25th February 2020

Valuations in Enfranchisement: a summary of the options considered in the recent Law Commission Report

By Sarah Finch

On Thursday 9th January 2020 the anticipated Law Commission report about leasehold valuation was published.

The law in this area has been criticised as too complex and costly for those who want to purchase the freehold of their house, participate with other leaseholders in the collective purchase of the freehold of a group of flats, or extend the lease of their house or flat.

In light of this criticism the Law Commission have been tasked with reviewing this area of law, with a view to making it simpler, quicker and more cost effective for leaseholders – in short to reduce the price of these processes. It goes without saying that wherever there is a winner, there is usually a loser and in this scenario, cheaper for a leaseholder is likely to mean a landlord will lose out, as well as the ground rent investors.

This latest report focuses on valuations within the processes referred to above and more particularly how premiums could be calculated in the future.

The report sets out three possible options for determining the premium.

Two of these options would have the effect of immediately reducing enfranchisement premiums as marriage value would not apply, which of course is not ideal for landlords.

The Law Commission contends reducing the price with any of these options would clarify and simplify the law, making the process of leasehold enfranchisement easier and less expensive to operate.

In terms of how this moves us forward, unless and until the government make a decision and then legislate in this area, nothing has changed

These options are described in more details below:

Option One:

A calculation based exclusively on the reversion and the term, meaning no hope or marriage value is to be included in the calculation.

This essentially means that Landlord will be compensated as he will no longer be entitled to the reversion of the property within the fixed term left to run in the lease and will no longer be entitled to the ground rent each year.

This doesn’t seem to address the issues reference as part of the ‘ground rents scandal’ but is very likely to cause premiums to drop significantly where there is less than 80 years left to run on the lease.

Option Two:

A calculation to include hope value (a deferred marriage value),  but exclude marriage value.

Hope value is always less than marriage value, as it reflects a future possibility rather than the marriage value that is always released upon the leaseholder’s acquisition of the freehold/an extended lease.

Again, the result of this possible change would likely be a reduction in premiums, at the costs of landlords.

Option Three:

The premium would be calculated on the term, reversion and marriage value – much like now. Leaseholders have criticised this possible option, feeling that it does not provide the promised changes and reform in this area.

Other Recommendations

Alongside the three schemes, the Law Commission put forward a range of other options for reform. These 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 obvious problem being that the anticipated income for ground rent investors, including pension schemes would be cut meaning that the problem is shifted to another group of people and away from leaseholders
  • The creation of an online calculator for determining the premium in line with whichever option is chosen. This could give rise to potential invalidity arguments where a leaseholder has relied on a website, rather than a professional and meaning, in the event of error, there would be no professional to pursue for any possible negligence
  • 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 – This in itself is likely to give rise to more complication as to what constitutes development and for how long this payment can be deferred for
Valuations in Enfranchisement: a summary of the options considered in the recent Law Commission Report

Have a question? Contact Sarah

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Have a question? Contact Sarah

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