[2025] EWHC 2751 (Admin)

In James the ECtHR considered 80 enfranchisement transactions in Belgravia, of which 3 related to building leases and 77 to premium leases. In the case of a building lease the ground rent related to the value of the bare site and the tenant covenanted to build a house on the land at his own cost. In the case of a premium lease the tenant paid a capital sum for a house provided by the landlord and a ground rent. The premium would take into account the costs of erecting the building and a profit element. Both types of lease made the tenant liable for repairs ([12]-[13] and [27]). The valuation basis in the LRA 1967 (site value) was applied in 28 of the cases and the valuation basis in the HA 1974 (house and site value) was applied in the remaining 52 cases [27].

The court noted that a long lease is a wasting asset. At the beginning of a very long term the value of the tenant’s interest may be more or less equivalent to that of a freehold if the rent payable is nominal. But the value of the tenant’s interest diminishes as the remaining term reduces, whereas the value of the landlord’s interest, in particular the reversion value, increases towards full FVPV. At the end of the lease, the tenant’s interest ceases to exist and the buildings and land revert to the landlord with the benefits of the tenant’s maintenance and any improvements he has made, without any compensation being payable to the tenant [13].

At [40]-[41] of James the ECtHR considered an argument of the applicants that the term “public interest” in the deprivation rule in A1P1 could never apply to a compulsory transfer of property from one person to another private party:

“40.

The Court agrees with the applicants that a deprivation of property effected for no reason other than to confer a private benefit on a private party cannot be 'in the public interest'. Nonetheless, the compulsory transfer of property from one individual to another may, depending upon the circumstances, constitute a legitimate means for promoting the public interest. In this connection, even where the texts in force employ expressions like 'for the public use', no common principle can be identified in the constitutions, legislation and case law of the Contracting States that would warrant understanding the notion of public interest as outlawing compulsory transfer between private parties. The same may be said of certain other democratic countries; thus, the applicants and the Government cited in argument a judgment of the Supreme Court of the United States of America, which concerned State legislation in Hawaii compulsorily transferring title in real property from lessors to lessees in order to reduce the concentration of land ownership.

41.

Neither can it be read into the English expression 'in the public interest' that the transferred property should be put into use for the general public or that the community generally, or even a substantial proportion of it, should directly benefit from the taking. The taking of property in pursuance of a policy calculated to enhance social justice within the community can properly be described as being 'in the public interest'. In particular, the fairness of a system of law governing the contractual or property rights of private parties is a matter of public concern and therefore legislative measures intended to bring about such fairness are capable of being 'in the public interest', even if they involve the compulsory transfer of property from one individual to another.” (emphasis added)

Thus, a measure designed to ensure a more equitable distribution of economic benefits and/or burdens within a particular form of legal relationship, may justify a deprivation of private property in the public interest in accordance with A1P1. The Court stated, “[a] taking of a property affected in pursuance of legitimate social, economic or other policies, may be ‘in the public interest’ even if the community at large has no direct use or enjoyment of the property taken” ([44]-[45]).

On margin of appreciation the Court in James said this at [46]:

“… the notion of 'public interest' is necessarily extensive. In particular, as the Commission noted, the decision to enact laws expropriating property will commonly involve consideration of political, economic and social issues on which opinions within a democratic society may reasonably differ widely. The Court, finding it natural that the margin of appreciation available to the legislature in implementing social and economic policies should be a wide one, will respect the legislature's judgment as to what is 'in the public interest' unless that judgment be manifestly without reasonable foundation.”

At [47]-[49] of James the court considered the aim of the LRA 1967, to remedy economic injustice as between landlord and tenant, to be legitimate. At [47] the court stated:

“47.

The aim of the 1967 Act, as spelt out in the 1966 White Paper, was to right the injustice which was felt to be caused to occupying tenants by the operation of the long leasehold system of tenure. The Act was designed to reform the existing law, said to be 'inequitable to the leaseholder', and to give effect to what was described as the occupying tenant's 'moral entitlement' to ownership of the house.

