Leasehold Enfranchisement – The Law Commission
02 Mar 2020
“They’re Reviewing the Situation”
The Law Commission has made recommendations on ways to reduce the cost of leasehold enfranchisement for consumers who want to extend their leases or collectively purchase the freehold to their home.
On 9 January 2020, the Law Commission delivered its report on Options for Reforming Valuation in Leasehold Enfranchisement. The body – which is responsible for reviewing the law – examined three major schemes as well as setting out additional “sub-options” which could be incorporated into these schemes individually or in combination.
It is now up to the Government to consider the proposed schemes and decide whether to incorporate them into their planned leasehold reforms.
How is the leasehold enfranchisement premium currently calculated?
“Who will buy?”
When a leaseholder either extends their lease or purchases the freehold to their home, they receive an “enhanced interest” in the property. Therefore, they must pay a premium to the landlord to be able to benefit from this interest.
As the law currently stands, there are three elements to calculating the premium for leasehold enfranchisement:
- Reversion – to compensate the landlord for the fact that they will not be able to take back possession of the property for another 90 years (in extension) or ever (in enfranchisement).
- Term – To compensate the landlord for the lost ground rent to which they would have been entitled if the lease ran for the full term at the current rates payable.
- Marriage Value or Hope Value – extensions of leases under 80 years will attract Marriage Value or Hope Value. Marriage Value is based on the assumption that the freehold interest and leasehold interest in a property are worth more together than their respective parts. The difference between the value in single ownership and the value in separate ownership is the Marriage Value. Hope Value is a deferred form of Marriage Value. It is based on the “hope” that if the freeholder sold the freehold in the future, the third party might realise the Marriage Value, and is a lower monetary value than Marriage Value.
What are the options for reform proposed by the Law Commission?
“You’ve got to pick a pocket or two…”
The Law Commission has outlined three potential schemes, each one based on a different assumption about the market in which the freeholder’s interest is valued:
The premium for leasehold enfranchisement will be calculated using only the Term plus Reversion with nothing due for the marriage value.
The premium will be based on Term, Reversion and Hope Value.
The premium will be based on Term, Reversion and Marriage Value. This is how premiums are currently calculated so alone would not lead to a reduction in prices for consumers. This scheme would be intended for use with one or more of the additional sub-options.
The additional sub-options
A new twist?
The Law Commission also set out the following seven sub-options to address other costs which sometimes arise for leaseholders upon extension or enfranchisement:
- Prescribing rates for the main elements of enfranchisement (the Term, Reversion and the Marriage Value).
- Capping the amount of ground rent taken into account when calculating the value of the Term.
- Development value – currently, as the landlord loses the right to develop a building due to enfranchisement, the leaseholders must compensate them for that loss. The Law Commission suggests that if leaseholders agree not to carry out development upon enfranchisement, they could be exempt from paying compensation.
- Differential rates to account for different types of leaseholder, for example, to favour individual owner occupiers rather than investors.
- Scrapping the 80-year cut off for payment of Marriage Value – this would simplify the process but make leaseholders with leases over 80 years liable for Marriage Value and subsequently increasing their premiums. The Law Commission recommends that this option should only be adopted if other sub-options (such as rate caps) are also introduced.
- Discount for improvements – The freehold value is taken into account when calculating the Reversion value and Marriage Value. If the property has increased in value due to the leaseholder making improvements, this increase could be discounted from the freehold value.
- Discount for risk of “holding over” – at the end of a long lease, the leaseholder usually has a right to stay in the property and pay rent to the landlord. This is called the right to “hold over”. This reduces the value of the freehold so in turn discounts the premium. The Law Commission recommends the right to hold over be retained to prevent premiums increasing for some leaseholders.
For the ordinary consumer, the methods of valuation set out in above schemes and sub-options are incredibly complex. The Law Commission therefore recommends the introduction of an online calculator leaseholders and freeholders can use to find out how much the enfranchisement premium will be.
What Happens Next?
Stick or twist?
The Law Commission has not personally identified which combination of scheme and sub-options it thinks is most appropriate. However, it will work closely with the Government to implement whichever option they choose.
One potential issue is that the reforms must not infringe on freeholders’ human rights and property rights or the Government may open itself up to risk of legal challenge under the Human Rights Act. The Law Commission has therefore obtained expert opinion on the prospects for successful challenge.
One way the Government may try to “soften the blow” for freeholders is to scrap the 80 year limit on Marriage Value. This would simplify the lease extension process but would increase costs for all leaseholders whose leases have more than 80 years left to run. The Law Commission suggests that this option should not be considered unless other options, such as rate caps, are adopted.
Leaseholders who are considering enfranchisement should therefore keep a close eye on the Government debates and, if the 80 year rule appears to be on the way out, they think about consulting one of our leasehold enfranchisement solicitors to commence their extension before the new law comes into effect. There is always some preparatory work which needs to be done before we can serve a statutory notice to “stop the clock running”, so to avoid the risk of losing out from a change in the law, you should instruct us at least one month before you wish us to serve the formal notice to extend your lease. Bear in mind that you will probably need to obtain a valuation from an experienced surveyor beforehand.
Other areas for reform
As well as leasehold enfranchisement, the Law Commission will be reporting on reforming other areas of law, in particular commonhold reform and the right to manage.
If taken up by the Government, all these changes will be incorporated into the current plans for widespread reform seemingly planned for this year.
However, we anticipate that the government will not be looking at any Law Reform until it has received and considered all three reports from the Law Commission.
Do you need advice about leasehold enfranchisement?
At Harold Benjamin, we are property law specialists based in Harrow and the West End, London. Our leasehold enfranchisement solicitors can provide advice on a wide variety of matters, including extension, collective enfranchisement, freehold purchase of a house, the right of first refusal, and the right to manage.
Extending your lease or purchasing the freehold to your home can be a lengthy and complex process but we can help you get started on the groundwork. We stay on top of the law so you can trust that you are always getting the highest quality of advice and the best possible deal on your enfranchisement.