The Law Commission has set out proposals to reduce the cost that leaseholders have to pay to buy the freehold or extend the lease of their homes – the process known as enfranchisement. If implemented, the suggested reforms have the potential to make the process easier and more affordable for millions of leaseholders across England and Wales.
The Law Commission’s report, putting forward a range of valuation options, follows its extensive consultation in 2018 and early 2019. It was requested by the government to review the law of leasehold enfranchisement in order to promote transparency and fairness in the residential leasehold sector and provide a better deal for leaseholders.
The Law Commission was asked to provide options to reduce the premium payable for existing and future leaseholders to enfranchise their homes, while ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests.
The report puts forward three key schemes for determining the premium, each aimed towards making enfranchisement cheaper.
Scheme 1
This valuation assumes that the leaseholder is never in the market to buy the landlord’s interest. The premium is the value of the term and the reversion, ie what the landlord would receive if the lease ran its course and the leaseholder never purchased the landlord’s interest. No “marriage value” (the additional value that is gained when the landlord’s and leaseholder’s separate interests are “married” into single ownership) or “hope value” (a deferred form of marriage value, where the freehold is sold to someone other than the leaseholder, who might sell the freehold to the leaseholder in the future; the purchaser will pay a proportion of the marriage value to reflect the “hope” of being able to do that deal in the future) would be payable.
Scheme 2
This assumes that the leaseholder is not now in the market, but may be in the future. That means that in addition to paying for the value of the term and the reversion, hope value would be incorporated in the calculation.
Scheme 3
This assumes that the leaseholder is in the market at the time the premium is calculated. As a result, the price payable is determined by the value of the term and the reversion and marriage value. The Commission says that, on its own, this would not reduce the premium, but it could do so when combined with other reforms.
Other proposals for reform
Other recommendations in the report include:
- Prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable.
- Helping leaseholders with onerous ground rents by capping the level of ground rent used to calculate the premium.
- The creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process.
- Enabling leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the landlord unless and until they actually undertake further development.
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 it chooses.”
Housing secretary Robert Jenrick MP said: “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 mis-selling of leasehold properties and I will also await their findings with interest.”
The Law Commission will be making further recommendations in the coming months for reforms to improve the current complex enfranchisement system.
In addition, it will publish reports on reforms to make commonhold a viable alternative to leasehold, and on improvements to the law that gives leaseholders the right to manage their properties.
To send feedback, e-mail jess.harrold@egi.co.uk or tweet @estatesgazette
