Professor Nicholas Hopkins gave evidence.

Q Good afternoon, everyone. Lovely to see you all. We will now hear from Professor Nicholas Hopkins, the law commissioner for property, family and trust law. We have until 2.30 pm with this witness. Will the witness please introduce yourself for the record?

Professor Hopkins:

I am Professor Nick Hopkins. I am the law commissioner for property, family and trust law. I have led the Law Commission’s work on enfranchisement and commonhold since our work began in 2017. Since 2020, I have also led our work on the right to manage.

Will Members please indicate whether they would like to ask a question of the witness? We will start with Matthew Pennycook.

I again put on the record my declaration of interest that my wife is a joint chief executive of the Law Commission, which Professor Hopkins is representingQ .

Professor Hopkins, thank you for coming to give evidence to us. I have two questions, perhaps three if we have time. My first relates to those clauses that implement options or recommendations made by Law Commission reports. Parts 1 and 2 of the Bill implement not all but a subset of those recommendations. I expect that the Law Commission will have had a dialogue with Government about what the clauses look like, but ultimately what goes into the Bill is a political choice for the Government. With a view to strengthening the Bill, I will be grateful if we can get a sense from you whether any of the clauses that draw on those options and recommendations is in any way problematic? Do they contain flaws? Are there omissions that mean they will not work in the way that the Law Commission intended them to?

My second question is related to the Law Commission’s reports as a whole. My understanding is that they were meant to work as a complete package. In drawing on only a subset of recommendations, is there a risk that some of the underlying rationales for the options and recommendations that you made will be blunted or limited by the fact that others have not been included?

Professor Hopkins:

To answer your first question, I am confident that the clauses of the Bill that implement the Law Commission recommendations achieve their desired intent. I know from my team that there will be a number of technical amendments. I do not think that that is necessarily unusual, given the complexity of the legislation, and it reflects the continuous process of examining iterations of clauses to ensure that robust scrutiny is applied.

I should explain the Law Commission’s involvement in the clauses. We have worked in much the same way that we would in producing any Bill: Law Commission staff have written instructions to parliamentary counsel, scrutinised drafts and iterations of the clauses, and commented back to parliamentary counsel. We have provided our usual role in the development of draft clauses.

As for the robustness of the clauses, as you said, our reports—in particular on enfranchisement—gave recommendations that would have wiped away the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, to provide an entirely new and unified scheme for houses and flats. In the process of instructing counsel, the Government have made decisions on what to implement. We have had to think about how to carry over that policy in the context of legislation that performs keyhole surgery on existing legislation, rather than starting with a blank sheet. With that constraint in mind, however, I am confident that the clauses achieve their desired purpose.

Q To ensure that I have understood you correctly, do you expect some technical amendments, whether minor or not, to come to clarify the provisions?

Professor Hopkins:

There will be some technical amendments to come that refine the operation of the clauses.

And on the package as a whole working?Q

Professor Hopkins:

On the package as a whole, the Bill implements key recommendations that would be most impactful to leaseholders, in providing them with much greater security and control over their homes and in putting the financial value of the home in the leaseholder’s hands rather than in the landlord’s hands. It will also enable leaseholders to take control of the management of their block through the right to manage, enabling more leaseholders to do that than can do so at the moment. In particular, it extends the non-commercial threshold from 25% to 50%, which is a doubling, and it also enables more leaseholders to own their block through meeting that threshold.

What is there in the Bill will have a considerable impact for leaseholders exercising enfranchisement rights, whether individually or collectively, and for leaseholders who are exercising the right to manage. There are other things in our schemes that are not there, and other benefits that will not be obtained. For example, sweeping away the ’67 and ’93 Acts, and providing a unified scheme, would bring with it the ability to remove some procedural traps that can arise. So there are other things in our scheme as a whole that are not in the Bill, but what is there will have considerable impact and a very positive impact for leaseholders.

On what is not there, the Government have chosen to include none of the recommendations on commonhold. We very much think that commonhold should be the default tenure going forward. Without enacting all of the 121 recommendations Q on commonhold, are there any that could be included in the Bill fairly easily, and in a way that would pave the way for commonhold in the future?

Professor Hopkins:

During Second Reading, the Secretary of State said that he thinks commonhold is preferable to leasehold, and I concur with that. We concluded that commonhold is a preferable tenure to leasehold. It gives the benefits of freehold ownership to owners of flats—the benefits that owners of houses already enjoy.

