Commonhold and Leasehold Bill [Lords]

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Mr. Cash: At the very moment when the hon. Lady said ''clear and simple'', I thought that I might invite her to consider a definition that I have come across, which seems to clarify the matter in two sentences:

    ''Marriage value arises because the value of a lease and the value of a reversion, if sold separately, is usually less than the value of the same property if sold with vacant possession. The merger of the lease and the reversion produces a boost in value known as the marriage value.''

If that is both clear and simple and in ordinary language, and if hon. Members can understand it vicariously through the hon. Lady, perhaps it is helpful for all of us.

Shona McIsaac: I think that that has made it as clear as the waters in the river Humber. Anyone who

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has seen the Humber will know that that is as clear as mud. Most people do not understand reversion, so the definition does not help. When the many elderly leaseholders in my constituency come to enfranchise, they do not understand what reversion means.

If we are going to compensate the landlord, there has to be a much simpler way of doing it than through this bizarre process. My hon. Friend the Member for Coventry, South (Mr. Cunningham) passed me a letter from one of his constituents. He came up to me looking rather worried, because one of the questions in the letter was, ''Clarify marriage value. I do not understand it.'' It also talks of insurance scams, by the way, but we shall discuss those under new clause 17. I have also had letters from the residents of Lima court in Reading about marriage value, which I have discussed with my hon. Friend the Member for Reading, West (Mr. Salter). He has taken up the issue of marriage value with Ministers previously. Like so many hon. Members, he feels that marriage value is unjust; it cannot be justified to residents.

I have had a great deal of correspondence on the matter from leaseholders from the south coast to the north-east and a great many from the north-west, which seems to be the area with the greatest number of leasehold houses. There are 2 million such properties, so we must be concerned about marriage value, which is the premium payment given to the landowner by someone who has a special interest in purchasing the freehold.

Perhaps we should consider two different types of tenant. That will demonstrate the unfairness very starkly. The first is in a leasehold house, the second in a council house. They have both lived there for a long time and according to law they are both tenants. The leasehold homeowner has paid for a mortgage and for the upkeep of the property and has improved it over the years, rewiring, replumbing, adding central heating, putting on a new roof, damp-proofing—very essential in Grimsby and Cleethorpes—and so on, all at his own expense. The council house tenant, on the other hand, might have had his home similarly improved, but by the local authority. Both categories have the right to buy and both could be subject to compulsory purchase—I have reservations about calling it that, but that is how the law describes it—yet long-term council house tenants can buy their home freehold. I appreciate that some tenants live in flats and therefore can buy only the leasehold, but in either case they buy it at a substantial discount.

The leasehold homeowner, however, has to pay a premium when purchasing the freehold and I find that disparity particularly bizarre. The freeholders receive their money on day one and may not need to be compensated; if they are to be compensated, we should find an easier way of doing it. Marriage value is not an easy concept to understand.

I seek the Committee's forbearance. I am about to do some of my notorious mathematics; I could not multiply 21,000 by 10,00 the other day, so I have carefully written out this example. I assume a purchase price of £250,000 on a house with a 99-year lease at a fixed ground rent of £75 a year. In my constituency, £25,000 is a more common price, but for the benefit of

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Committee members from the more affluent parts of the country, I am using figures that they will find more normal.

I assume that the freeholder will be entitled to 100 per cent. of the reversion in 2099. The value of £250,000 deferred 99 years at 6 per cent.—I am being particularly generous in using such a figure—is £781.025. The difference in value between a freehold and a 99-year lease on day one is no more than that, but what has the leaseholder purchased with the mortgage? The answer is that he has bought 99.687 per cent. of the freehold value of both land and buildings. If he has not bought 99.687 per cent. of those, what on earth has he paid for? The reality is that he has paid more than the freehold value; adding those previous figures together will show that on day one he paid a maximum of £250,781.

Our hypothetical leaseholder has to pay the ground rent for the next 99 years at £75 a year. Using the same 6 per cent. interest rate, the capitalised ground rent works out at £1,246.31. On day one, the leaseholder therefore has a mortgage of £250,000 and the capitalised ground rent of £1,246. That makes a total of £251,246. Comparing that total with the £250,781 that he paid on day one means that the leaseholder is paying the freeholder an excess of £465. The freeholder has realised more than 100 per cent. of the value of the property on day one, expends not one penny more on the property and can look forward at the end of the 99 years to claiming back 100 per cent. of the price. That is completely bizarre.

It is more likely that, after 70 years, the leaseholder will purchase the freehold and pay 50 per cent. of the so-called marriage value—that is, the difference between the leasehold value with 29 unexpired years and the value of the freehold. It could be argued that the freeholder is entitled to no more than the capitalised value of the ground rent for 29 years. That would be a much more reasonable way of compensating him.

Mr. Cash: I find that interesting. Was that question set by Edexcel?

Shona McIsaac: I do not understand the question, so I shall not answer it.

The freeholder is having two bites of the cherry and can come back after 99 years and dig up the whole tree. We used the analogy of cars earlier; perhaps in this case we should use the analogy of a chemist. It would be absurd for a chemist to charge an ill person a premium for a drug because they have more interest in buying it than a fit and healthy person. The special valuation basis and marriage value could contravene human rights legislation. I would like the Minister to comment on that.

If the Government are not going to abolish marriage value—I know, deep in my heart, that they will not—we could examine ways of calculating the amount so that some allowance is made for the leaseholder's long-term maintenance costs. The costs born by the leaseholder are usually far in excess of the costs of any improvements made by the freeholder. An allowance is made for that in the calculation of marriage value and it is always in excess of what the

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leaseholder has done. We should consider introducing some sort of deduction from the marriage value of the value of the enfranchising tenant's improvements to the property.

