Amendment 41

Leasehold and Freehold Reform Bill - Committee (2nd Day) – in the House of Lords am 6:00 pm ar 24 Ebrill 2024.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Lord Borwick:

Moved by Lord Borwick

41: Schedule 4, page 167, line 31, leave out from “rate” to “and” in line 33 and insert “determined using this formula:Bank Rate at the time that the notice of intention to enfranchise is served + 5 %Member's explanatory statementThis amendment seeks to make the process for setting the deferment rate more efficient through using a fixed formula based on Bank Rate, rather than requiring the Secretary of State to set the deferment rate in regulations.

Photo of Lord Borwick Lord Borwick Ceidwadwyr

My Lords, I first declare my interest in my home, which is a long-leasehold property in London. It would not normally be declarable, but in the case of this Bill, this should be an exception. I also declare my interests as in the register in property companies, some of which are developing or have developed houses.

While I am not a great fan of a Conservative Government forcing freeholders to sell land to lease- holders, that principle sailed many years ago, and my Amendments 41, 43, 44 and 45 are designed to simplify the process in this Bill, reducing the costs for the department. They would speed up the process, perhaps by as much as 18 months, making it quicker and cheaper for the Government.

The present structure of the Bill has the price of the enfranchisement calculated by a system laid out in Schedule 4, under which the single most important factor is the deferment rate. I believe that the deferment rate is more important to the size of the actual price than the abolition of marriage value or any other factor.

What is the deferment rate? Some noble Lords believed that it must be in the Bill, but that is not so. The deferment rate, an interest rate by another name, is to be decided by the Secretary of State for DLUHC by way of statutory instrument. When will this be published? We do not know. Departments take a different time for SIs, and some take as long as five years. I have been criticised in the past for being acidic about the Department for Transport taking as long as five years to bring forward an SI on disability matters. The point is that it is certainly not instantaneous.

The interest rate is to be set by the Secretary of State at a date to be announced in due course. I could be rather difficult and quote my right honourable friend from another place, Michael Gove, on the subject of setting interest rates. He has been a supporter of the principle that interest rates should be set not by the Chancellor but by the independent Bank of England. For many years we have had that as a common policy between all parties, yet the Bill reverses that policy, at least in respect of the deferment rate.

The Minister has said that the rate will be a market rate for about 10 years, amended only by another SI. I am afraid that markets do not work like that—they alter fast and furiously. Over the last 10 years, the national rate has varied quite widely, between 0.1% and today’s 5.25%. Yet the department will fix it for the next 10 years, subject only to review at about a year’s notice. If the department was that good, it could make a fortune in the markets rather than create legislation. It cannot be done accurately, but the department still wants to do it.

I submit that my solution is better: there should be a variable rate, varying automatically as a simple margin over base rate. We can have a debate about what that margin should be. I have proposed 5% as a probing amendment. The leaseholder will, in almost all cases, be a worse credit risk than the freeholder, and I have asked several banks about their prospective price for a loan to finance an enfranchisement. I have had a variety of suggestions, as each price will of course depend on the particular circumstances, but a margin of 5% over base rates seems to be a reasonable guess.

There are occasions when leaseholders of flats in a block have enfranchised but one in 100, say, has not come up with their share. It is not unknown for the freeholder himself to provide the finance, and I am told that a margin of 5% over base is considered reasonable by freeholders when they are the lenders.

The first thing would be to agree that the rate should be variable, to take account of current financial circumstances. My Amendment 41 achieves this. The second thing is to agree that the margin on the rate over bank rate should reflect the leaseholder’s cost of borrowing, which is consistent with the rest of the terms of the Bill, but at present I am not entirely certain what that margin should be. I look forward to other noble Lords expressing their opinions.

Amendments 43 to 45 are either consequential or the equivalent measure for leaseholds to be extended rather than enfranchised. My noble friend Lord Forsyth, who is not in his place, was going to support this proposal and may put his name to it later, if it comes forward on Report.

The noble Lord, Lord Truscott, mentioned this amendment at an earlier stage. I did not know whether I should stand at that moment or wait. I hope he will forgive me for replying to his point now. The current rate set by the tribunal is 4.75% or 5%—the noble Earl, Lord Lytton, can immediately correct me if I am wrong—so 10.25% may be wrong, but so is 4.75% or 5%. The noble Lord, Lord Truscott, asked whether a return of 10.25% is available, but the question should be whether any lenders charge as much as 10.25%. I believe that they do, so his argument is actually an argument for variable rates. I beg to move my amendment.

