Judicial Review Day 2: Heat is on and the wigs come off in sweltering courtroom 76

By Liam Spender

Liam Spender is a trustee of LKP and head of real estate litigation at Velitor Law. The views expressed here are his own.

Today saw the second of four days in the freeholders’ judicial review challenge to the Leasehold and Freehold Reform Act (“LAFRA”).

Court 76 was packed again [with lawyers. Actually there was some space for public and a partially sighted leaseholder facing an enfranchisement bill sat next to me: SOK] The Court sat 30 minutes earlier to try and bring the case back on to its timetable. The air conditioning has broken down so the barristers were excused wearing their wigs. Tomorrow they will also be excused having to wear other court dress.

But the heat seemed to do little to shorten the length of their submissions.

Much of today concerned the freeholders’ argument that LAFRA is unlawful because it deprives them of market value compensation. This involved quite dry legal and technical arguments. Legal submissions were also made on behalf of the John Lyon’s Charity and the Portal Trust.

Both judges continue to make unsympathetic interventions, some continued from yesterday. Much of the afternoon passed with long periods of silence from the judges, but they did make some interventions against points made on behalf of the two charities.

The morning began with Stephen Jourdan KC (for Long Harbour) finishing his submissions on marriage value. His central point was that marriage value had been granted in both the 1967 and 1993 Leasehold Reform Acts. Many commercial transactions had been carried out on the basis that freeholders would receive marriage value. It was a deprivation of freeholders’ property to remove the requirement to pay marriage value, particularly where the freeholders’ assets were matched to long-term pension liabilities.

The judges again asked for details of how this would affect pension funds. Mr. Jourdan said he had no figures to give.

Mr. Jourdan also said that the government had misunderstood the nature of marriage value. It was not a statutory right. Rather it was something recognised by the market as arising when a lease was extended or the freehold acquired. Mr. Jourdan referred to a number of cases in which marriage value had been recognised.

Lord Justice Holgate asked why the removal of marriage value did not comply with freeholders’ human rights. He noted that by law any compensation only had to be “related to” market value. That could include compensation that was “reasonably related to” market value. Particularly where the market value in question was uncertain, as was the case here. Mr. Jourdan conceded that was correct as a general statement of the law but said it did not apply in this particular case because in this context market value had been repeatedly held by the courts to include marriage value.

Mr Justice Foxton noted that it was possible for a statutory measure of compensation to make many different types of adjustments and assumptions to reflect social policy imperatives and still be “related to” market value. Mr. Jourdan agreed that was also a general statement of the law, but not one that applied here because the government had adopted measures broader than required to achieve its aims.

Mr. Justice Foxton also suggested that marriage value was an indication of inequality between freeholders and leaseholders because of their unequal bargaining power. The leaseholder had to extend to avoid paying even higher marriage value later on.

Mr. Justice Foxton also said that freeholders who had set up business with the specific aim of commercially exploiting their rights to marriage value were not “forced sellers” in the same way as someone’s facing compulsory purchase of a house to make way for a road. Their commercial aim was to be bought out to realise the value of their statutory rights.

James Maurici KC (for Cadogan / Grosvenor) then also spoke on marriage value and the government’s impact assessment. He criticised the government for failing to consider alternatives that could have delivered the stated aims of making lease extensions cheaper and easier without infringing freeholders’ human rights.

One example was “grandfather” rights.

He said LAFRA should have allowed leases with 80 years or less to run at a particular point in time to continue under the pre-LAFRA system. He claimed that this would only exempt 8% of leases, all of which were in Prime Central London.

Mr. Maurici said that the government’s reference to marriage value being “removed” was incorrect because LAFRA allowed the leaseholder to keep all of that value without compensating the freeholder.

Mr. Maurici argued that the measures adopted in LAFRA were irrational because, according to the government’s own impact assessment, they transfer billions from freeholders for only £90 million of net societal benefit. He said it was not in dispute that about two-thirds of the benefits of LAFRA would flow to leaseholders in London. There were more buy-to-let landlords and more overseas landlords in London than elsewhere.

Mr. Maurici also argued it was unlawful for the government to require freeholders to bear all the burden of making lease extensions cheaper and easier. Given the small societal benefit no government could reasonably allow taxpayer money to be spent on a compensation scheme for the freeholders, which demonstrated that the measures were not balanced fairly.

At some length, he also criticised the figures in the government’s impact assessment, which the government admitted in April were out by more than £500 million. On Cadogan / Grosvenor’s own figures the true loss to freeholders from removing marriage value was more than £4 billion, not the £2 billion estimated by the government.

He said whether the Cadogan or government figures were used there was clearly an enormous transfer of wealth from freeholders to leaseholders without compensation being paid.

Mr. Maurici also made legal points on the Lindheim and Karibu cases, emphasising that European Court of Human Rights case law had moved on since the Duke of Westminster’s unsuccessful 1986 challenge to the 1967 Leasehold Reform Act in James. He argued that the modern case law required full market value compensation in housing cases.

Both Mr. Maurici and Mr. Jourdan also emphasised that previous legislation had been justified as a moral imperative, but LAFRA did not serve any moral imperative because it transferred value from freeholders to buy-to-let investors largely based in London or abroad.

