Leasehold and Freehold Reform Bill (Second sitting)

Richard Fuller Excerpts

Committee stage
Tuesday 16th January 2024 Public Bill Committees

[Barry Gardiner]

Well, it has been with us for a very long time, hasn’t it?

Professor Hopkins: Yes. So the system has to work, and that is what the Bill achieves in relation to leasehold.

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

Q Can we talk a little about discount rates? I think there are two, but there may be more. There is the capitalisation rate and the deferment rate. Could you explain how, if at all, the Bill changes either of those discount rates and what the rationale for that change is?

Professor Hopkins: The Bill ensures that those rates will be prescribed by the Secretary of State. At the moment, on every enfranchisement claim—whether it is the lease extension or the purchase of the freehold—the rate used to capitalise a ground rent and to determine the price paid for the reversion has to be agreed for the individual transaction. That is a significant source of dispute, and it is a dispute where there is a real inequality of arms.

The leaseholder is only interested in what they have to pay for their home and the landlords have an eye not only to that particular property, but also to what it would mean for their portfolio of investments—so they agree a particular rate on one flat in a block, for example. The Bill ensures that those rates are fixed by the Secretary of State and mandated, so there is then no argument about what rate applies in an individual case. It takes away that whole dispute and ensures that the same rates are applied in all claims.

[Richard Fuller]

Q What is the merit of allowing politicians to fix the rate? Does that not that create other hazards?

Professor Hopkins: The politician will be fixing the rate through advice that they receive.

[Richard Fuller]

Q Well, we do not allow politicians to set interest rates any more, because we realise that that was subject to political whimsy and error, so we gave that to the Bank of England—which of course is always right. I am just wondering, does there not seem to be some hazard here? I understand the point about trying to get the rate fixed and the imbalance in individual discussions, but why is it not in the Bill that it would be based on market conditions or prevailing rates? Why not go for something like that, which everyone can see and is transparent—you can feed it into a calculator—rather than allowing politicians to have that role?

Professor Hopkins: In our report on valuation, we set out a number of options for reform to reduce the price payable. In relation to the fixing of rates, we identified two separate options: they could be fixed at market rate; and they could be fixed at below market rate to reduce the price leaseholders pay to a greater extent. We put the decision on how to fix the rates as a matter for the Government to consider, and now the power is given to the Secretary of State.

[Richard Fuller]

Q If I may, I have another question. We always do an impact assessment on Bills. This one has quite a large impact assessment, which is in the billions of pounds—£2.984 billion is the present value for costs. I looked in detail at that, and the vast majority is about a transfer of value from freeholders to leaseholders; it is not about benefits from more efficient systems. If I look at the first section, £2.8 billion is transfers and £400 million is benefits. Is there a particular reason why it is so heavily weighted to transfers?

Professor Hopkins: The impact assessment is not a Law Commission impact assessment. We have provided technical input to the Government in preparing that assessment. I am not sure that I can give a definitive reason why so much more was in one pot than the other. It is probably because the Bill removes marriage value from the premium, which adds a significant sum to premiums now for leaseholders who have 80 years or less, so I think a lot of that sum is the saving.

[Richard Fuller]

Q And that was the Law Commission’s objective.

Professor Hopkins: The terms of reference that we agreed with Government for the project in relation to premium were that we would provide options to reduce the price payable while providing sufficient compensation to landlords, recognising their legitimate property interests.

[Richard Fuller]

That was very helpful; thank you very much.

[The Chair]

Mindful of the fact that we will be drawing this to a close at half-past, I call Matthew Pennycook.

--- Later in debate ---

[Mike Amesbury]

Keep going.

Karolina Zoltaniecka: I would not give up on it; it is well worth waiting for.

Harry Scoffin: We need share of freehold in the meantime, at least.

[Richard Fuller]

Q Part 4 of the Bill is called “Regulation of estate management”, which I think is a particular area of interest for you. You said that it all starts at the beginning, when councils and developers decide to do that. Do you think that getting control of that is an essential part of the effective regulation of estate management?

