Amendment 23

Leasehold and Freehold Reform Bill - Committee (2nd Day) – in the House of Lords at 3:54 pm on 24 April 2024.

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Baroness Andrews:

Moved by Baroness Andrews

23: Clause 36, page 29, line 29, at end insert “and has effect subject to section (LRHUDA 1993: Non-development guarantee)”Member's explanatory statementThis amendment is related to another amendment in the name of Baroness Andrews inserting a new Clause (LRHUDA 1993: Non-development Guarantee).

Photo of Baroness Andrews Baroness Andrews Labour

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?

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.

Photo of Lord Best Lord Best Crossbench 4:00, 24 April 2024

My Lords, I support Amendments 23 and 24 in the name of the noble Baroness, Lady Andrews. I can imagine the anguish that must be felt by leaseholders in blocks of flats who are facing the disruption of one or even two new storeys being built on the roof of their flats. With freeholders now having permitted development rights for upward extensions, residents face the disruption, noise and hassle of builders, lorries, cranes, skips, scaffolding and so on for months—and now they face the prospect of being unable to buy the freehold of the block because development, or the possibility of upward development, adds to the value of the block and can make enfranchisement prohibitively expensive. The extra value of adding new storeys, or the compensation demanded for not developing where there is potential to add them, generates additional freeholder profits but makes enfranchisement unaffordable, yet the Leasehold and Freehold Reform Bill is all about giving leaseholders a better deal and easier access to enfranchisement.

I note that the previous Secretary of State promised to fix this specific problem through a clause in the Bill enabling leaseholders in a block to agree together that no upward extension should take place. In this way, they remove the extra value for the freeholder. It seems that in the drafting of the Bill the promised new clause, originally an option proposed by the Law Commission, has got lost. So, on behalf of the 2 million-plus lease- holders who could be affected, I strongly support the amendments from the noble Baroness, Lady Andrews, which would fulfil the Government’s earlier promise.

Photo of Baroness Thornhill Baroness Thornhill Liberal Democrat Lords Spokesperson (Housing)

My Lords, I suppose I could say “#UsToo”. I support these amendments, which are simple in purpose, in the name of the noble Baroness, Lady Andrews, who summed them up thoroughly, clearly and personally. As things stand under PDR, a freeholder can add two storeys to their existing building as a matter of right, with no planning permission needed: as I look round Watford, I can see evidence of that with my own eyes. But I also know that that can have very serious consequences. As well as the inconvenience of the building work going on for as long as it takes, you also discover that the top-floor flat that you paid a premium for is now worth less as you are a middle-floor flat. Then there is the pressure on communal space and amenities, including the dreaded bin store and the state thereof.

Adding two more storeys to a presumably well-planned block of flats, for a set number of residents, is not consequence-free. But the consequences are absolutely trivial compared with the knock-on effects of such development on the Government’s own stated aim, which is to encourage more leaseholders to buy their freehold. This is an additional and often insurmountable obstacle. It significantly raises the cost of enfranchisement, as has been said. The value of the block will have gone up. The leaseholders are now required to pay more for their freehold. In many parts of the country, this takes it way out of reach, as in the noble Baroness’s case.

The noble Baroness, Lady Andrews, very thoroughly cited a positive trail of support: all the right noises from the Secretary of State in 2021, the Government’s complete recognition of the dilemma and a real promise of the ability to look into some restriction.

It is clear that there is a policy conflict here: the need for more homes, which we all agree on, versus the enfranchisement of leaseholders. As things stand, the homes policy is top trumps. Can the Minister advise on whether there will be a review of PDRs in general, including focusing on unintended consequences such as this and whether there is a way to sort this out in the leaseholder’s favour in the Bill? At the moment, it feels as if the freeholders are still very much holding all the aces and current residents have no voice at all in this significant change to their environment and, possibly, their life chances and finances.

Photo of Baroness Taylor of Stevenage Baroness Taylor of Stevenage Opposition Whip (Lords), Shadow Spokesperson (Levelling Up, Housing, Communities and Local Government)

My Lords, I am very grateful to my noble friend Lady Andrews for the collaborative way in which she has prepared and worked on her amendment, and drawn the attention of the House to what seems to be an omission from the Bill. We believe this needs to be rectified and my noble friend has not only set out, with her usual thorough approach and eloquence, exactly what the issue is, but has also proposed a straightforward and elegant solution, which we support.

My noble friend describes the Law Commission report as adopted by the Government in January 2021. Indeed, the government press release of January 2021 indicated that the Bill would strongly take account of this government commitment to release leaseholders from the straitjacket of hope of future development value. I quote from that press release:

“Leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying ‘development value’”.

This is based on a Law Commission suggestion, which clearly indicates the direction of travel and which we believe the Government have accepted. To quote from the Law Commission recommendation:

“Premiums would be reduced at the date of the freehold acquisition claim. If leaseholders subsequently decided that they wanted to develop, they would pay a portion of any profit received on a subsequent development to the landlord, rather than (as at present) having to pay development value in respect of a speculative future possibility of development”.