Photo of Lord Moylan Lord Moylan Chair, Built Environment Committee, Chair, Built Environment Committee

My Lords, I rise to support, in general, the principle of what my noble friend Lord Borwick has said, but I am not entirely sure that we need to go into this new world that he is creating when we have a perfectly satisfactory world that already exists. I hasten to add that I am not a chartered surveyor, and everything I say is subject to correction by Members of this Committee who understand these matters better than I.

My understanding is, first, that the deferment rate exists already—this is not a new thing being invented. It is essential in any enfranchisement that you have a rate of interest at which you discount to a present value what has to be paid, because you are dealing with transactions that are theoretically happening in the future, but you are paying for them today. For that, you need a rate of interest. At the moment, that rate of interest is set in the environment of a tribunal, and the tribunal can change the rate of interest on the basis of evidence adduced to it, and the basis of argument as to why that evidence is applicable to a particular case. I am sure that to a degree it reflects market value, the circumstances of those properties and the location, whether it is central London or some other part of the country—the rates will be different. Nobody has ever thought that system to be wrong.

The second thing, and this is where I may part company from my noble friend, if I have it correct and he has not grasped the point, is that the rate currently used is a real rate. It is a rate that assumes zero inflation, because the valuations used for future value—the value of my flat in 80 years—assume that there is no inflation over that period. So the appropriate discount rate is a real rate of interest, and that may explain the discrepancy between the four-point-something per cent, on the one hand, and the 10-point-something per cent that my noble friend has come up with. In either case—whether I am right about that or he is not—we need to understand whether the deferment rate is a real rate of interest or one that incorporates inflation. In my view, that is not clear in what has been said.

The Government are proposing that this decision—currently sensitively taken on the basis of evidence and argument by an independent tribunal—should be transferred to become the arbitrary choice of the Secretary of State. This has huge implications. If you really want to make it very cheap for a leaseholder to extend their lease, or to acquire the enfranchisement of their property, all you have to do, arbitrarily, is set a very high deferment rate—because that will produce a very low present value that you have to pay. But if you want to protect the freeholder class, you would set a very low deferment rate, which would mean that the leaseholder had to pay a very large amount.

It is an entirely political choice if the Secretary of State sets the deferment rate without any constraints—it hands money to one class or the other as seems politically suitable to you. We are asked to agree this measure with no indication, as my noble friend has said, as to what deferment rate the Secretary of State will choose. All this—whatever your views on the rights and wrongs, whether leaseholders are good people or bad people, what you should do about charities, and everything else—is profoundly unsatisfactory. We are moving from an evidence-based system to one that is essentially arbitrary. We are giving a power that is inherently political, not financial. We are doing this with no sight whatever of what the decision of the Secretary of State might be. Why on earth would we agree to this? Whether my noble friend’s solution is the correct one or we are better sticking with the current system is an important question, but why are we making changes in the first place and giving these powers away with no understanding?

Photo of Lord Young of Cookham Lord Young of Cookham Deputy Chairman of Committees, Deputy Speaker (Lords) 6:15, 24 Ebrill 2024

My Lords, I am grateful to my noble friend Lord Borwick for allowing what I hope will be a short debate on the deferment rate. I am conscious that I am a very inadequate substitute for the noble Lord, Lord Forsyth.

The deferment rate is very important, as my noble friend Lord Moylan explained. It is the current value of the vacant possession of a flat when the lease expires. According to what deferment rate you choose, it affects the premium that is paid by the leaseholder. My understanding is that the current deferment rate was set in a Court of Appeal case in 2007—the so-called Sportelli case—which ended up with the two rates that I think my noble friend Lord Moylan referred to: 4.75% for houses and 5% for flats. That was fixed nearly 20 years ago. There was a recent appeal decision in a Welsh court—I have the name in front of me but, like many Welsh names, it has a large number of consonants and very few vowels, so I am afraid that I cannot pronounce it. The appeal failed because the land valuer was not an economist, but it opened the way to an appeal to alter the rate. My noble friend Lord Moylan touched on my first question: when will the Secretary of State come to a decision? It affects what leaseholders do at the moment: whether they should wait for a preferential rate, which might be fixed by the Secretary of State, or whether they should try now, in case it moves the wrong way.

