Mark Chick is Partner and Head of the Landlord & Tenant team at law firm Bishop & Sewell, and a Director of ALEP, the Association of Leasehold Enfranchisement Practitioners
Following the ministerial statement by Matthew Pennycook on Thursday 21 November, we now have more of an idea of the timelines for the implementation of the Leasehold and Freehold Reform Act (‘LFRA’), the need for secondary legislation and the Government’s plans for further consultations. We also know that the Government is committed to “finally bring[ing] the feudal leasehold system to an end” and making commonhold a viable alternative. The fact that leasehold is not strictly ‘feudal’ in its origins seems to have passed most commentators by.
It is also perhaps no surprise that the ministerial statement doesn’t mention the Human Rights issues that have been raised in relation to LFRA, and the legal challenges that have been lodged against the 2024 Act on the basis that the Act is incompatible with the right to ‘peaceful enjoyment’ of property under the Human Rights Act 1988. In total, seven freeholders have commenced legal proceedings to try to sue the Government through the High Court to stop, or delay, the changes taking effect.
On 17th October, the High Court ruled that it would allow the applications brought by a number of freeholders (The John Lyons Charity, The Portal Trust, Wallace Group, Annington Homes, the ARC Time Freehold Income Fund, Long Harbour, and Cadogan Estates) to proceed to a hearing in January 2025, which will determine whether the claimants should have permission to apply for judicial review.
Whilst the full details of each of these cases are not yet in the public domain, we do know that they are concerned with the impact of the valuation reforms, including the proposal to remove marriage value from the calculation, as well as the changes to the valuation methodology and the removal of the ability of the landlord to recover its costs. The claimants say that even though the provisions of LFRA are not yet in force, they are already having an adverse impact on the value of their interests.
The relation between the Human Rights Act and property rights is set out in Protocol 1, Article 1 of the European Convention on Human Rights, this provides that: “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 and subject to the conditions provided for by law and by the general principles of international law.”
These principles are enshrined in UK law by the Human Rights Act 1988. As such, the challenge for the Government in bringing into force legislation like this is to strike a fair balance between the interests of the two sets of property owners. Ultimately, the extent to which the state can intervene to change the value of one party’s assets or to regulate the use of them is only likely to be legitimate where this sits appropriately with the wider interests of society as a whole. In other words, it is acceptable in certain cases for the state to intervene to regulate and control the use of private property rights where this strikes the right balance between the rights of the parties involved.
The question of whether this balance has been correctly struck will depend on the extent to which the legislation seeks to ‘control the use’ of these property assets (freeholds) balanced with a consideration of whether these measures go so far as to ‘deprive’ the owner of the use of them altogether.
It is certainly clear that LFRA seeks to ‘shift the dial’ considerably from freeholders to leaseholders, and indeed gives force to the stated aim to make enfranchisement ‘cheaper and easier.’ The Act itself contains a declaration of compatibility with the Human Rights Act and the Law Commission considered this aspect when setting out the options for reform in this area, obtaining an opinion on this aspect in its report stage, but even this said that the matter was ‘finely balanced’ and as the Law Commission acknowledged, these are ultimately political choices.
Ultimately, the outcome will depend on whether the Government can show that the interference with property rights is justifiable – if not then the Court may rule that the freeholders have a viable case to proceed to judicial review.
The Residential Freehold Association has previously said plans to cap ground rent and regulate ground rent could leave the Government open to compensation claims in the region of £30 billion. There is nothing about ground rent and the control of this in LFRA and this is something that Matthew Pennycook promises will be something to be looked at in the new Leasehold and Commonhold Reform Bill that the Government proposes. However, the potential scope for compensation to be payable if the legislation’s changes are too extreme once implemented must be in the back of the Government’s (and particularly the Treasury’s) mind.
This may well be another reason (aside from the complexity of the legislation itself and the recognised errors requiring primary legislation to fix) that the Ministerial Statement indicates that the earliest changes will begin to happen on the valuation side of things is in the summer of 2025. This is when the Government plans to consult on the proposed capitalisation and deferment rates as the first part of ‘fixing the act’s serious flaws’ before approving secondary legislation. Reading between the lines, all of this indicates a much longer timescale for valuation reform, maybe a further year or two from the initial review next summer.
Whilst we don’t know all the details, it is highly likely that these challenges, the need to consult and also to make changes to LFRA with primary legislation will considerably delay the implementation of the valuation provisions in the 2024 Act. We will know more about the Human Rights side of things in January when the next hearing in these cases takes place.
If you have a query concerning leasehold property, then please contact Bishop & Sewell’s expert Landlord & Tenant team by emailing [email protected] or call on +44(0)20 7631 4141.
The above is accurate as of 25 November 2024. The information above may be subject to change. The content of this note should not be considered legal advice, and each matter should be considered on a case-by-case basis.