That proposal is linked to the amendments that I tabled earlier, which required freeholders to detail the purchase price. If they quote a marriage value figure, the enfranchising homeowner could try to bargain by deducting an amount for the improvements that he has made.

I know that the Minister will not accept the abolition of marriage value, but I hope that she understands that there are deep concerns about the issue. Many hon. Members find it disquieting that marriage value has remained in the Bill. I hope that we can deal with the matter again on Report.

Ms Keeble: We have discussed marriage values several times, so I will not rehearse all the arguments but I will go over some of them. It is clearly one of the contentious issues in the Bill and it is a major issue for the leasehold reform campaign groups. Throughout the passage of the Bill, the Government have kept to certain principles and conventions. We have recognised the property rights on both sides of the equation of both the freeholder and the leaseholder, although some people would say that the freeholder should not have any rights. If we did not recognise their rights, we might run into difficulties with the Human Rights Act 1998. My hon. Friend the Member for Cleethorpes (Shona McIsaac) must recognise that that Act cuts both ways.

Andrew Selous (South-West Bedfordshire): I am interested in how the Minister feels what she has just said about the Human Rights Act fits in with recent events in Scotland, where large landowner's rights are being altered by the Scottish Parliament. If those measures are deemed to be in line with the Act, which I assume they must be, I question the Minister's remark that varying freeholders' rights in this case would contravene the Act. Will she comment on that?

Ms Keeble: I will not comment on something that is being considered by a separate regime in Scotland. I have difficulties with some English legislation. The Scottish system, including provisions on home tenures, is substantially different and I do not want to stray on to that.

Mr. Cash: Under the Scotland Act 1998, if the Secretary of State believes that a provision is ultra vires, he can sort the matter out on his own account. An avenue is open, but I do not think that we should pursue the matter too far.

3.15 pm

Ms Keeble: No. I would not want to stray into the territory of the Secretary of State for Scotland. We have recognised the property rights of both sides of the equation and I have argued consistently in that respect throughout our proceedings.

The second principle that we have sought to maintain in the Bill, as part of preventing some the abuses that have arisen around freehold, is that of

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preventing one side from realising a windfall profit. Some hon. Members have made the case that we should not let the freeholder realise windfall profits, but an equal case can be made that the leaseholder should not be allowed to do so either.

There has been much discussion of the nature of marriage value and the nature of the sale of the freehold. We have used the term compulsory purchase, which has been contested. The nature of the transaction is most particular, because it is where the two different and legitimate interests in the property are united. In that sense, it is different from some other transactions. In examining how the matter should be handled, we have rationalised and improved the system. I do not want to deal in great detail with the changes that we have made, but I will run through some of our proposals to simplify the valuation basis, since hon. Members are right to say that the Government do not intend to abolish marriage values.

The provisions of the Leasehold Reform, Housing and Urban Development Act 1993 were defective in two ways. They provided that the freeholder's share could never be less than 50 per cent., and could be higher. That was unfair, because it was possible for the freeholder but not for the leaseholder to argue for a higher share. It also led to arguments between the parties, which could be protracted and expensive, about how big the shares should be. The provisions encouraged the parties into further arguments about the amount of marriage value, even when it was obvious that there would not be any.

In practice, in all but a few highly unusual cases, LVT decisions split marriage value equally between the parties, although that has not prevented landlords from arguing for a larger share. We have therefore maintained that marriage value should be split 50:50 in all cases. The clauses that we have already discussed have made such provisions for collective enfranchisement, lease renewals and enfranchisement of leasehold houses.

We have also, as hon. Members know, made provision for a cut-off at the 80-year point. We have heard different views on the principle of the cut-off and the point at which it should be set. Our objective has been to prevent costly arguments that are disproportionate to the sums at issue. We accept that LVTs have sometimes awarded an element of marriage value where the unexpired period of the lease is 90 years or more. That would normally be a relatively small sum and is in addition to the other aspects that we must consider.

A number of representations have been made to us by professionals with long experience in the field to that effect that before the 1993 Act came into force, flats with very long leases did not command an appreciably higher price than those with unexpired leases of 80 years. That shows that, at that time, leaseholders placed no additional value on the ability to obtain a new, longer lease.

A key principle of the 1993 Act was that valuations for collective enfranchisement and lease renewals should be made on the assumption that the Act did not exist. In practice, the Act's operation has distorted

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the market, so that transactions have taken place including an element of marriage value when the unexpired period of the existing lease exceeded 80 years.

That effect has been assisted by the fact that some experienced and well resourced landlords, especially on the great London estates, have brought to bear on the transactions the best professional advice that money can buy, often leaving the leaseholder somewhat outgunned. Our proposals, which we have discussed and debated at some length, would restore the original objectives of a provision under the 1993 Act to the valuation process.

I should specifically respond to the suggestion made by my hon. Friend the Member for Cleethorpes—and perhaps the hon. Member for Torbay (Mr. Sanders)—that people would not agree to buy a car on such a basis. My hon. Friend mentioned council houses and suchlike. The dispute centres, as it has in several of our debates, on the nature of what leaseholders buy when they first purchase their leases. They buy not the freehold, but a long lease, and when they sell, they sell a long lease. For some people, that is not an attractive option; they simply will not buy a leasehold property. In providing commonhold, we have clearly provided a far preferable form of tenure for flats; we have also made arrangements to give people the right to manage.

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