Halima Ali: I do not agree that it is. All it is doing is creating a two-tier system where a set of homeowners, like myself, living on a private estate are dealing with this situation, whereas other homeowners are not. I do not see how regulating it is helping, because overall, the management company still get to set the fee.

[Richard Fuller]

Q Actually, I was trying to say that we should stop it altogether because—

Halima Ali: Oh right, sorry—

[Richard Fuller]

I was not being very clear, I am sorry—it is my job to be clear, not yours. I think what you were saying is that this is trying to fix the problem, but the root of the problem is that councils are permitting this to go ahead.

Halima Ali: Yes, absolutely.

[Richard Fuller]

Q I am sure we will have a debate about what is and is not in scope of this Bill, in terms of that very important issue, but I wanted to hear you say that that is a crucial part of what you would understand by effective regulation of estate management.

Cathy Priestley: Yes. There are other detrimental effects on estates, other than those on the homebuyers, because non-adopted areas are not built up to adoption standard, so there is a quality issue. There is also a community cohesion issue, if you have one lot of people paying for everybody else’s open space.

[Richard Fuller]

Q The whole issue of adoption may or may not be in scope, but there were some other suggestions that you had, such as that estate management charges may not include fees for areas that are open to the general public. You feel—this is on your website—that someone can walk down a grass verge or by some trees and you are paying for that twice, through your council tax and through estate management charges. Is that right?

Halima Ali: That is correct. I will make a specific point; I am sure this is the situation nationwide as well. When I purchased my property, the council tax for band C was around £1,000. Currently, it is at £2,000. If you look at that and the average family income, there is a big disparity. How are we able to afford all this? Ultimately, we are paying council tax twice. It is unfair on us. It is unfair on vulnerable people who generally do not understand all these arbitrary rules and regulations and who are coming to us for support.

Cathy Priestley: Most of the people in our group were unaware of what they were getting into. They are unaware of the unlimited liability, because this cannot be capped. It is what it is, and it costs what it costs.

[Richard Fuller]

Q I think we can look at strengthening some of the provisions at the start and at the end, in terms of the rights if someone wants to sell their property and how people are leant on if they have not paid all the fees, affecting their ability to sell their property. I know we have limited time, but another aspect is the compensation for those who suffer these charges. If we cannot look within scope at adoption and just cancelling the whole lot, what are your thoughts, since there will be a separation of charges and a new cost structure, about enabling people who have estate management fees for common areas to deduct that off their council tax? Essentially, you would not pay twice. There will be a number of those costs that generally would be seen as being covered by your council tax in other circumstances. Do you think the Bill should include a provision where you would be entitled to pay only once for those by deducting that cost from your council tax?

Cathy Priestley: I do not know what councils would think about that. About 50% of the estate charges are just administrative fees. Councils could do it much cheaper. I do not think it would be acceptable to councils, but it would be great for us, yes.

[Richard Fuller]

It would make them adopt them quicker though, wouldn’t it?

Cathy Priestley: It certainly would, yes.

[The Chair]

Finally, we have two minutes left—Marie, please.

--- Later in debate ---

[The Chair]

Apologies: I mis-spoke earlier and missed out Richard Fuller.

[Richard Fuller]

That’s all right, Dame Caroline. Let’s stick with net present values, shall we, Professor?

Professor Leunig: Go for it—I’ll get out the calculator.

[Richard Fuller]

Q You will be aware that impact assessments are required now for all legislation, very helpfully.

Professor Leunig: Indeed, yes. It’s a very long one, by the look of it.

[Richard Fuller]

Q It is, and it seems very expensive legislation. Do you agree with that?

Professor Leunig: Yes.

[Richard Fuller]

Q The top line says that the best estimate of present value is £90 million, but then it says that the low estimate is minus £1.5 billion and the high estimate is £1.5 billion. Doesn’t that indicate that the Government don’t have a clue?