Commonhold does of course have a history. It was introduced in the Commonhold and Leasehold Reform Act 2002 and has not taken off. Our recommendations as a whole were designed to provide a legal scheme that would enable commonhold to work more flexibly and in all contexts—to work for complex, mixed-use developments. With commonhold having failed once, there is a risk of partial implementation, meaning that commonhold has a second false start, which would probably be fatal to it. I think that the legal regime for commonhold needs to be looked at as a whole, to ensure that it works properly for the unit owners, developers and lenders who lend mortgages over commonhold. We need the legal regime that works. We need to remove any other blocks on commonhold.

Do you think that it is a missed opportunity not to take those recommendations on commonhold forward?Q

Professor Hopkins:

It is our job at the Law Commission to make recommendations for Government reform and of course we would like to see those recommendations implemented, but ultimately what goes in the Bill is a matter for the Government to decide, not the Law Commission. There is a lot in this Bill that is very positive for leaseholders, albeit the commonhold recommendations are not there.

Q Have the Government spoken to you about why they have seemingly rowed back on the direction of travel on commonhold?

Professor Hopkins:

Since we published our reports in 2020, we have been supporting the Government as they work through the reports and develop their legislative plans, but I cannot speak for what decisions they have made and what has led them to make those decisions on what is and is not in the Bill.

Good afternoon, professor. You have provided several recommendations to the Government on leasehold enfranchisement. Do you believe that the provisions in the Bill will make it easier and cheaper to buy a freehold or extend a leaseQ ?

Professor Hopkins:

Yes, they certainly will, and I will draw attention to a number of provisions. First, those that deal with the price that leaseholders will pay will ensure that it is cheaper. For the first time, how that price is calculated is mandated, and it is designed to identify the value of the asset that the leaseholder is receiving. At the moment, the focus is on compensating the freeholder for the asset they are losing. The price will consist of two elements. There will be a sum of money representing the terms and buying out the ground rent, but that will be capped so that onerous ground rents are not taken into account in calculating that sum, and a price representing the reversion, which would be the value today of either a freehold or a 990-year lease that will come into effect at the end of the current lease. In calculating those elements of the price, the deferment and capitalisation rates will be prescribed, so that will remove the current disputes.

The price is mandated and the price is cheaper, and there are other things in the Bill that will help, such as the ability of leaseholders to require the landlord to take leasebacks of property when they are exercising a collective enfranchisement so that, for example, they do not have to pay for the expense of commercial units that they do not want responsibility for. There is a lot in there. There is reducing price and also reducing the ability for disputes to arise.

I will also refer to the provisions on costs that will generally ensure that parties pay their own costs in relation to a claim. Leaseholders will not be paying the costs of freeholders.

Q Is it fair to say that you are content with the provisions that the Government have put in the Bill?

Professor Hopkins:

It is fair to say that what the Bill does will be of substantial benefit to leaseholders.

Thank you for all your work. Can you remind the Committee how many recommendations you made in totalQ ?

Professor Hopkins:

Across enfranchisement, right to manage, and commonhold, we made around 350 recommendations.

Q And how many did you make on commonhold?

Professor Hopkins:

I think we made around 120.

Q You had to go through a long process. When did you start your deliberations on the commonhold provisions?

Professor Hopkins:

We began it as a package of work that was being conducted in parallel. We began in 2017 as part of the 13th programme that we published in December of that year. We published three consultation papers on enfranchisement, right to manage, and commonhold. We ran public consultations from September 2018 to January 2019. We received around 1,800 responses across those papers, and around 1,600 responses to leasehold surveys that we undertook for enfranchisement and right to manage. Then, in 2020, on the basis of all the evidence we had, we published four reports: a report setting out options relating to valuation to reduce the price payable, and then a report on each of enfranchisement, the right to manage, and commonhold in July of that year.

Q So you started your work in 2017.

Professor Hopkins:

Yes.

Q Without going through all the work that you have just described, what is the risk if the Government adopt policies or measures such as making commonhold the default position?

Professor Hopkins:

We have to separate the two issues. Our work on commonhold was designed to provide the legal fixes needed so that commonhold can work. In our report we concluded that commonhold is the preferred alternative to leasehold. The question of whether commonhold becomes a default or whether it is mandated was not a matter on which we were asked to provide advice to the Government. You need the legal fixes to be in place, though, and then the decision must be made about what is done in order to ensure that commonhold is given a fair chance.