Eliminating what are judged to be social injustices is an example of the functions of a democratic legislature. More especially, modern societies consider housing of the population to be a prime social need, the regulation of which cannot entirely be left to the play of market forces. The margin of appreciation is wide enough to cover legislation aimed at securing greater social justice in the sphere of people's homes, even where such legislation interferes with existing contractual relations between private parties and confers no direct benefit on the State or the community at large. In principle, therefore, the aim pursued by the leasehold reform legislation is a legitimate one.”

The court specifically referred to the tenant’s “moral entitlement” to the house which had formed the basis for the approach taken in the LRA 1967 (and see also [51] and [56]).

The court noted that the main criticisms of the legislation had been voiced when it was under consideration and being debated. The fact that political considerations had influenced the process did not preclude the aim of the legislation from being legitimate [48]. The injustice of the leasehold system, and the respective “moral entitlements” of tenants and landlords, were matters of judgment on which there was room for legitimate conflict of opinion. The views of the applicants were not groundless, but there was sufficient evidence to support the legislature’s view to the contrary [49].

There then followed this important passage:

“In a building lease the original tenant will have built the house, in a premium lease he will have paid an initial capital sum which typically took account of the building cost, and in both kinds of lease the tenant will have been responsible for all running repairs. This means that the long-leasehold tenant and his predecessors will over the years have invested a considerable amount of money in the house which is their home, whereas the landlord will normally have made no contribution towards its maintenance subsequent to the granting of the original lease.”

It is significant that those same economic considerations underpin the rationale for the measures under challenge in the claims before us.

In these circumstances the court decided that the UK Parliament’s belief in the existence of this social injustice was not manifestly unreasonable, or outwith the margin of appreciation [49]. However, it went on to decide that there also has to be a reasonable relationship of proportionality between the State’s aim and the means it employs. Alternatively, a fair balance has to be struck between the public interest and the requirements for protecting an individual’s property rights. The requisite balance will not exist if a party would have to bear an “individual and excessive burden” (James at [50]). The court then considered the specific arguments which had been raised on the striking of a fair balance in that case (51]-[69]).

The availability of alternative solutions does not itself render legislation unjustified. That is one factor in deciding whether the means selected are reasonable and suitable for achieving the aim and whether the balance is fair [51].

Although in James the tenant’s “moral entitlement” argument applied across the board, Parliament had not acted unreasonably in restricting the right to enfranchise in 1967 to less valuable houses, nor in extending that right in 1974 to certain more valuable houses, albeit on a different valuation basis. Those decisions fell within the State’s margin of appreciation [52].

The taking of property without any compensation can only be justifiable under the deprivation rule of A1P1 in exceptional circumstances. The terms of the compensation payable are relevant to an assessment of whether the contested legislation represents a fair balance between the various interests involved and whether or not it imposes a disproportionate burden on one group. As to the standard of compensation: the taking of property “without payment of an amount reasonably related to its value” would normally constitute a disproportionate interference which could not be justified under A1P1. But that Article does not guarantee a right to full compensation in all circumstances. Legitimate public interest objectives, such as measures for economic reform or greater social justice, may call for payment of less than full market value, that being a matter which falls within the State’s wide margin of appreciation in this domain ([54]).

The court then returned at [56] to the subject of “moral entitlement” discussed in [49]. Parliament had been entitled to take the view that from a moral perspective the building belonged to the tenant because of the capital payment by the tenant when the lease was granted and the monies spent since then on maintenance and improvements. It followed logically that the tenant should only have to compensate the landlord for that part of the property for which he had not already paid. Although the valuation basis in the LRA 1967 excluded marriage value, it did compensate the landlord for the existing investment value of his interest in the ground. Accordingly, a fair balance had been struck between the interests of the private parties concerned and thereby between the general interest of society and the landlord’s right of property.