Leasehold and Freehold Reform Bill

Written evidence submitted by Grosvenor (LFRB34)

A. SUMMARY

1. Grosvenor is supportive of many of the Government’s reform s to date, including the extension of leaseholds up to 990 years and actions to increase fairness in service charges and ground rents.

2. More broadly we understand and accept the policy trajectory of leasehold reform and welcome opportunities to simplify a complex part of the housing market.

3. The Bill does however propose measures in two specific areas , the practical and policy impact consequences of which the committee should explore in more detail . These relate to the treatment of Marriage Value and increased enfranchisement eligibility of mixed-use buildings , specifically :

a) The significant and unconscionable one-off windfall that would predominantly benefit investors ( not homeowners ) created by the "abolition" of Marriage Value.

b) How raising the non-residential limit on collective enfranchisement will exacerbate the fragmentation of some of the country’s most successful high streets , and deter long term private investment in the regeneration of places, buildings, public realm and the wider community by property companies that own and actively manage contiguous portfolios .

c) The management implications of mixed-use buildings being collectively enfranchised by absentee investors rather than genuine owner occupiers.

d) How mixed-use heritage buildings and streetscapes may be impacted by the increase of the non-residential limit for collective enfranchisement.

4. Amendment – We suggest removing clause 1 from the Bill. This clause represents a substantial shift in the type of mixed-use building that will retrospectively be captured by collective enfranchisement. It will reduce the willingness of property owners to invest in existing buildings and lead to developers including less residential in new buildings to avoid the risk that these buildings will be enfranchised. Furthermore, it will detract from the valuable stewardship of places which is dependent on the contiguous ownership of property.

The move to a 50% threshold also never formed part of the Law Commission’s recommendations and was retrospectively introduced.

5. Amendment We suggest removing clauses 9-11, plus Schedule 2 from the Bill. "Abolishing" Marriage Value would not in fact "abolish" it, but in reality would constitute an unconscionable one-off transfer of wealth to largely professional investors which does not improve genuine home ownership in any way. Research by Quod Economics shows that 80% of the total marriage value transfer would occur in London and the southeast, where 60% of leaseholders are investors and not genuine owner occupiers. This will also only serve to widen geographical inequalities.

6. Amendment – We suggest including an amendment to exempt mixed - use listed buildings and properties in conservation areas from collective enfranchisement. Extending the non-residential limit to buildings where 50% of the building is in commercial use will increase the likelihood that streetscapes of unique national importance, where the historic environment is secured through long-term single ownership and stewardship, are fractured and deteriorate, resulting in the loss of historic character and the wider benefits these areas bring to society.

7. Amendment – We would suggest removing clause 6 plus schedule 9 from the Bill. Leasebacks should be voluntary not mandatory. Leaseholders collectively enfranchising should not be able to cherry-pick which parts of the building they want to compulsorily acquire from the freeholder simply to make the process cheaper. Any person, individual or corporate, should have the option to exit when their property rights (and associated liabilities) are being changed and diminished so fundamentally.

B. AMMENDMENTS THAT MAY BE MADE TO THE BILL

8. Regulating Property Managers – We would support an amendment which implemented the recommendations of Lord Best’s Review to regulate property managers.

9. Forfeiture – We would support amendments that curtailed forfeiture, so long as they were in keeping with the Law Commission’s work to provide alternative means for landlords to enforce covenants on behalf of themselves and other leaseholders.

10. Abolishing leasehold for flats – We cannot support abolishing leasehold for flats, as there is no workable alternative at present. Parliament should proceed cautiously given the impact this could have on the new flats market, and existing leaseholders.

C. MEASURES WE SUPPORT IN THE BILL

11. Part 3 of the Bill contains a number of consumer-focused measures that we support.

Abolishing the residence test for collective enfranchisement – clause 1

12. Removing the requirement that a leaseholder must have owned the lease for at least two years before qualifying to buy their freehold or extend their lease is a welcome move. Due to delays and issues with registering ownership, proving the length of ownership for enfranchisement can be a needlessly litigious process, resulting in unnecessary costs for both leaseholders and freeholders.

Insurance and service charges – clauses 26-33.

13. These are all reforms that seek to improve transparency and many of which have our long-standing support.

Litigation costs – clauses 34 and 35.

14. We support these clauses and agree that the default position should not be that a landlord can recover their litigation costs via the service charge, but that the Tribunal should be able to award costs accordingly.

D. OUR INTERESTS IN THE BILL

15. Grosvenor is one of a number of property companies who have longstanding large-scale ownership of property in London and other regions in the UK.

