CA Reacts To Leasehold Recommendations

Earlier this month – on the 9th January – the Law Commission published its first report on the series of consultations it is holding into leasehold reform.

As you will no doubt know, leasehold reform is a major policy priority for the CA going forward, and it’s therefore important that we look closely at these reports, the solutions and options they set out for change, and give our opinion on whether these fit the brief, whether they will deliver the necessary improvements, and how they might impact on our members and, indeed, all stakeholders.

So, let’s review what this report says and what that might mean. This Law Commission Enfranchisement Report deals with calculating enfranchisement premiums and sets out options for the Government to review. We do not, however, expect a response from the Government until the final three reports from the Law Commission – on Right to Manage, Reforming Enfranchisement Regime and Commonhold – are published. We are told that this should be done shortly.

As mentioned, the report is the result of the Commission’s consultation into producing fairer premiums for enfranchisement. In effect, three options are offered:

• For leases with over 80 years left to run:
Scheme 1: Term + Reversion.
Scheme 2: Term plus Reversion plus Hope Value – hope value is the value ascribed to the position where the leasehold and freehold come into a single ownership but where the leaseholder is not in the market now but might be in the future.

• For leases with under 80 years left to run:
Scheme 3: Term plus Reversion plus Marriage Value – marriage value is the value ascribed to the position where the leasehold and freehold come into a single ownership and where the leaseholder is in the market. Scheme 3 is the basis on which the maximum valuations are completed at present but the Commission suggests that it (or any of them) could be used as a framework for other reforms to reduce premiums.

The Commission’s suggested sub-options are:
i) Prescribed rates for the term, reversion and marriage/hope value:

• a. Term – prescribed capitalisation rate.
  b. Reversion – prescribed deferment rate.
  c. Marriage/hope value – prescribed relativity (relative value of the leasehold interest compared to a freehold interest).

ii) Capping the treatment of ground rent to 0.1% in the calculation of Term. Ground rents are generally considered onerous over 0.1% of the freehold value
iii) Development value in a block or an estate enfranchisement could be removed through a restriction on future development within the enfranchisement deed.
iv) Differential pricing for different types of lease, for example, owner-occupier calculations are less than owner investors.
v) 80-year cut-off for the marriage value is retained unless removed in combination with other reforms.
vi) Simplifying the calculation of the discount applicable to the freehold value based on leaseholders’ improvements.
vii) Retaining the discount for hold-over (the leaseholder retaining occupation of the property at the end of the lease term) unless other reforms sufficiently reduce premiums to enable the  complexity of the calculation to be removed from the process.

The report recommends that once the options and sub-options are agreed then, while the valuation calculation is still complex, an online calculator could make it easy for the leaseholders and landlords to calculate the enfranchisement premium – in certain circumstances. An online calculator could only be produced if the rates were prescribed.

During the original consultation we asked why a simple ground rent multiplier valuation could not be used as our research indicated that the Scottish Long Leases Act to expand long leases to freehold had done just that.

The Commission addressed this in its report explaining that it would not work in this jurisdiction because in England and Wales our leases are often less than 125 years with rent review clauses, whereas in Scotland the ground rents were low with no rent review and the leases long.

Overall, the report is very detailed and fair in its analysis of an inherently unfair system. The calculations of premiums takes no account of the fact that the buyers of modern leases paid full value at the point of purchase and then continued to pay via their ground rent, and if they want to stop paying their ground rent or return their term to a saleable level they then have to pay again to enfranchise or extend their lease.

To include, in addition to recompense for the ground rent and the reversion, the hope or marriage value at an arbitrary 80-year point is not reflective of the benefits of technology in calculating a more realistic marriage value, low at 80 years and increasing as the term decreases. We would however still argue that marriage value, hope value and development value are not appropriate for residential leases and should only be the purview of commercial leases.

The Law Commission report seeks to redress these issues through the recommendation of prescribed rates for the term, reversion and marriage/hope value which could be adjusted to reflect Government policy. To the CA, this seems a sensible way of approaching a conundrum where the interests of the leaseholder and freeholder can never align.

If you would like to read the full report, it can be viewed here: https://www.lawcom.gov.uk/project/leasehold-enfranchisement/

Beth Rudolf is Director of Delivery at the Conveyancing Association (CA)