Q Thank you for that clarification. As a follow-up, if any Government adopted a policy on commonhold such as has been talked about sometimes, but without doing the legal fixes, what would be the risk?

Professor Hopkins:

The risk at the moment is that the legal regime that governs commonhold is too rigid. It does not apply effectively in larger, mixed-use developments, because they were not envisaged at the time. The risk is that you mandate a legal regime that does not work. You need a legal regime that works, which could then be mandated if that is what the Government chose to do.

First of all, let me thank you for the Law Commission’s work, which was extensive and hugely helpful. I am conscious that the recommendations on structural dependency rules have not been adopted by the Government in the drafting of the Bill. Even those leaseholders who are going to benefit from the uplift of 25% to 50% of the non-residential limit in the Bill may still be disqualified, because of the shared plant room in underground car parksQ and so on. Do you believe it would be preferable and helpful to introduce into the Bill at Committee stage some of the recommendations that you made on that?

Professor Hopkins:

I do not think I would like to comment on whether specific amendments or recommendations could be introduced. They would have to be seen in the light of what they would do to the scheme that is in the Bill and how the provisions interrelate. That basic uplift from 25% to 50% is significant and will enable many more leaseholders to exercise their rights. There are perhaps things around the edges, but what is there is beneficial.

Q I totally agree. It is certainly beneficial that there is the uplift from 25% to 50%. However, if one were to adopt the view that the commission take on structural dependency and those shared services, some groups would be prevented from benefiting unless we adopt the terms that you have recommended.

Professor Hopkins:

Yes, although you have to look at what impact that would have in terms of what is in the Bill as it stands.

Q Of course, commonhold is not within the scope of the Bill. Indeed, the way in which the Government framed your remit meant that your report was closely constrained in what it could say about recommending that as a tenure. Following on from what the hon. Member for Redditch said, do you think it would be helpful to move to a system where all new build flats had a share of freehold and that that was the only tenure going forward? In effect, that would give us a foretaste, and all the caveats that you outlined to the hon. Member for Redditch could gradually be put in place around that.

Professor Hopkins:

It is certainly the case that it is easier to do things with new builds than it is for existing leasehold blocks. Our report includes recommendations on the conversion of existing blocks, which is undeniably more complex than building a commonhold block from the start.

We concluded in our report that commonhold was the preferred tenure because it gives the advantages of freehold; leasehold is really performing a job it was never designed to do. When I gave evidence to the Select Committee on the Ministry of Housing, Communities and Local Government, as it then was, I said that if commonhold works, you do not need leasehold. But whether you then mandate commonhold is not just a legal question; there is a political question there.

Q Indeed. Currently, a leaseholder who has three or more flats in a development is instantly disqualified from participating in an enfranchisement claim. The Law Commission concluded that that regulation should be scrapped because it is hard to enforce and can be easily gamed by what I think you called sophisticated investors. You said that the practical effect of that 1993-era policy is to deprive leaseholders of the ability to buy out the freehold and to enfranchise. Are the proposals we are talking about ones you would be pleased to see introduced in Committee to get rid of that barrier?

Professor Hopkins:

Again, all these things are Law Commission recommendations, and I am always going to say that the Law Commission would like to see our recommendations implemented—

I am delighted; that is what I wanted you to say.

Professor Hopkins:

But I cannot say whether they are the right things or the most impactful things to add to the Bill. What is there is great and is going to be hugely beneficial. There are lots of other things in our recommendations that would benefit leaseholders—

Q Improve the lot of leaseholders, yes. At one point slightly earlier, you seemed to give the impression that we were—I think this is the polite way of saying it—polishing an excrescence in this Bill. Is that broadly your view, and should we just get on with commonhold eventually?

Professor Hopkins:

No, that is absolutely not my view. Whatever happens with commonhold, leasehold is going to be with us for a long time. There are people who own 999-year leases. The system has to work. When we published our reports, we published a summary of what they were seeking to do. We identified them as having two distinct aims. One is to make leasehold work, and work better, for those who now own the leasehold and who will own it in future. Secondly, it is to pave the way for commonhold to be available so that everyone can enjoy the benefit of freehold ownership in future. But we always saw those as two entirely legitimate aims that legislation would need to pursue.

Q One way of tackling this would surely be to enable all leaseholders ultimately to gain the benefits that freeholders, or people who have a share of the freehold, currently have, by enabling them to convert to commonhold.