16. In London, this portfolio encompasses holdings in Mayfair and Belgravia, whilst in Liverpool Grosvenor part owns and manages the 42-acre Liverpool ONE retail and entertainment destination, which opened in 2008.

17. The nature of Grosvenor’s portfolio in London has evolved over years, with active management ensuring we create places that meet the needs of a transforming city and population over time.

18. Operating at scale as a private company enables us to act in the long-term interest of a broader range of outcomes rather than a purely short-term commercial gain. This includes long-term investment in mixed, vibrant communities and positive social and environmental outcomes, as set out below.

19. Environmental performance: Across London, a £90m retrofit programme is underway to improve the energy efficiency of our buildings. As of the end of 2023, over 1 million sq. ft of residential and commercial space has been retrofitted. Activity at this scale is only possible because those homes and commercial units are in single ownership.

20. Public Realm: In addition to our £1.3bn West End development pipeline, we invest in public spaces to support the area’s success and attractiveness. This includes the £25m privately funded transformation of Grosvenor Square for the benefit of the West End’s communities.

21. Social benefits: Across Mayfair and Belgravia, Grosvenor supports almost 700 affordable homes (a larger portfolio than our market rented housing). Last year, the future of 486 affordable homes was secured through a new 150-year lease between Grosvenor and Peabody. The extension of the leases on these properties until 2171 is a significant voluntary investment in affordable housing.

22. Social benefits: As a private business with an interest in the long-term success of the places we manage, Grosvenor was one of few property companies to step in during the COVID-19 to support our occupiers, ensuring they would be able to continue trade. This £41m of support included waiving rent and other forms of financial support.

E. SPECIFIC MEASURES AND AMENDMENTS

Raising the non-residential limit for collective enfranchisement

23. Increasing the non-residential threshold for mixed-use collective claims to 50% (from 25%) never formed part of the Law Commission’s initial recommendations and has been introduced retrospectively.

24. The committee should explore the practical impact and unintended consequences of the G overnment’s proposals to increase the non-residential limit for collective enfranchisement from 25% to 50% (the " 50% rule " ) which will:

a) Lead to more fragmented ownership of the high street, including those of national importance and heritage value that have been successfully managed in single ownership for decades.

b) Undermine the cohesive management of mixed-use properties and disincentivise property owners with contiguous property portfolios from investment in placemaking and public realm.

c) Discourage property developers who look to retain their assets in the long-term from investing in new mixed-use buildings.

d) Incentivise developers to , rationally, ensure residential comprises less than 50% of any new mixed-use building, reducing the supply of new homes. Grosvenor has already been compelled to modif y its plans and reduce the proportion of residential within a project due to the potential impact of this proposal.

25. The long-term management of a place is not a static endeavour, it is a dynamic, continually evolving exercise that brings together a combination of planning, development, real-estate strategy, letting, maintenance and curation of the public realm.

26. As the regulatory requirements for managing mixed-use buildings have grown – from building safety to decarbonisation – the technical understanding and investment needed to ensure compliance has increased. Property companies who manage buildings across one geographical area can act at scale and bring decades of experience and institutional knowledge of the buildings themselves. As an example, Grosvenor is currently undertaking one of the country’s largest retrofit programmes. To date, this work has improved the energy efficiency of 1 million sq. ft of space. The fragmentation of property interests would result in sporadic interventions at best, and in some cases result in complex buildings being managed by those without the necessary knowledge or experience.

27. Contiguous ownership allows for change to happen at scale as can be seen by recent successful regeneration projects including Grosvenor at Liverpool ONE, The Crown Estate’s work to revitalise Regent’s Street, Argent Related at Kings Cross, and British Land at Canada Water.

28. When, in the case of Grosvenor and others, this is coupled with patient private capital, this has enabled property companies to devise and deliver new master planned neighbourhoods and ensure the effective long-term management of those places.

29. Long-term stewardship of place is predicated on more than asset values. It encompasses broader concerns including the long-term vibrancy of an area, the mix of market and affordable housing, rent setting to encourage a range of businesses and enterprises to be based and thrive long-term in an area.

30. The erosion of the interests of contiguous property interests through enfranchisement has in many cases negatively impacted on the adaptability of these areas and led to a noticeable shift in the acquisition of property as an investment rather than as a home. This is borne out by the high proportion of leasehold flats (60%) in Prime Central London that are owned by investors.

31. In the heritage sector, leases can help provide protection for buildings either for themselves or as an integral part of the landscape, and can be an effective way of ensuring that whole streets or neighbourhoods retain their historical character. This is in no small part because obligations under leases can be enforced more easily than those between freehold owners.

Marriage Value

32. The Government is not ‘abolishing’ marriage value, as is often described. It is simply expropriating the freeholders’ interests in that value and allocating it as a one-off windfall to the leaseholder, who may not be a genuine homeowner.

