My Lords, in moving this amendment I shall also speak to Amendment 24. These might seem to be rather arcane amendments; Amendment 23 is a technical amendment and Amendment 24 is the substantial point and a proposed new clause. This might look like an arcane point but it is a very significant one and it is simple to correct. The amendment asks the Government to act on a promise to remove a significant blockage, which at the moment
increases the cost of enfranchisement to leaseholders who are threatened with upward extensions to blocks of flats and have to pay the freeholder extra for the possible profit he might have made had he chosen to develop. The proposed new clause, although detailed— I apologise for the length of my speaking note—would remove the blockage. I am extremely grateful to noble Lords around the Committee for supporting this, and to the Minister, who has already met me. We all agreed that this is something that must be put right in the Bill.
I declare an interest as a leaseholder in a block of flats that has been under threat of an upward extension for not two years but five years. The consequent blight and anxiety have been considerable. Asking for compensation for not extending upward is now an accessible and popular option for freeholders looking for more profit, especially when it falls under the relaxed requirements of permitted development. That means that there would be no automatic planning hearing, and often what would count as a major development slips by for determination simply by planning officers. There is no requirement for affordable housing, friendly accommodation that would help disabled people, or considerations of planning issues such as the impact on structural stability or protection from massive disturbance for residents.
Given that upward extension can be authorised in wider circumstances than the normal planning rule, it is estimated that there are about 2.2 million custom-built private sector leasehold flats in blocks where development value—for example, for upward extension—could be an issue, and therefore where leaseholders might face this additional obstacle to enfranchisement. There are certainly many people already affected by upward development in London alone.
The current key legislation is paragraph (5) of Schedule 6 to the Leasehold Reform, Housing and Urban Development Act 1993. It defines development value in relation to premises to be enfranchised as an
“increase in the value of the freeholder’s interest in the premises which is attributable to the possibility of demolishing, reconstructing, or carrying out substantial works of construction on, the whole or a substantial part of the premises”.
To give a graphic illustration, in our own situation in my block of flats, when faced with a development we were not consulted on and did not want, we sought to enfranchise ourselves. The cost was originally estimated at £750,000 for 103 flats. Now the development value has been added, that has shot up to £1.75 million. We can no longer raise the funds and we cannot buy the freehold. What has shocked me most as I have pursued the Government on this point is that the impact assessment on upward extension of permitted development shows that the Government actually knew that this would happen. They anticipated that upward extensions would generate freeholder profits to the tune of £530 million in land value uplift, even without any actual development. Moreover, the impact statement recognised that this may make it more expensive for leaseholders to enfranchise.
To their credit, the Government realised that there was something wrong, especially since it would contradict the policy intentions of this Bill to make enfranchisement cheaper. So they referred it to the Law Commission, which reported in 2020 on options to make enfranchisement cheaper and easier. In option 9, it said that:
“When exercising enfranchisement rights, and in order to reduce the premium payable where there is development value, leaseholders could be given the ability to elect to take a restriction on future development of the property”.
The Government accepted the option. On 11 January 2021, in the House of Commons, Robert Jenrick promised in a Written Statement:
“Leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying ‘development value’
”.—[Official Report, Commons, 11/1/21; col. 10WS.]
Nothing would give us more pleasure in my block than a promise not to develop.
Even more to their credit, this solution was signposted in the impact statement on this Bill, in Annex 2, at paragraph 12, which recognises that the prospect of paying development value can make enfranchisement “prohibitively expensive”, and contemplates that there will be a new right for an option not to pay development value on the condition that leaseholders guarantee not to develop themselves. So I must ask the Minister this: with all these assurances having been given, where is this new clause? What has happened to the policy commitment?
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The Minister knows I have enormous respect for her—she and I have solved many problems outside this House together, and I am sure that we can do so inside the House as well. Perhaps in her response she could explain to me why the impact statement recommends something that the Law Commission did not recommend, and which I find slightly bizarre—that
“the freeholder will be paid reasonable out of pocket expenses that have been genuinely incurred in pursuit of development”.
Why do the Government feel they have to reward the developer again for doing this, when the Secretary of State in another place is all for squeezing freeholder revenue streams, not finding new ones?
This is about helping the Government. The proposed new clause would speed up the process of decision— I am doing the Government’s job for them. To cut through the legal language necessary in the proposed new clause, let me explain briefly how it would work, and how Amendments 23 and 24 relate to Schedule 5.
Amendment 23 makes a link between the non-development guarantee and Schedule 5. Paragraphs 2(2) and (4) of Schedule 5 restate the existing law in the 1993 Act and define development value in relation to the premises to be enfranchised as any increase in the value of the freeholder’s interest in the premises
“attributable to the possibility of demolishing, reconstructing or carrying out substantial works of construction on, the whole or a substantial part of the premises”.
Subsection (1) is the key provision of the proposed new clause. It covers the point that leaseholders can obtain
“a reduction in the price payable for collective enfranchisement in relation to any premises”
if the nominee purchaser—the leaseholder, or the leaseholder’s representative—guarantees not to pursue development. This is achieved by way of a non-development guarantee, or NDG, to be proposed when the necessary notice under Section 13 of the 1993 Act
is given. The guarantee specifies that the nominee purchaser, if they acquire the freehold, promises not to carry out or allow others to carry out similar development works.
In proposed new subsection (2) we have provided that, in making this calculation, exact terms will be followed: works of
“demolition, reconstruction or substantial work of construction”
which correspond to those specified in the guarantee in subsection (1) must be disregarded. There can be no doubt about what sort of development we are talking about.
We also recognise the need for flexibility. The law recognises that enfranchisement can be a process of negotiation about price and terms, and that the price may have changed by the end of the process. The amendment takes care of that. Proposed new subsection (3) recognises that the NDG, incorporated in a final negotiation, may indeed differ, but requires that the terms must be “set out expressly” in the final documentation.
We have also solved the problem of how to make the guarantee legally effective—there is no end to the help we are giving the Government. Even if the freehold changes hands, by using the Local Land Charges Act 1975, under proposed new subsection (4) an NDG is registerable as a local land charge and is enforceable by injunction by the immediately former freeholder. This follows the model of Section 106 planning agreements, which are enforceable by injunction by the local authority under Section 106(5) of the Town and Country Planning Act 1990. It avoids the problem recognised by the Law Commission of formulating the restriction as a covenant between incoming and outgoing freeholders.
Finally, there is the question of how long the guarantee should last. The impact assessment is silent on this, but the Law Commission, at paragraph 6.167 of its report, says that a time limit should possibly be imposed, and that in any event it is not necessarily the case that the restriction on development should last for the life- time of the lease. It suggested 10 or 20 years, but the measure in the impact assessment is silent on this. However, given the constant changes in planning law, we follow the advice of the Law Commission.
Subsection (6) adopts a 10-year lifetime for the non- development guarantee from the date of enfranchisement, after which it would be removed from the local land charges register. In subsection (8) we also provide specifically that a registered NDG may be varied with the consent of both the current and former freeholder. I pay tribute to David Boardman, who has given us expert advice on this.
The amendment covers all the necessary points. There is much more that I could add in context, but the Committee will be relieved to know I am not going to do that. The Minister may well tell me how to improve the clause and I would be very pleased if she could do that, but I hope she will not find fault in my seeking to help her to put in place simply what the Government said they wanted. I remind her that the decision was based on legal advice that they themselves commissioned, it was announced by the Minister in another place and it was contemplated in the Bill’s own impact assessment. All that is missing is the
actual new clause that would have delivered it, which I have now provided and which I look forward to the Minister accepting. I beg to move.