Extending a flat lease or buying the freehold – where we are now (or rather – where we aren’t).
It was all over – or that’s what we thought when the Prime Minister announced the election date.
The Leasehold and Freehold Reform Bill was progressing through the House of Lords with strong arguments on both sides, but the Bill was very far from the finished article. When the election was called, it was bound to be scrapped, along with the Renters Reform Bill. However, to widespread surprise, the Bill made “wash-up” and at the very last minute received Royal Assent just as Parliament was prorogued. That Friday afternoon, before Parliament closed down, the final House of Lords debate made for exciting viewing. The Lords had been far more critical of the proposed Bill than the Commons, but that afternoon, one peer after another from all sides of the House, tore into the Bill. One peer for example, (Lord Robathan – Con) described the Bill as “not decent or fair, half-baked and half thought out and there will be huge problems in the future….in fact….. chaos”.
Despite the opposition in the House of Lords, the Bill passed – and so now we have the Leasehold and Freehold Reform Act 2024, or LAFRA as it is being called.
Much has been promised to leaseholders in the Act with regard to reducing the cost to extend a short lease or buy the freehold. However the question has to be asked by leaseholders – is it just too good to be true? We don’t have all the details yet, but it looks as if leaseholders might now expect a gift, in some cases, of several hundreds of thousands of pounds, possibly millions even in the most expensive properties in central London, all at the expense of the freeholder. Is this really what Government intended?
As fortunate as the Act might be for leaseholders, is it realistic, or fair even, for a leaseholder to expect to receive such a windfall at the expense of the freeholder? To put it simply, the Government has passed an Act that enables one property owner to compulsorily acquire property from another property owner without having to pay market value.
In the House of Lords, the Bishop of Manchester, when explaining the effect of the Act on freehold-owning charities, of which the Church Commissioners is one of many in London, “the Bill will take money used for charity purposes and give it to the wealthy – robbing the poor to pay the rich: a reverse Robin Hood”.
In a recent podcast by leading barristers Stephen Jourdan KC and Edward Blakeney from Falcon Chambers, they discuss the legality of the Act in the light of the European Court of Human Rights. Article 1, Protocol 1 of the ECHR says, “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No-one shall be deprived of his possessions except in the public interest”. The Government has stated the Act complies with A1P1, but the message from Messrs Jourdan and Blakeney is contrary, and their argument is clearly set out in the podcast – there WILL be a Human Rights challenge by freeholders to Strasbourg, and provided the case is conducted properly, they WILL win. The claim would be on two main issues, the gifting of all the marriage value to the leaseholder, when previously it was split 50/50, and the capping of ground rents at 0.1% of freehold value, allowing leaseholders to buy out their ground rent obligation without having to pay a full price for it. To any claim might be added the prescription of deferment and capitalisation rates at anything other than ‘market rate’, although the Minister in the House of Lords did say prescription will be at ‘market rate or rates’, and furthermore in the original written submissions, a legal challenge was threatened in respect of freeholders having to pay their own costs in a freehold or lease extension claim.
With the recent passing of the Act, it will now be for the new Government to bring it in via secondary legislation and statutory instrument, and how this will be done will hopefully be revealed shortly. However, the Government cannot be oblivious to the real expectation of a Human Rights challenge. Is it realistic to expect that the Government can bring in the Act as set out, knowing they would certainly face a Human Rights challenge? To risk a claim in Strasbourg is one thing, but to lose would be disastrous, and expensive (several billions at stake for the taxpayer).
All sides need clarity. As valuation practitioners in central London where there are many £millions at stake, we need urgently to know what to advise our clients, all of whom are in limbo with on-going lease extension and freehold claims stalled. Several clients are quite distressed, especially those leaseholders who have already bought their freehold, and are now “freeholders”. An interesting statistic from the Government Impact Assessment is that 37% of leaseholders are also freeholders. Those leaseholders may never recover the money they have laid out in good faith for any non-participant flats whose share they had to fund to enable them to buy their freehold in the first place. Under the Act, as set out, they could be financially punished for doing exactly what the Government encouraged them to do – buy their freehold. They too need clarity, but all we can say to our clients is “wait and see”.
We hope to see some decisions urgently from the new Government.