Professor Leunig: Oh, yes, absolutely. That is not necessarily reprehensible, because sometimes you just cannot have a clue.

I am often asked to forecast the future. I say, “Why did economists get the last four years wrong? Because we didn’t predict that Vladimir Putin would invade Ukraine.” Making predictions about the future as a social scientist is, by and large, a mug’s game. All you can do is stand up from first principles and say, “When do market economies work well? They work well when contracts are simple and plain and everybody understands them.” That is much truer of commonhold than of leasehold, which is why I support commonhold rather than leasehold.

[Richard Fuller]

Q What is clear, though, is that the business net present value is scored at minus £1.7 billion, so presumably we can pretty much say that the impact on business is going to be—

Professor Leunig: Does it have a range?

[Richard Fuller]

Q Not on my copy; I presume it must have, but this figure is listed at the front.

Professor Leunig: I have not seen the impact assessment.

[Richard Fuller]

Q Well, let me draw on that. The core of this is something I mentioned earlier. If you look at the benefits, there is a total of £2.8 billion of impact monetised, which is under a heading of “transfers” —so transfer of value—and there is £418 million under the heading of “benefits”. The numbers might be different because of other things later, but that is not material to the main point. What strikes you about the intention of the Bill if three quarters, 80% or 90% is about transfers and not efficiencies or benefits?

Professor Leunig: I would want to read it before giving a definitive answer, but the information that you have given me tells me that this Bill is above all a redistributive Bill. However, both of those are static estimates. The main change in property rights is usually dynamic; for example, what does it do to the incentives for people to improve their own homes? I would be surprised if that were captured in those benefits. If it is captured, I would be interested in seeing over how many years it is captured, and so on and so forth. Of course, a lot of this Bill, as I understand it—assuming that it is like every other Bill—leaves all the important stuff to secondary legislation and regulations. I imagine that those figures, in particular the figure of £2.8 billion under “transfers”, are heavily dependent on exactly how the secondary legislation is written.

[Richard Fuller]

Q So it is redistributive, primarily. It sounds that way from those numbers, but there may be some hidden benefits that have not been monetised in the report. That is helpful.

Professor Leunig: Yes.

[Richard Fuller]

Q That is helpful. What is your instinct? Most of this is about removing marriage value payments. In your understanding, what would you expect the geographic distribution of that transfer redistribution to be?

Professor Leunig: The biggest winners and losers will be in the south-east and in London, because that is where the marriage values are greatest because that is where property prices are highest. If you own a flat in Peterlee, one of the lowest value housing markets in Britain, the marriage value will be trivial at the moment, so changing the rules on marriage values will have a very small effect.

[Richard Fuller]

Q So this is a London wealth transfer.

Professor Leunig: That will be the biggest—

[Richard Fuller]

Q Is it right to say that this Bill is a wealth transfer from rich freeholders to rich leaseholders? This is primarily just moving money between rich people, isn’t it?

Professor Leunig: No. Not every leaseholder in London is rich, by any means. If you are buying a flat for £300,000 in London, that will make you rich by the standards of someone in Peterlee, but I do not think a young couple buying a flat for £300,000 would meet The Daily Telegraph’s definition of “the rich”.

[Richard Fuller]

Q So the geographic dimension—there are more leasehold properties in London—and the redistribution argument is stronger than the “all properties in London are expensive compared to everywhere else” argument.

Professor Leunig: Yes.

[Richard Fuller]

Q That is helpful to know. Therefore, does redistribution matter—it could be a social good or not—and does it matter who and how that redistribution happens? Are those things material? Should we be looking at them in detail?

Professor Leunig: Redistribution is ultimately a political issue; it is about who you think should have the money. Government engages in redistribution all the time. Sometimes it does so explicitly through the tax system— I am looking forward any day to my tax cheque coming back from HMRC for the money I overpaid last year—and in other ways it does so implicitly.

