Leaseholders and freeholders waiting for clarity on lease extension premiums may be disappointed, following the Law Commission’s publication of proposed reforms to leasehold enfranchisement.
With the most radical reforms rejected or unlikely, and no timescales provided for change, Jeremy Weaver, Head of Litigation at Brady Solicitors suggests that the report provides little in the way of clarity or guidance for either leaseholders or freeholders – particularly in situations where leases are approaching 80 years left.
“Leasehold home ownership: buying your freehold or extending your lease – report on options to reduce the price payable” was published on 9 January 2020 and is part of a lengthy consultation on a series of wide‐ranging reforms to the enfranchisement regime.
The report sets out various options for calculating premiums, and groups these into three schemes, summarised below:
- Scheme 1 would abolish marriage value, leading to substantial savings for leaseholders with leases at 80 years and below.
- Scheme 2 reduces marriage value to ‘hope value*’ and would again substantially benefit leaseholders by reducing the premium when a lease gets below 80 years.
- Scheme 3 is effectively no change, with marriage value remaining payable when a lease gets to below 80 years.
Schemes 1 and 2 would offer clear benefit to leaseholders with a diminishing lease, as they have the potential to greatly reduce the cost of leasehold enfranchisement.
On the flipside, Schemes 1 and 2 will have a substantial negative effect on freeholders. Recognising this, commentators – and the report itself – suggest that these schemes could allow freeholders to successfully bring a Human Rights challenge, on the basis of a loss of ‘peaceful enjoyment of possessions.’ This leaves us with Scheme 3 and no change to marriage value.
There is a list of potential ‘sub-options’ contained in the report, some of which may be valuable to leaseholders with a diminishing lease, including capping the treatment of ground rent, applying a discount for leaseholders’ improvements to their property, and preferential rates for owner-occupier leaseholders.
However, with no timescales and no plan for implementation, leaseholders waiting to extend their lease are left none the wiser. With Schemes 1 and 2 looking unlikely, a leaseholder with a lease approaching 80 years left may consider it sensible to start their lease extension now, rather than waiting for a reform that may never arrive.
Freeholders can perhaps take more comfort from knowing that marriage value is here to stay, in the short term at least, but should be aware of the proposed sub-options and how they could apply to their leasehold portfolios.
For those, like our team at Brady Solicitors, keen to see an enfranchisement model that works for both leaseholders and freeholders, with clarity on what is a ‘fair premium’, this report does not really deliver.
More now rests on the three further reports to leasehold reform that are due from the Law Commission. These cover a wider review on the enfranchisement regime, plus proposals for the reform of both right to manage and commonhold ownership.
2019, for various reasons, felt like somewhat of a policy vacuum. But, with a new government keen to build support, and sustained industry pressure for leasehold reform, we hope that these three additional reports will help to bring the much-needed clarity to both leaseholders and freeholders.
We will be monitoring developments, including any proposed timescales for implementing the proposed ‘sub-options’ and will provide further updates on our website. If you would like advice in the meantime, please do get in touch.
*The report defines Hope Value as: “Hope value” is a deferred form of marriage value. If the freehold is sold to someone other than the leaseholder, marriage value will not be realised as a result of that sale. However, the purchaser might “hope” that they will sell the freehold to the leaseholder in the future, which will realise marriage value. The purchaser may therefore pay an additional amount now to reflect that future possibility. That additional amount is “hope value”.