I want to raise a totally different point. At the moment, there already is a deferment rate set by the Government under the personal damages Act 1996. Using exactly the same basis as a deferment rate for leasehold, the Lord Chancellor sets the deferment rate for personal injury damages. Unlike what is proposed in this Bill, that rate changes quite often. In 2017, the rate was changed, and it was a negative rate for some time. It was changed again in 2019, and then again in 2023. It is now 0.5% for short-term cases and 3% for long-term cases. My question for the Government is: will we have two separate Secretaries of State fixing deferment rates at different times and coming up with different rates, or is there a case for rationalising the Government’s view as to what is an appropriate deferment rate?

One opportunity would be for the Secretary of State simply to replicate what the Lord Chancellor does. The Lord Chancellor has recently had a consultation on how to fix deferment rates and has come up with a short-term rate and a long-term rate. It seems odd to me to have two totally separate systems in the Government for basically coming to the same decision—that is, deciding what the long-term rate is on a risk-free investment. I wonder whether my noble friend the Minister has had discussions with the Lord Chancellor’s department to see whether we can have a common approach to this important issue.

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

My Lords, for me, this is a very technical set of amendments, but they are very important. As we have heard, this issue can have significant implications.

I always go back to first principles. One of the aims of the Bill is to make enfranchisement cheaper than it is currently, and so more readily available. However, as we have heard, that will entirely depend on the deferment rate and how it is set. My understanding was that the current deferment rate was set by the Court of Appeal in 2007, as the noble Lord, Lord Young of Cookham, said. The debate is around whether it is right for that to continue; whether another process should be used, such as that proposed by the noble Lord, Lord Borwick, in his amendment about using the bank rate as a base for setting a deferment rate; or whether, as in the Bill, the responsibility is passed to the Secretary of State to determine the deferment rate. I have to agree with the noble Lords, Lord Moylan and Lord Young of Cookham, that the latter does not seem right.

When I was investigating the deferment rate issue, I noticed that Homehold Services Ltd gave evidence to the Commons Public Bill Committee that was very telling. It criticised the fact that the “applicable deferment rate” was referenced throughout the Bill

“without specifying what this will be”.

It provided an example of what effect a change in the deferment rate could have on the cost of enfranchisement. It said:

“A lease extension … on a £200k flat with 80 years unexpired and no ground rent would be c. £4,000”.

That is the example given by Homehold Services Ltd; as it is one of the experts, I thought it might be right. It continues:

“If the deferment rate was reduced from 5% to 4%, the premium would increase to c. £8,500. At 3.5% it would be … £12,000”.

Those small changes in percentages have very high consequences for the leaseholders. This is important—that is what the evidence told me when I read it.

The argument from Homehold Services Ltd was that the deferment rate must be set no lower than that set by the appeal judgment in 2007. Otherwise, the consequence is that the rate can escalate considerably, as the noble Lord, Lord Moylan, pointed out. The cost of enfranchisement would increase, removing the ability of many leaseholders to continue with the process—contrary to one of the objectives of the Bill. Can the Minister say what consideration the Government have given to the deferment rate?

The noble Lord, Lord Young of Cookham, said that the Chancellor’s department has had a consultation on this and come up with some figures. Why are those not being adopted in this instance to set the rate in the Bill? As we have heard, it is very important to know exactly what the deferment rate will be. I do not believe that it is satisfactory to leave the applicable deferment rate to be set by a statutory instrument some time in the future. Surely, if the Government’s intentions are as they are set out in the Bill—to make it cheaper for leaseholders to enfranchise—one of the key rates must be this one. Therefore, I would have thought that we would want to see it set during the course of this Bill, rather than wait for a statutory instrument.

I have a lot of sympathy with the arguments that have been made by the mover of the amendment and others about the need for certainty here, rather than a principle and uncertainty as to the exact figure at which the deferment rate will be set.

Photo of Lord Khan of Burnley Lord Khan of Burnley Opposition Whip (Lords), Shadow Spokesperson (Levelling Up, Housing, Communities and Local Government)

My Lords, I will speak to Amendment 42 in the name of my noble friend Lady Taylor of Stevenage, which was well supported by my noble friend Lord Truscott in his earlier remarks.

Deferment rates are a phenomenally complex area to understand, and the standard valuation method in Schedule 4 is extremely technical. The Law Commission set out options. It did not make recommendations, but the Government have chosen to allow the Secretary of State to prescribe the applicable deferment rate. I thank the noble Lord, Lord Borwick, for his contribution and for seeking to make the process for setting the deferment rate more efficient and asking for more clarity and certainty.

