear from the outset—when the Government announced the reforms—that rates should be set at market value to ensure that the amount landlords are compensated reflects their legitimate property interest. It is important that landlords receive sufficient compensation. To his earlier questions about legality, this is an important safeguard to ensure compatibility with various rights-based legislation, which we talk about extensively in this place.

The Secretary of State will set the deferment rate in secondary legislation. We have been engaging, and continue to engage, with the sector to understand its position to ensure that rates are set in a way that is fair to all those whose property rights are changed and interfered with, and fair to leaseholders. Although I cannot give an indication or a guarantee around regionality, I am happy to say that we want to set the levels at market rates, but also with the recognition that many different elements need to be considered, one of which may be regionality. That is why we need to continue this conversation beyond this discussion. The proposition that the Government are now putting to the Committee is to set these elements in primary legislation and to continue the discussions that my hon. Friend and others have asked for through other means that will come forward in due course.