The Law Commission also set out clearly the principle that leaseholders should not need to have to negotiate on a piecemeal basis for this restriction but should be granted it by right. The commission refers to leaseholders of flats acquiring the freehold to their block and states that,

“as they would not be required to pay the landlord an additional sum to reflect the potential to develop their properties, leaseholders would no longer be required to negotiate with the landlord to create such a restriction; rather, they would be entitled to demand such a restriction be included” and

“disputes, negotiation and litigation about development value would be reduced”.

The Law Commission clearly believed that the election to take a restriction on development outweighed the disadvantages put forward by other consultees and that such an election was eminently possible to implement where there was agreement among leaseholders.

I also point out that this issue arises, in part, from yet another unintended consequence of the permitted development regime—a point mentioned by the noble Baroness, Lady Thornhill—on which I have made my views clear in your Lordships’ House in the past. I am not an unequivocal fan of PD. Permitted development removes the step of local accountability through the planning system, often the contribution to local community infrastructure and almost always the contribution to local affordable housing which would be required through traditional planning applications.

At its worst, permitted development drives a coach and horses through local plans, resulting in residential property in inappropriate areas and buildings, and in taking buildings out of commercial use where it may not be appropriate to do so. In the case of the subject of this amendment, its very existence can create an added financial pressure on those wishing to exercise their enfranchisement rights. That is another reason why we believe that the solution proposed by my noble friend Lady Andrews delivers an equal and justifiable right to leaseholders.

We strongly support my noble friend’s amendment. As the noble Lord, Lord Best, has said, 2 million leaseholders may be affected. We support it on their behalf and not least because it meets the overall aim of the reform to leasehold as stated by the Government and in the Bill: that it should reduce enfranchisement premiums while maintaining sufficient compensation for landlords. It also sets out a clear and practical route map for the implementation of such a scheme. We look forward to hearing from the Minister about how she might make the necessary progress on this issue.

Photo of Baroness Scott of Bybrook Baroness Scott of Bybrook Parliamentary Under Secretary of State (Department for Levelling Up, Housing and Communities) 4:15, 24 April 2024

My Lords, I thank the noble Baroness, Lady Andrews, for her Amendments 23 and 24 on development value. I also thank her very much for meeting me on this subject.

The amendments would introduce a scheme where enfranchising leaseholders would not pay development value if they guaranteed that they would not develop for a period of 10 years. Under the current law, lease- holders are sometimes required to pay development value when collectively enfranchising a block of flats. This is the value of the potential future development of the property, such as through adding another storey to the building, as we have heard. We recognise that development value can make the cost of enfranchisement prohibitively high.

We are committed to bringing forward a workable scheme and are exploring this area further. It is, as we have found, however, an area fraught with loopholes and technical detail. To be honest, it will take us time to get this right.

Before I finish, I want to bring up permitted development, because all noble Lords have brought this up. As noble Lords probably know, the Government have recently consulted on making changes to various permitted development rights. The consultation ran for eight weeks from 13 February to 9 April. We are considering the responses and I am sure we will have a debate on those in this House in due course.

The noble Baroness, Lady Andrews, is right about this issue. We know about it and we support her, but it is difficult. I would like to meet her again, and anybody else who would like to come, to go through her amendments in detail and take things forward in that way.

Photo of Baroness Pinnock Baroness Pinnock Liberal Democrat Lords Spokesperson (Levelling Up, Communities and Local Government)

Could the Minister tell the Committee whether the problem that the noble Baroness, Lady Andrews, has defined could be resolved by removing permitted development rights altogether on these blocks of flats? This goes back to what was the case. If any development was proposed, it had to go through the normal application to the local planning authority.

Photo of Baroness Scott of Bybrook Baroness Scott of Bybrook Parliamentary Under Secretary of State (Department for Levelling Up, Housing and Communities)

I do not think that would be a sensible solution, because there might be times when permitted development might be the correct thing to do and everybody might be happy about it, including those leaseholders who have enfranchised. We need to take this steadily because it is fraught with complexity.

Photo of Baroness Andrews Baroness Andrews Labour

I am extremely grateful to everyone who has supported the amendment, especially the noble Baroness on my Front Bench. I am also particularly grateful to the Minister. I understood her to say that the Government are committed to bringing forward a workable scheme to deal with this problem, which is exactly what I wanted to hear. I know it must be fraught with difficulties. There are lots of rights and planning issues involved. There is a whole nest of issues that would have to be addressed. The important thing is that it be in line with the timetable for the Bill. Perhaps she will be able to say more about this when we meet, but I hope that it will be either aligned in the timetable, so that there is no more confusion and we can get this tracked as soon as possible, or, if it requires legislation, in the Bill. I take the point, and I would be very happy to meet her—and to take in with me an army, and its advisers.

I have one further reflection on the PDR review. I did my homework—I did what the Minister said, and I saw whether I could use the current PDR review as a way of raising this, but it does not allow me to do that; it is too narrow in scope. Therefore, in fact we need a proper review of PDR, because the implications are so varied and wide. If the Government could commit to that, there would be a lot of political capital in it. In the meantime, I am happy to leave this amendment, and we will see and wait on progress.

Amendment 23 withdrawn.

Clause 36 agreed.

Amendment 24 not moved.

Schedule 4: Determining and sharing the market value