Our amendment is clear and would ensure that, when determining the applicable deferment rate,

“the Secretary of State must have regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost”.

We understand that the 2007 Cadogan v Sportelli judgment, which has broadly set deferment rates, was made in the context of 0.5% interest rates. If the Government are minded to remain of the view that the Secretary of State should fix the deferment rates, how best should they do that? Although it may work in London, what would need to be taken into account for other parts of the country? Is there a need to set multiple rates for different parts of the country to deal with the variations?

I want to explore the prescribed rates a bit more and how they can function most effectively across the country. On balance, however, we believe it is right that the Secretary of State be given the power to set both the capitalisation and the deferment rates used to calculate the price payable on enfranchisement or extension. It may indeed be the case that the Sportelli judgment has produced deferment rates that are broadly adhered to as a starting point in most claims for leases with at least 20 years to run, but there are real problems in relying on a 17 year-old case to maintain generic rates over the long term.

As with much of the Bill, we await future regulations to understand the process by which the Secretary of State will determine those rates and what the initial rate that he determines will be. This is a point that the noble Lord, Lord Young of Cookham, and the noble Baroness, Lady Pinnock, alluded to. I will be grateful if the Minister could confirm whether it is the Government’s intention, before they introduce the regulations required to bring the new processes into force, to undertake a public consultation on precisely how the applicable deferment rate should be determined.

When it comes to the regulations required to bring the new valuation process into force, we recognise that they are the means by which the detailed methodology for setting the applicable deferment rate will be brought forward. However, while it would not be right to pre-empt those regulations at this stage, we believe that the objective underpinning the setting of the deferment rate should be set out in the Bill, as the noble Baroness, Lady Pinnock, also mentioned. How the Secretary of State sets the rate and what it should be are crucial to the premiums that leaseholders will pay. Can the Minister provide some clarification on this?

While the rate or rates will need to be set at a level that does not unfairly strip freeholders of value, we think it is important that the Bill states clearly that in determining what should be the rate or rates, the Secretary of State must have at the forefront of their mind the need to reduce premiums for leaseholders. While other considerations will clearly need to be taken into account, not least how to ensure that landlords receive adequate compensation to reflect their legitimate property interests, this amendment would oblige the Secretary of State to set a rate or rates with the overriding objective of encouraging leaseholders to acquire their freehold at the lowest possible cost. It is important as it is the deferment rate that will be the primary driver of price to be paid by leaseholders in enfranchisement or extension claims.

It is essential that reducing premiums for leaseholders is the determining factor in the process by which such a rate or rates will be set and reviewed; therefore, it must be put in the Bill. I hope the Minister will give due consideration to our amendment, and I look forward to her response.

Photo of Baroness Scott of Bybrook Baroness Scott of Bybrook Parliamentary Under Secretary of State (Department for Levelling Up, Housing and Communities) 6:30, 24 Ebrill 2024

My Lords, I thank the noble Baroness, Lady Taylor, and my noble friend Lord Borwick for Amendments 41 to 45 in this group. I turn first to the series of amendments tabled by my noble friend, and I thank him for his constructive engagement with me and for the time he spent in trying to address this vital matter.

Amendments 41 and 43 to 45 would seek to replace the current provisions in the Bill, which will allow the Secretary of State to set the deferment rate used in enfranchisement valuation calculations, as well as removing a requirement to review these rates every 10 years. Instead, these amendments would require the deferment rate to be prescribed by a formula, which would be based on the Bank of England’s base rate plus 5%. The specific deferment rate would then be calculated based on the date of the leaseholder’s enfranchisement claim.

As I have discussed with my noble friend Lord Borwick, this is one potential solution for setting the deferment rate, but it is not the only one. I am aware of the importance of the deferment rate to both leaseholders and freeholders, and it is important that we take the time to take this decision carefully. There are serious consequences with any attempt to prescribe the methodology for setting the deferment rate in the Bill; this would tie the hands of this Government, and successive ones, in terms of adapting the approach if the need were to arise. It is also important that the Government retain their role in providing balance between market stability and the need to review the rates. It is the Government’s view that the proposals in the Bill enable this balance, and it would therefore be inappropriate, at this stage, to prescribe in the Bill the methodology for setting the deferment rate.