33. Put simply, marriage value occurs when two separate assets, the freehold asset and leasehold asset, are brought together or "married" to become one single asset. By doing this, value is created. This is currently shared 50:50 between the leaseholder and the freeholder. What the Government is therefore doing is changing the law so that 100% of the marriage value goes to the leaseholder – this is not ‘market value’ as it is frequently described. As a reminder, marriage value only applies when a lease is under 80 years, which puts in place an appropriate parameter for this value recognition.

34. The Government’s proposals will largely fail to support leaseholders who live in their homes. Our commissioned evidence from experts points to the fact that "abolishing" marriage value would constitute a significant one-off transfer of wealth predominantly to buy-to-let and – very significantly – overseas investors based in London and the southeast. We have shared this information with the Government.

35. Data shows that the proportion of leasehold properties which are rented privately varies across the country and is never less than 40% and sometimes over 80%.

36. In central London it exceeds 60%. However, this is not unique to London. In Manchester (69,000 leasehold flats, 76% rental), Liverpool (37,000 leasehold flats, 82% rental) and Leeds (37,000 leasehold flats, 72% rental).

37. Therefore, the main beneficiaries of this one-off transfer of wealth will not be owner occupiers, but investors.

38. In addition, the "abolition" of marriage value will bring the greatest financial benefits to London and the southeast (many of these are offshore leasehold investors, and not genuine homeowners), undermining the Government’s aim to level up the least prosperous parts of the country.

39. 80% of total value transfer as a result of the "abolition" of marriage value would be in London and the southeast, already by some way, the wealthiest parts of the country.

40. Moreover, the wealth transfer would particularly be concentrated in just three London boroughs (Camden, Westminster and Kensington and Chelsea).

41. These boroughs are also home to some of the highest rates of foreign home ownership (Westminster the highest rate, Camden and Kensington and Chelsea in the top six boroughs) and as such the wealth transfer is likely to benefit non-UK based landlords or investors disproportionately.

Mandatory Leasebacks

42. Compulsory leasebacks of ad hoc spaces ( including not just flats but spaces such as ce llars, storage or oddly figured commercial spaces , particularly i n older and heritage buildings ) will create overly complex ownership structures and confused management responsibilities.

43. The proposal is that, in order to make enfranchisement "cheaper", a nominee purchaser will be able to require a freeholder to take leasebacks on (i) any flat that is not participating in the claim and (ii) any commercial unit irrespective of whether or not a freeholder wishes to retain an interest in a building (over which they will no longer be able to exercise any control), they will be obliged to do so.

44. It is perfectly possible that, following a collective enfranchisement, the previous freeholder may find themselves in the position, in consequence of the grant of leasebacks, of still retaining the greater value in the building. Nevertheless, management of the building will have passed to the leaseholders and that former landlord will no longer have any management control over it.

45. Furthermore, there is no recognition in the Bill that this could result in the former freeholder being obliged to take a leaseback of ancillary parts of a building, for example a small office suite only accessible through the common parts, pavement vaults, boiler rooms, ancillary storage etc, that would have no obvious value but would require management and costs to operate.

46. Replacing a freehold interest with a long lease over certain commercial areas removes development rights, and in the case of non-residential elements being part of the mandatory leaseback, this will create much more complex title structures, the very opposite of the Government’s ambitions to make leasehold ownership simpler and more transparent.

47. Currently, if the claimant tenants acquire the freehold, they take the freehold of the whole building and become the direct landlord of the occupational tenants. In effect the title structure is preserved, but the claimant’s company take the role as freeholder.

48. If, instead the previous freeholder is forced to take leasebacks of some of the flats, a new property title layer is created for those flats. The claimant’s nominee company is the direct landlord of the occupational tenants of those who participated in the claim, but when it comes to the non-participant flats, the old freeholder is the head-leaseholder, with an intermediate interest between the new freeholder and the occupational tenants of those flats.

49. This has the potential to create multiple management issues. Imagine trying to work through the ownership, governance, and safe maintenance of a busy mixed-use building.

50. As an example, half a building is commercial, with a licensed restaurant with associated fire safety/ventilation needs, or an office needing safe access for 24-hour shift workers and or a medical centre dealing with medical waste, with six residential flats above – two of which are now leased back to the former freeholder and the rest now owned by a couple of non-resident investment companies and a couple of individuals.

51. It is unclear how these residential owners without the freehold of the entire building realistically ensure its optimal and safe operation, with its diverse operational, regulatory and compliance requirements – let alone care about a commercially-attractive set-up and placemaking.

January 2024

 

Prepared 17th January 2024