My Lords, it is a pleasure and an honour to follow the noble Lord, Lord Thurlow. The Government’s Leasehold and Freehold Reform Bill is certainly attracting support and high expectations in some places, and not only from current and potential leaseholders, with lower charges, longer lease extensions and more rights regarding management of blocks of flats. Leasehold for newly built single houses is to be abolished, so it is leasehold flats—which make up the great majority of leasehold properties—that are really being discussed today.
What is not to like about the possibility of leasehold properties paying lower, possibly even peppercorn, ground rent—which really means zero rent? That already applies to leases taken on since 2022, but consideration
is now being given to applying it to all leasehold properties. What is not to like about the possible abolition of marriage value, making a far more profitable outcome for leaseholders applying for an extension to their diminishing lease, or about all leases, new and renewed, running for 990 years?
However, I have real misgivings about the main thrust of this Bill. Essentially, I find it hard to support in principle government intervention in legally held property rights, especially those that have existed for many years in accepted legal property arrangements established between two consenting parties, the freeholder and the leaseholder—although I would advise that both parties get proper legal advice so that they understand what they are taking on. It is surely important to reflect that leasehold has been a property arrangement that has benefited millions of people over many years, certainly in London, where owning property is an expensive business. Leasehold has provided, probably, the only route for most people to owning at least a small home for a set period, usually extendable, that is remotely affordable.
I myself, after working for some years in London and sharing a flat with an endlessly changing group of friends, decided I that I had to have a place of my own, and leasehold provided the only affordable and dependable route. Yes, there are greedy freeholders and property investors whose demands need to be restrained, and I very much welcome the Bill’s proposals to help leaseholders to challenge more easily poor management and unreasonable charges in court, but overall this system has survived as long as it has because, in the main, it has worked. It has provided benefits for both sides.
My first problem with the Bill concerns the proposals to axe two key components affecting the financial benefits that accrue to the freeholder. Both have been discussed at some length already, so I will try to be brief.
The first is ground rents, which stem from the entirely legitimate principle that the land on which leasehold properties sit is not owned by their inhabitants and therefore requires rent to be paid. I believe that the Government are still considering the long-term future of ground rent. I totally agree that the level of ground rent must be kept reasonable, but it cannot simply become peppercorn, which would create a huge drop in income for freeholders and investors, such as pension funds. I suspect it could lead to a major legal challenge, as we have also heard. However, I would support a proposal that defends the principle of ground rent but limits the impact by settling on a permanent reasonable sum, to be agreed by both sides involved.
My second concern is marriage value, which we have also been hearing about. This arises when a leaseholder applies to the freeholder for a lease extension when the lease drops below 80 years. Marriage value represents the total value of the property—of both the freehold and the extended leasehold added together. The total is then divided between the two parties to reflect the benefit to both of them of marrying their interests.
The Bill proposes abolishing marriage value and, as the noble Lord, Lord Palmer, mentioned, allowing the leaseholder to extend their lease for far less, at the expense of the freeholder. As several noble Lords have said,
this will massively advantage the many investors who own leaseholds as an investment rather than a home, especially in lucrative areas such as London and the south-east. According to figures produced by Quod and Cluttons, 80% of this transfer of marriage value would occur in London and the south-east, where approximately 60% of leasehold properties are held by investors, not home occupiers.
Alongside this, another proposed change would allow leaseholders to extend leases without having to have lived in the property for at least two years. I am told, and as we have also heard from the noble Lord, Lord Thurlow, that increasing numbers of investors are already circling round, given the prospect of more easily buying properties with leases that are running down, extending them to 990 years and selling them on for a huge profit. Property prices will certainly rise in those circumstances.
Mv final problem is with the proposed change in the rules for mixed-use buildings. A mixed-use building with more than 25% non-residential use cannot currently be managed by leasehold residents, but this limit is set to be raised to 50%, giving rise to concern about management of the buildings, as we have heard from the noble Lord, Lord Thurlow. Where leasehold residents successfully apply to manage buildings with a much larger—50%—business and retail presence, or to buy the freehold, as they can with a majority in favour, they will find the management a very much more complicated task. To meet the needs of retailers whose shops often open on to the streets, and business offices, and to keep residents happy, very hands-on management is needed, along with knowledge of business needs. There are suggestions that, in these cases, leaseholders who want to run these buildings should have lived there for at least two years so that they can begin to understand the needs and issues of these buildings, as well as having familiarity with where they are based.
One other problem is that, as I have been told, freeholders may start reducing the number of leasehold flats in mixed-use buildings precisely to avoid losing control. This includes local authorities, which have, over many years, housed leaseholders in mixed-use buildings but would be concerned about them taking control of the buildings and subsequent management failures, which could affect the overall quality and appearance of the streets where they are sited.
I have real concerns about some of the Bill’s proposals. I hope the Government will consider the issues raised here very carefully.
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