On questioning from Lord Justice Holgate Mr Maurici conceded that there was uncertainty about how to calculate the costs and benefits of LAFRA. He also agreed that the case ultimately came down to whether the government had adopted proportional measures that balanced the interests of freeholders and leaseholders fairly. He said that the government had not done so.

Continuing a line of questioning from yesterday, Mr Justice Foxton said he doubted whether the freeholders could be compared to people subject to compulsory purchase orders. They had chosen to set up businesses to take advantage of the existence of a statutory scheme involving the payment of marriage value. They took the risk that the statutory scheme could be changed.

Mr. Jourdan then addressed the court on LAFRA removing the right of freeholders to recover their legal and professional costs on future lease extensions and enfranchisements.

He said this measure was disproportionate and unlawful because there were costs that arose exclusively as a result of the forced transfer on a lease extension and it was unfair to expect landlords to both lose their property and have to cover their own costs. He also argued that it was a common feature of sales compelled by law that the affected party had its costs paid.

He said that as the right to extend a lease had been expanded then the corresponding compensation had been increased. LAFRA broke that pattern.

Lord Justice Holgate asked how many leases were likely to be affected by the costs provision. Mr. Jourdan answered that Long Harbour had about 9% of leases with less than 80 years to run, with about 5% with 80 to 99 years to run. He said the position was similar for the ARC Time Freehold Income Fund.

Both judges also expressed doubt that in every compulsory purchase case the affected party’s costs were always paid.

Mr. Justice Foxton also noted that the current regime is one-sided in that it allows the freeholder to receive its 50% share of marriage value and other compensation before any costs, whilst the leaseholder only received its 50% share net of both side’s costs and after paying compensation to the freeholder for the extended term and loss of ground rent.

The day concluded with legal argument on behalf of John Lyon’s Charity and The Portal Trust.

Edward Fitzgerald KC spoke for the John Lyon’s Charity. He said LAFRA infringed John Lyon’s Charity’s rights because the government had made no allowance for the fact that many of the leaseholders in its 91 St. John’s Wood properties were wealthy and / or foreign. He claimed about half of them are commercial investors.

Mr Fitzgerald spoke at length about how reducing the charity’s income would affect its ability “to do good with children” and instead disproportionately benefit “affluent leaseholders”. He said the government had acted disproportionately by not giving John Lyon’s an exemption. He referred to the fact that amendments enabling this had been tabled but not put to a vote during the House of Lords debate on LAFRA.

Lord Justice Holgate noted that John Lyon’s Charity had no named beneficiaries and its class of beneficiaries were instead defined by a geographical area. It was therefore open to it to invest money in different ways to produce the income it required for its charitable purposes without investing in residential leasehold property in St. John’s Wood.

Mr Justice Foxton also said that the issue he saw with John Lyon’s argument is that they would have no issue if LAFRA had increased the cost of extending a lease, but that would also reduce their income because it would make it less likely people would extend. That would presumably also lower the value of its assets because the freeholds would be less attractive. The implication in the observation was that he thinks a change in price payable due to LAFRA is therefore not determinative of whether the measures are proportionate.

The day concluded with Martin Westgate KC speaking for the Portal Trust. Portal has about 500 properties on an estate in Hackney. The estate is currently leased to Sanctuary Housing under two leases made in 1976. Sanctuary Housing rents out the properties and currently pays a ground rent of around £400,000 a year to Portal.

The Portal Trust says that it is affected by LAFRA because Sanctuary Housing may be able to force it to extend the leases or to sell the freehold of the residential parts of the estate. This would cause the Portal Trust a loss of tens or hundreds of millions on the valuation basis in LAFRA. He said that contrary to the government’s arguments the fact Sanctuary Housing had proposed extending the leases meant that the leasehold system was not a bad thing in every case.

Both judges pressed Mr. Westgate on whether Portal really is affected given that Sanctuary Housing has not exercised its rights since the arose, when the residency requirement for claiming a lease extension was abolished in 2002. There is also doubt about whether Sancutary Housing is eligible to do so.

Mr. Westgate also began to address the “ab ante” issue of the correct legal standard to apply in determining whether LAFRA was lawful. Mr. Westgate said that Portal is not bringing an ab ante challenge because it was already affected by LAFRA on the facts of its own case.

The counsel for both charities also suggested that it was possible for the court to make declarations of incompatibility in relation to them even if they found against other freeholders involved.

Both judges were quiet for much of the two charities’ legal arguments. Their few interventions did not appear favourable but it may be that they have more sympathy for arguments for charitable causes.

Overall it was another bumpy ride for the freeholders. The interventions from both judges again indicated a reluctance to accept key aspects of their case. The main unsympathetic interventions from yesterday also continued into today. Crucially the observation that all that is happening in LAFRA is the terms of a statutory scheme are being changed for future transactions and property is not being expropriated without compensation.

The freeholders’ case is due to continue for about an hour tomorrow morning. The government will then begin presenting its case, continuing into Friday. The freeholders will then reply on Friday afternoon.

The case continues. Court sits at 10.30 tomorrow morning.