These deferment rates are a really important part of the Bill. At the moment, it is difficult for leaseholders to understand how much they may have to pay to the landlord when they enfranchise. Different rates are used across the country and across the industry on a case-by-case basis. The deferment rate is used to calculate the reversion value, and this provides the landlord with the compensation for the value of the freehold property with vacant possession in the future; that is, at the end of the lease. Prescribing these rates and using them to develop an online calculator, which will help leaseholders understand what they may have to pay, is also important. These rates will be prescribed at a market value to ensure that the amount that landlords are compensated reflects their legitimate property interests. These are important decisions.

The noble Lord, Lord Moylan, asked about the timing; this could take years and years, but we do expect the majority of these reforms to come into effect in 2025-26, as set out in the Bill’s impact assessment. Obviously, this may change, but that is what we expect. We will continue to carefully review all the information and views shared on the setting of rates, and I welcome any further thoughts that the Committee has on this matter.

Photo of Lord Moylan Lord Moylan Chair, Built Environment Committee, Chair, Built Environment Committee

Does my noble friend the Minister have a moment to give a response to my query about whether the Government regard the deferment rate as a real interest rate or one that incorporates inflation? I ask because the calculation, as I understand it, assumes zero inflation in the value of the asset over the time to the point at which it is being valued, and that a real interest rate is therefore appropriate. Is that her assumption or is she assuming an inflation-based interest rate, which, I suggest, would have consequences for how the asset is valued at the end of the term during which it is assessed? Does she have any comments on that?

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

I reiterate that this is why we would like the Secretary of State to be involved because it is complex and there needs to be a balance. I will come back to the noble Lord with any further comments, but this is why we would prefer the Secretary of State to have this role, to make sure that we are balancing the market at the time with leaseholders’ representation.

I turn to Amendment 42 from the noble Baroness, Lady Taylor, which would require the Secretary of State, when prescribing the deferment rate used in the enfranchisement valuation calculations, to set this at a level that would encourage

“leaseholders to acquire their freehold at the lowest possible cost”.

I assure the noble Baroness and the Committee that the Government are committed to making enfranchisement cheaper and easier and that these reforms will achieve that aim.

I understand how vital setting rates is for enfranchisement premiums. This very proposal was discussed in the other place, and I reiterate the importance of not constraining the Secretary of State via the Bill when making such important decisions. We have been clear that we will set the rates at the market value and recognise that many different elements need to be considered when setting them, as I have just reflected to my noble friend. We continue to have conversations with all relevant stakeholders. As I said, I welcome members of the Committee sharing their views on this matter so that the Government can take them into consideration when making a final decision. For these reasons, I ask my noble friend—

Photo of Lord Borwick Lord Borwick Ceidwadwyr

I am sorry to interrupt my noble friend again. One of the problems I see with this is the great difficulty in making a change except through statutory instruments, and the amount of time this takes. Whenever the Secretary of State decides that a change must happen, it must happen more quickly than through the route laid down in the Bill. At present, the amount of time doing the statutory instrument, and the fact that we cannot debate its details or change it, makes the whole thing very unfortunate.

There is something to be said for the point, made by my noble friend Lord Young of Cookham, that there is a route through that is used by the Lord Chancellor. I had not appreciated that the deferment rate had so many different implications. I am sure we could call it something different for this purpose, and thus carve out the rate for property matters. But, with a delay of one year or more between a decision and taking action, it is a very difficult subject to structure using the statutory instrument route.

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

My noble friend is absolutely right, and that is why we have not made this decision. We want to get it right, and that is why we listened to everything everybody said in this place and the other place. We will come back to my noble friend with our deliberations. This is important, and speed will also be important: you cannot take a year to change things that need changing, because of the market. They have to be dealt with in a timely manner.

Regarding my noble friend Lord Young’s point about the Lord Chancellor, I will take it back to the department and see whether any discussions have been had on a common approach, and if not, why not, and whether we should have those discussions.

For the reasons I have given, I ask my noble friend to withdraw the amendment.

Photo of Lord Borwick Lord Borwick Ceidwadwyr

My Lords, I thank everybody for their constructive points and for the education that I have received through this process. I beg leave to withdraw my amendment.

Amendment 41 withdrawn.

Amendments 42 to 46 not moved.

Schedule 4, as amended, agreed.

Schedules 5 to 7 agreed.

Clause 37: Costs of enfranchisement and extension under the LRA 1967