Professor Hopkins:

Yes. Conversion is always going to be more difficult than building from the start. We have recommendations that would enable conversion and enable more people to convert than can at the moment, where unanimity is required, but leasehold is going to be with us for a very long time.

Well, it has been with us for a very long time, hasn’t it?

Professor Hopkins:

Yes. So the system has to work, and that is what the Bill achieves in relation to leasehold.

Can we talk a little about discount rates? I think there are two, but there may be more. There is the capitalisation rate and the deferment rate. Could you explain how, if at all, the Bill changes either of those discount rates and what the rationale for that change isQ ?

Professor Hopkins:

The Bill ensures that those rates will be prescribed by the Secretary of State. At the moment, on every enfranchisement claim—whether it is the lease extension or the purchase of the freehold—the rate used to capitalise a ground rent and to determine the price paid for the reversion has to be agreed for the individual transaction. That is a significant source of dispute, and it is a dispute where there is a real inequality of arms.

The leaseholder is only interested in what they have to pay for their home and the landlords have an eye not only to that particular property, but also to what it would mean for their portfolio of investments—so they agree a particular rate on one flat in a block, for example. The Bill ensures that those rates are fixed by the Secretary of State and mandated, so there is then no argument about what rate applies in an individual case. It takes away that whole dispute and ensures that the same rates are applied in all claims.

Q What is the merit of allowing politicians to fix the rate? Does that not that create other hazards?

Professor Hopkins:

The politician will be fixing the rate through advice that they receive.

Q Well, we do not allow politicians to set interest rates any more, because we realise that that was subject to political whimsy and error, so we gave that to the Bank of England—which of course is always right. I am just wondering, does there not seem to be some hazard here? I understand the point about trying to get the rate fixed and the imbalance in individual discussions, but why is it not in the Bill that it would be based on market conditions or prevailing rates? Why not go for something like that, which everyone can see and is transparent—you can feed it into a calculator—rather than allowing politicians to have that role?

Professor Hopkins:

In our report on valuation, we set out a number of options for reform to reduce the price payable. In relation to the fixing of rates, we identified two separate options: they could be fixed at market rate; and they could be fixed at below market rate to reduce the price leaseholders pay to a greater extent. We put the decision on how to fix the rates as a matter for the Government to consider, and now the power is given to the Secretary of State.

Q If I may, I have another question. We always do an impact assessment on Bills. This one has quite a large impact assessment, which is in the billions of pounds—£2.984 billion is the present value for costs. I looked in detail at that, and the vast majority is about a transfer of value from freeholders to leaseholders; it is not about benefits from more efficient systems. If I look at the first section, £2.8 billion is transfers and £400 million is benefits. Is there a particular reason why it is so heavily weighted to transfers?

Professor Hopkins:

The impact assessment is not a Law Commission impact assessment. We have provided technical input to the Government in preparing that assessment. I am not sure that I can give a definitive reason why so much more was in one pot than the other. It is probably because the Bill removes marriage value from the premium, which adds a significant sum to premiums now for leaseholders who have 80 years or less, so I think a lot of that sum is the saving.

Q And that was the Law Commission’s objective.

Professor Hopkins:

The terms of reference that we agreed with Government for the project in relation to premium were that we would provide options to reduce the price payable while providing sufficient compensation to landlords, recognising their legitimate property interests.

That was very helpful; thank you very much.

Mindful of the fact that we will be drawing this to a close at half-past, I call Matthew Pennycook.

May I press you a bit further on valuation? This is a phenomenally complex area to understand, and the standard valuation method in schedule 2 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.

In all your work, did you wrestle at all with the fact that there may be some leaseholders who do not benefit from a fixed rate, in the sense they could have negotiated higher and more favourable rates in certain circumstances? Is that potentially a risk? Related to that, will it be the case that the Government need to set multiple rates to account for regional variations? Is a single fixed rate going to be an issue?

Professor Hopkins:

In answer to both questions, I cannot sit here and say that every leaseholder will pay less. I can identify the fact that leaseholders with 80 years or less on their lease will pay less, because they will not pay marriage value, and that leaseholders with onerous rents will pay less, because of the cap on those taken into account.

Overall across the system, having the prescribed rates will be a considerable saving for leaseholders on the whole, because that takes out the legal and valuation costs in negotiating a rate and a price. It takes out that entire source of dispute, which will be beneficial—

Order. I apologise for interrupting you. I am afraid that brings us to the end of the time allotted for the Committee to ask you questions. I thank our witness very much on behalf of the Committee.