The final act of the Conservative government before parliament was dissolved earlier this year was to bring the Leasehold and Freehold Reform Act 2024 into law on 24 May. The 2024 Act included broadly welcomed provisions to address poor practice by some residential landlords, along with amendments to the Building Safety Act 2022. However, it also included sweeping changes to the established system of residential leasehold ownership in England and Wales, including to the basis and process for making leasehold enfranchisement claims and the calculation of the premiums payable for lease extensions and acquisition of freeholds.
These changes will not come into effect until the new government passes secondary legislation, but the consequences are already being felt by freeholders, as leaseholders either hold off making claims or seek to negotiate reductions to existing claims.
Marriage value
Under the current law, if a leaseholder chooses to buy their freehold or extend their lease, they will pay their freeholder compensation for the loss of value from being deprived of their freehold (in the case of enfranchisement) or having their reversionary interest in the property deferred (in the case of lease extensions). The premium for a lease extension and price for a freehold acquisition include (among other elements) the value of the right to receive the ground rent that would otherwise have been payable by the leaseholder and (where the existing lease is less than 80 years) 50% of the “marriage value”.
Marriage value is the additional value that the interest in land gains when the freeholder’s and leaseholder’s interests are “married” into single ownership that is split 50:50 between them. The 2024 Act provides for an assumption (in most cases) that the ground rent is capped at 0.1% of the market value of the premises (thus reducing the amount payable to the landlord where the actual rent is higher) and removes the leaseholder’s obligation to pay any marriage value.
The background to the Act
The Act was rushed through despite many years of consideration, consultation and debate on the topic of leasehold reform, the current cycle of which commenced with the previous government’s reference to the Law Commission in 2017. The terms of reference that were included in the Law Commission’s 2018 public consultation required it to look at making the process of enfranchisement easier, quicker and more cost effective and to “examine the options to reduce the premium… payable by… leaseholders… whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests”.
There was an overwhelming response to the consultation from freeholders, including private landowners but also charities and the public sector, all of which articulated the substantial loss of value that could arise if some of the proposals were implemented. The charities included detailed evidence of the devastating consequences that loss would have on their ability to carry out their charitable activities.
The Law Commission published its report in early 2020, including three proposals to change the valuation basis (with and without marriage value) and identified that the law of human rights was highly relevant to the potential changes.
The following year, proposals for reform that included a rent cap and the abolition of a leaseholder’s obligation to pay the freeholder’s share of marriage value were put forward.
The draft Bill was accompanied by an impact assessment setting out the government’s own calculation of the cost to freeholders. This showed they would lose £3.5bn over a 10-year period, including £1.9bn from the abolition of marriage value alone. It found that 65% of the transfer of marriage value would be in London and the South East and 37% to leaseholders who rented out their properties on a commercial basis.
Further evidence was put forward by stakeholders of the consequences of the proposals in the government’s call for evidence in January 2024 and was articulated in both houses (most notably in the House of Lords) as the Bill ran its truncated course through parliament. Despite this, the rent cap and abolition of marriage value were included in the legislation.
The Act under challenge
Seven affected parties have made applications for judicial review of various elements of the 2024 Act, including the rent cap and abolition of marriage value, claiming that they do not comply with the requirements of Article 1 of the First Protocol of the European Convention on Human Rights. They include two charity claimants which risk seeing value that was previously available for philanthropy transferred to leaseholders, including wealthy Londoners and commercial landlords.
The claims were commenced at the beginning of July this year, but the government has not yet responded in detail. Instead, it agreed a stay of four of the claims arguing that, until the secondary legislation required to implement the relevant provisions of the 2024 Act is in place, we will not know the full picture.
The other three claimants (including the charities) did not agree to the stay. They maintain that the secondary legislation cannot make the primary provisions of the 2024 Act compatible with A1P1, and that waiting until the Act is in force would make unravelling it more difficult. They say they are already suffering significant harm which is open-ended because the government will not commit to any timetable to bring in the secondary legislation.
The government sought to impose a stay on these claimants against their will, but this has now been rejected by the High Court. The court lifted the stay on the other four claims and all seven will now proceed together to a permission hearing that will decide whether full claims for judicial review should proceed.
If it wanted to, the government could require parliament to revisit the 2024 Act at any time to address the issues that have been raised in these claims. If it does not, and the challenges are successful, the court would make a declaration that the Act is incompatible with A1P1, which would to all intents and purposes compel the government to do so.
Jason Tann is a partner at Howard Kennedy, which has been instructed to act for John Lyon’s Charity
