The Law Commission has published a report setting out options for reducing the costs leaseholders have to pay during the enfranchisement process of extending their lease or buying the freehold title.
The report suggested three potential reform routes to help reduce costs whilst maintaining a fair outcome for both leaseholder and freeholder.
The first option assumes the leaseholder is never in the market, including the time the premium is calculated and bases the cost exclusively on the reversion and the term.
The second option assumes the leaseholder is not in the market when the premium is calculated but could look to sell their property in the future. This option would include ‘hope value’ but exclude marriage value.
The third scheme remains closely linked to current law in that it assumes the leaseholder is in the market at the time of premium calculation. The premium would therefore be calculated on the term, reversion and marriage value.
Currently, properties where terms dip below 80 years incur an additional ‘marriage value’ which recognises the additional market value of the extended lease before the premium is calculated.
Freeholders will be reluctant to part with this given a fifth of the 100,000 homes per year looking for extensions fall below 80 years. The Association of Leasehold Enfranchisement Practitioners estimate this is worth around £2.5 billion per year or thousands of pounds per transaction.
This is where the difficulty lies – finding a fair compromise between the two interested parties. When many freeholders are made up of pension investment firms, the loss could become considerable. Meanwhile, a marriage value could price out many leaseholders leaving them trapped in unsaleable properties.
The law commission claim scheme 1 and 2 would immediately reduce enfranchisement premiums as all marriage value would be omitted from the overall cost. However, they also claim the third option, using existing law, could benefit leaseholders if they are used as a framework to implement other reforms.
Organisational consensus seems to suggest that the reform proposals are a clear step in the right direction in striking a fair and reasonable balance between the needs and desires of all stakeholders.
However, some fear that the proposals lack a definitive enough conclusion and potentially provide unnecessary ambiguity. Whilst the report will stimulate the debate, the Association of Leasehold Enfranchisement Practitioners (ALEP) claim ‘clarity and consistency’ is needed in the present to ensure current leaseholders are offered a fair and transparent enfranchisement price.
Mark Chick, ALEP Director, and Partner and Bishop & Sewell, said:
“The Association of Leasehold Enfranchisement Practitioners (ALEP) has reviewed the Law Commission’s report published today (9th January 2020) which assesses how the process of valuing enfranchisement can be simplified.
“The report examines ways to reduce enfranchisement premiums for leaseholders, whilst ensuring landlords receive sufficient compensation. The document sets out ways in which the current enfranchisement valuation system – which can sometimes be complex, inconsistent and biased – may be improved.
“Other options which form part of the Law Commission’s recommendations for reform include capping ground rents and, prescribing rates and development value. In addition, the introduction of an online calculator is proposed. This would help leaseholders and landlords to ascertain the enfranchisement premium, providing simplicity, accessibility and reducing the scope for disputes, costs or delays to the process. Although how this might be fairly and accurately prescribed, developed and implemented remains to be seen.
“The valuation aspect of leasehold is a complex subject and any future reforms need to ensure the right balance of fairness is struck between leaseholders and freeholders alike. Whilst the recommendations set out in the Law Commission’s report are a step in the right direction, they do not provide a clear-cut way forward. Instead, they present more options for debate at a time when what the sector needs is clarity and consistency.
“ALEP campaigns for integrity and transparency within the sector and it is vital that future reforms to the valuation process are not unnecessarily delayed or hampered by convoluted legislation. Importantly, any reform must work for all parties involved.
“Today’s report forms part of the Law Commission’s wider consultation concerning reforms to existing leasehold legislation and regimes, a consultation in which ALEP members were actively involved in. We eagerly await further reports from the Law Commission which will outline these proposals and help shape the future of the leasehold enfranchisement sector.”
Mark Hayward, Chief Executive, NAEA Propertymark on today’s report from the Law Commission on reforming leasehold enfranchisement:
“It’s encouraging to see that steps are being taken towards resolving the inherent issues of leasehold which is something we argued for through our 2017 Leasehold: A Life Sentence? report which found that 93 per cent of respondents wouldn’t purchase another leasehold property.
“While we still need a robust solution for all of those affected by the issue, this a positive step in making it easier for leaseholders to buy their freehold or extend their lease and we encourage further reform to tackle this problem.”
Mark Steggles, partner at law firm Thomson Snell & Passmore, commented:
“The Law Commission’s report sets out a path for making leasehold enfranchisement simpler, more transparent and cheaper for leaseholders. The report sets out three alternative options for a new regime for calculating the premiums payable to extend a lease or purchase a freehold, and a further seven sub-options in terms of items to consider when calculating the premiums for each regime.
“The potential abolition of marriage value (which is the increase in value that occurs where a tenant acquires the freehold) is the proposed reform most likely to concern landlords as it would decrease the value of the premiums payable by the tenants. However, this proposed reform, together with the proposed introduction of prescribed rates for calculating premiums and a suggested route for capping the impact of ground rent escalators that are causing such controversy at the moment, are likely to be warmly received by leaseholders.”
Professor Nicholas Hopkins, Property Law Commissioner said:
“We were asked to provide options for reform that save leaseholders money when buying their freehold or extending their lease, while ensuring that sufficient compensation is paid to landlords. This is what we’ve done.
“We are ready to help the Government in implementing whichever options for reform they choose.”
Housing Secretary Rt Hon Robert Jenrick MP said:
“I welcome these proposals from the Law Commission which provide options to make it simpler and faster for leaseholders to buy their freehold or extend their lease.
“I will consider the proposals outlined in this report carefully and set out our preferred way forward in due course.
“We have already committed to addressing the abuses of leasehold seen in recent years, by reducing ground rents to a peppercorn level and limiting new leasehold to apartments, save in the most exceptional circumstances. The Competition and Markets Authority is examining the alleged misselling of leasehold properties and I will also await their findings with interest.”
What are your thought on the leasehold proposals?
2 responses
The recommendations in the report are incredibly underwhelming.
The document repeatedly defends the freeholders’ human right to own and profit from someone else’s property via the leasehold system, which is absolutely crushing.
Rather than recognise leasehold as an exploitative feudal anachronism, the Law Commission seems intent to defend the principles of the system, rejecting many options for reform that would make enfranchisement genuinely cheaper, simpler and fairer.
For example, the option to calculate the cost of enfranchisement by a simple multiplication of the current ground rent was dismissed by the Law Commission as it would contravene human rights legislation”
Leasehold is scarcely ‘feudal’ but rather it’s an established way of purchasing.
A better question is why so few solicitors seem to give purchaser clients proper advice prior to buying a leasehold property of any type.