The streets and squares that dominate the parts of West London surrounding Hyde Park were determined by profit, not public policy. Some of the most valuable property in the world was built by developers like Thomas Cubitt and James Burton on land which is still owned by freeholders like the Crown Estate or the Cadogan or Grosvenor families; those occupying many of the houses and flats on these Great Estates are often either short-term tenants or possess long-term leaseholds without the underlying freehold.
The core distinction between the Great Estates and other freeholders – those who own the land underlying leasehold properties and retain rights over leaseholders – is their concentrated geographic ownership. Residents of the Great Estates are a very small portion of the many residential leaseholders in the UK, but they benefit from the system in ways that others may not.
This is not just some outdated feudal relic, this system has had long term benefits, as I explored in a publication out last year. While I focus on the historic development of the estates, they continue to exercise good management to this day and are a bizarre target for leasehold reform.
The concentrated ownership allows the estates to have more control and capture the spillover effects resulting from their decisions. This allows and incentivises neighbourhood stewardship in ways that more disparate ownership does not.
When one owns the surrounding properties, incentives are aligned to prevent actions on a property that may reduce the value of surrounding ones.
More importantly, unified land ownership means that a landlord can capture the positive benefits of neighbourhood stewardship like providing amenities and pricing commercial rents fairly for shops that bring buzz to the neighbourhood and traffic to the surrounding businesses.
A small coffee shop or organic butcher may not offer the most competitive rate for a storefront, but flats and shops surrounding them may be leased for enough in aggregate to make this a reasonable choice for landlord. It can make sense to attract flagship shops like Waitrose for the same reason. Similar policies are used in shopping centres with unified ownership, but the Great Estates are unique in doing this at the neighbourhood level.
The benefits of unified ownership can be seen in the difference between Regent Street (owned by the Crown Estate) and Oxford Street (split among many freeholders). It can also be seen in the revitalisation of the Howard de Walden estate’s Marylebone High Street and Lamb’s Conduit Street (split between the Rugby and Bedford Charity Estate) among others.
The estates have also created new commercial areas like the Cadogan estate’s Duke of York Square and mixed use densifications like the Grosvenor estate’s Cundy Street Quarter in Belgravia. Some may accuse the landowners of simply passively accruing riches which flow from their holdings, the truth of the matter is that the estates have had increasingly active professional management.
Concentrated ownership incentivises neighbourhood stewardship and prevents races to the bottom – proposed leasehold reform threatens to undermine this. In cases where they have been able to achieve permissions, their stewardship has entailed making serious investments in redevelopment (without some of the difficulties of land assembly), and what urbanists call placemaking.
The leasehold system has been the subject of populist criticism and political action for years. Starting in 1967, qualified leaseholders have had the right to purchase their freehold and extend their leases. The Duke of Westminster’s Grosvenor estate challenged these provisions all the way up to the European Court of Human Rights (and lost). Additional leasehold reforms are likely to stand up to challenges, but that doesn’t mean they are advisable. There is little reason to undermine neighbourhood stewardship in the places that are managed best.
The proposed reforms seek to make it easier for long-term leaseholders to enfranchise – that is the compulsory purchase of the freehold associated with their property. Just as under current rules, the freeholder must be compensated for their loss of value, but if the leaseholder qualifies, they cannot stop it.
The procedures by which this value is calculated have unsurprisingly been the focus of much debate and legal action. The value of the freehold at the time of the enfranchisement varies considerably depending on the length of time before the end of the lease (when the property would return to the control of the freeholder, or the leaseholder would have to pay for an extension).
One feature of the calculation that would be altered by the reform is the consideration of the so-called ‘marriage value’. In this case, the fact that enfranchisement is complicated by the right of existing leaseholders to renew their lease (and thereby lower the present value of the freehold) prior to enfranchisement. Existing legislation requires leaseholders and freeholders to split the value of the difference between the value absent extension and the new, lower value after the extension.
Advocates for leaseholders have long wanted to change these rules. In fact, the Law Commission was tasked with finding ways to encourage more and cheaper leasehold conversion. Following these recommendations, the current draft of the Leasehold and Freehold Reform Bill abolishes marriage value considerations. This lowers the cost to leaseholders at the expense of freeholders.
More than just encouraging more enfranchisement by making it cheaper for leaseholders, the current bill also expands the eligibility, most notably for collective enfranchisement of a block of flats. It does this by raising the maximum level of non-residential property (e.g. offices or shops) in a building (from 25% to 50%) to be eligible for enfranchisement. This further threatens the continued neighbourhood stewardship practiced by the estates.
Past leasehold extension and enfranchisement has chipped away at the geographic integrity of the estates, but lawmakers have realised the benefits of the leasehold system as practiced by the Great Estates and allowed various exemptions and special policies. The 1967 legislation limited enfranchisement to leaseholders of houses (not flats) and only applied to those below a rateable value which many in Inner London exceeded. Furthermore, Estate Management Schemes enacted before 1993 continue to limit actions of owners of enfranchised property.
While much of the appeal of leasehold reform is based on examples of abuse and the logic of redistribution generally, this becomes less clear on the London estates. The estates are well managed, and leaseholders are often quite wealthy with the leased property often just one of a number within their portfolio. This again is nothing new. Even with the rules limiting enfranchisement to houses under a rateable limit, Nigel Hague KC writes in his text on the topic of enfranchisement:
‘Although the 1967 Act was passed primarily to meet the anxieties of ordinary householders in South Wales and other areas where the long leasehold system was widespread, it is notorious that the persons who in fact derived most benefit from the 1967 Act were relatively wealthy purchasers of short residues of long tenancies of houses in Belgravia, Chelsea, Kensington, Westminster and similar expensive areas of London, just under the £400 Greater London rateable value limit.’
It would be wise for leasehold reform to recognise the distinctive role of the Great Estates in London by limiting legislation impacting them as it has done historically. One easy way to limit the effect of the broader leasehold reforms on the Great Estates would be to introduce a clause that ensure the rules designed to make leasehold enfranchisement easier and cheaper actually target residential leaseholders.
For instance, rules targeting flats that are places of residence rather than just additional properties. This type of rule would have a very little impact on most leasehold properties but would help ensure that the Inner London estates can steward the kinds of places where the wealthy are willing to buy an expensive leasehold pied-a-terre and the rest of us love to visit.
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