For example, as somebody who has been employed in universities for most of my academic career, my income was constrained by the fact that Government limits university fees. I teach at the London School of Economics. The fee that we charge for a master’s suggests that we could charge much higher than £9,250 to undergraduates, but the Government do not let us. That is a legitimate decision by the Government. It makes me directly poorer. That is a transfer away from someone like me—broadly speaking, on the richer end of the spectrum—to people who are currently not very well off but who later on will be rich.

That is just the right of a Government to define property rights in such a way that some people are winners and some are losers. The right to borrow Jeffrey Archer’s books from the library, for which he gets virtually no compensation, is exactly the sort of political decision that you are entitled to make by dint of having a democratic mandate. Apart from agreeing with you that there is redistribution, I do not think that there is a great deal that any of us at this straight table can say to those of you around the horseshoe. It is your right, privilege and responsibility to make that decision.

[Richard Fuller]

That is very helpful. I will stop there, but I want to come back on discount rates later if I have time.

Professor Leunig: Excellent.

[The Chair]

We have a very enthusiastic witness. I call Barry Gardiner.

--- Later in debate ---

[The Chair]

In that case, we will go to Richard and it might pop back in again.

Professor Leunig: Oh no, he is going to test me on net present value.

[Richard Fuller]

Q No: discount rates. As I understand it, there are two discount rates that are currently used in the calculations—the capitalisation rate and the deferment rate—and one is sort of fixed by a legal process. In terms of making changes to the marriage value, there is also a change in the way in which the discount rate is going to be determined; it will be done by the Minister by regulation. What are your thoughts about that?

Professor Leunig: The default rate chooses 3.5% because that is the rate in the Green Book. Again, it is fundamentally a political decision, because you put the rate one way and the value goes up. You put the rate the other way and the value goes down. It is just a political decision. I really do not think that there is a right or wrong answer to that.

The only thing to say is that I would be very cautious in using the current Bank of England base rate because it is so volatile. The idea that if we had made the calculation two years ago we would have used a discount rate of 0.25%, but today we would use 5.25%, is absurd. You need one number that you stick with through thick and thin, and the default rate, I think, is the Green Book discount rate of 3.5%. I am happy to believe that if we were in the Department and I was employed, you could sway my belief that 3.5% is the right answer, but that is where I would start.

[Richard Fuller]

Q I am interested because so many other purchase decisions—indeed the mortgage you get—will be subject to market rates at that time. Those rates can go up and down, and that will have a very material effect on the cost of your mortgage, so why take this out of traditional market principles?

Professor Leunig: Because this is a one-off decision. For example, we saw Paul Johnson mention this week that the cost of student loans has gone up dramatically because of the rise in interest rates. We do not suddenly cut the number of people who can go to university and then increase it when interest rates are low, because we accept that most people de facto get one shot at university when they are 18 or 19. Over the 25 years of your mortgage, you will re-mortgage a number of times so it averages out, whereas this is a one-shot thing. We do not really want people acting strategically on which day to do it. That is why we would prefer to have a single number over time.

It is not a stand-up case; I grant you. You have a case. It is the classic thing of marking to market, right? When you retire, if you have a defined contribution pension scheme, you are to some extent at the whim of the market on the day you retire and in the five years before, as you move out of equities and into bonds. If you are a defined benefit pension holder, de facto we use the scape rate, which is a long-run average. I argue, in effect, for something similar to the scape rate for something like this.

[Richard Fuller]

Q At the moment, we do not know what will be in the regulations in relation to how the Minister should go about determining that. Do you have any advice for how he should structure that part?

Professor Leunig: As I say, my main advice would be to make a political decision and pick an interest rate, rather than to make a political decision without realising you have made a political decision and go for Bank rate, or Bank rate plus two or minus one, and to have complete randomness over the following years.

[The Chair]

If there are no further questions from Members, I thank the witness very much. We will move on now to the final panel.

Professor Leunig: May I say well done? You have had a very long day.

Examination of Witness

Dr Douglas Maxwell gave evidence.