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Leasehold enfranchisement valuation reform proposals published

Out-Law News | 21 Jan 2020 | 11:00 am | 3 min. read

The Law Commission of England and Wales has proposed reforms of the leasehold enfranchisement rules and options for home owners who want to buy the freehold or extend their lease.

The proposals (322-page / 3.5MB PDF) form part of the law reform body's programme of work to reform the leasehold enfranchisement process, with the intention of improving fairness and transparency while making the process simpler and more affordable for leaseholders.

The Law Commission's report sets out three potential calculation methods, along with other sub-options for reform which could feature in any of the three methods proposed. It has also suggested that an online calculator be developed, whichever method is ultimately adopted by the government. It has rejected the use of a simple formula based on multiple of ground rent, as favoured by leaseholders, as likely to be incompatible with UK human rights laws.

Property disputes expert Sarah Campey of Pinsent Masons, the law firm behind Out-Law, said that the proposals were "a step in the right direction to help further the government's aim to tackle perceived unfair practices in the leasehold sector".

Sarah Campey

Senior Associate

The current system is complicated and uncertain and some of the options the Law Commission has proposed for reform go some way to addressing this.

"The current system is complicated and uncertain and some of the options the Law Commission has proposed for reform - capping the treatment of ground rents at 0.1% of the freehold value of the property and prescribing the rates in calculating the premium, and the introduction of an online calculator - go some way to addressing this," she said.

"The options the Law Commission has presented in its report seek to strike a fair balance between leaseholders and freeholders. The report highlights the law governing human rights is extremely relevant in ensuring sufficient compensation is paid to freeholders and this has been considered throughout. Leaseholders campaigned for the introduction of a simple formula such as the ground rent multiplied by 10 as being an 'obvious' and 'fair' solution. The Law Commission has not included this as an option for reform in its report as it is unlikely to be compatible with human rights laws. Its exclusion will result in leaseholders criticising the reforms for not being radical or going far enough," she said.

Under the leasehold system, property owners own their homes for a fixed period of time, usually for many decades. The leaseholder pays an annual 'ground rent' to the freeholder of the property, which usually increases at a rate set by the terms of the lease.

Leasehold has traditionally been used for flats with shared spaces and on similar developments, with the status reflected in a discount on the purchase price of the property. The UK government, in its response to a consultation of June 2019, committed to banning almost all new leasehold arrangements for new-build houses, with limited exceptions. It also committed  to take action on escalating ground rents by reducing them to zero on new long leases, as well as to modernising the enfranchisement process.

For this report, the Law Commission was asked to provide options to reduce the price payable by leaseholders to enfranchise their homes while ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests. Its three main proposals are based on removing the 'marriage value', which reflects the difference in value between owning the freehold outright and the sum of separately-owned freehold and leasehold interests; removing the 'hope value', which reflects the potential value of selling the freehold in the future; and removing both.

Additional sub-reforms proposed by the Law Commission are capping the level of ground rent used to calculate the enfranchisement premium at 0.1% of the value of the property; prescribing the rates used when calculating the premium in order to remove one of the main sources of disputes under the current system; and enabling leaseholders seeking to collectively enfranchise a block of flats to avoid paying additional 'development value' to the freeholder unless and until they actually carry out that development.

Property disputes expert Sarah Campey said: "In the last 10-15 years, ground rents have steadily increased and led to a rise in so-called 'onerous' ground rents, which can be considered to be anything in excess of 0.1% of the value of the freehold".

"The government has proposed to bring forward legislation to ensure all future ground rents are capped at a peppercorn level, subject to limited exemptions. However, the government did not propose to apply this cap retrospectively to existing leases. Under the current system, leaseholders with onerous ground rents can exercise their enfranchisement rights which would have the effect of removing the ground rent, however because of the onerous ground rent the premium has been very high making the process prohibitive. The Law Commission's proposal to cap the level of ground rent used in calculating the premium would significantly help these leaseholders," she said.

"An online calculator would be a welcome introduction for all parties to simplify the process and reduce costs. However, it can only be produced if the rates for calculating the premium are prescribed. Under the current system there is frequent disagreement on the appropriate rates as the impact on the premium can be significant. It will not be an easy task to set the level of prescribed rates across the board and we expect to see further debate around this," she said.

The Law Commission intends to publish a further report setting out its recommendations to simplify the current complex rules around enfranchisement in the spring; along with final reports on reforms to make commonhold a viable alternative to leasehold and improving the law that gives leaseholders the right to manage their properties.