The Law Commission presents options to reduce premiums payable on leasehold enfranchisement

The Law Commission’s long awaited report in which it proposes “options” for reforming the valuation process in leasehold enfranchisement was published on 9 January 2020.

It puts forward three key alternative schemes for determining the premium payable which are designed to meet the objective of making it cheaper and easier for leaseholders of flats and houses to enfranchise. The Law Commission makes it clear that these schemes are also aimed at ensuring that “sufficient compensation” is paid to landlords to reflect their legitimate property interests and their rights under the Human Rights Act 1998.

The three schemes

Each proposed scheme uses a different basis to determine the price payable. The report outlines each scheme by reference to three main elements of the current valuation process used.

Scheme 1

This produces a premium based on Term + Reversion only. It assumes that the leaseholder is not in the market when the premium is calculated and that they will never be in the market. It therefore specifically excludes any extra value attributable to a leaseholder being in the market both at the time (known as marriage value) or in the future (known as hope value).

Scheme 1 is designed to reflect a premium based on what a landlord would receive if the lease was simply run down to its contractual expiry and the leaseholder chose not to extend or acquire the freehold i.e. the landlord would simply receive the ground rent for the remainder of the unextended term (“the Term”) and then obtain vacant possession on contractual expiry (“the Reversion”).

Scheme 2

This is a premium based on Term + Reversion + Hope Value. It assumes that the leaseholder is not in the market when the premium is calculated but may be in the market in the future (that is the “Hope”).

Scheme 2 is designed to reflect what a landlord would receive if their interest was sold to a third party.

Scheme 3

This is a premium based on Term + Reversion + Marriage Value and assumes the leaseholder is also in the market when the premium is calculated.

It reflects how premiums are currently calculated. Therefore on its own, unlike Schemes 1 and 2, it would not clearly lead to a price reduction. However, the Law Commission envisages that if it is combined with other reforms detailed below, it could still be used to reduce the price.

Plus additional Sub-options

The Law Commission also propose a further 7 sub-options for reform which can be applied to the three key schemes to reduce premiums. These include:

• Prescribing the rates used to calculate the premium payable. This is aimed at providing greater certainty as to the price payable and removing the current scope for considerable dispute as to the rate that applies in relation to the capitalisation rate (1), the deferment rate (2) and relativity (3);
• Assisting leaseholders faced with onerous ground rents by capping the ground rent used to calculate the premium to 0.1% of the freehold value of the subject property;
• Allowing leaseholders who wish to collectively enfranchise their block to avoid paying development value until such time as the development is undertaken;
• Introducing pricing for different types of leaseholder so that owner occupiers benefit from a reduction but investors do not.

The Human Rights element

There is a considerable emphasis in the paper that the Law Commission has taken very seriously the scope for Human Rights arguments that landlords may raise to challenge any legislation the Government implements. The report acknowledges that the law governing Human Rights is highly relevant for valuation reform. Article 1 of the First Protocol (the “Convention Rights”) provides for the peaceful enjoyment of property (A1P1). The Law Commission labels very clearly that any reforms need to be compliant with Convention Rights. This acknowledgement appears to be aimed at addressing concerns from those acting on behalf of leaseholders who are already arguing the recommendations do not go far enough.

Other “take away” points in the paper

• An on-line calculator: the Law Commission notes the benefits of introducing this to be used in “certain circumstances” if rates are prescribed.
• A separate scheme for straightforward or low value claims: the Law Commission sets out its view on the role of a simple formula to set the price e.g using a multiple of the ground rent. It highlights the problems associated with such formulae in all but a limited category of cases including straight- forward and low value claims. A final definition to determine which claims would fall into this category will need to be decided if adopted but it is aimed at providing a more tenant favourable way of calculating premiums.

Next steps

The report enables Government and Parliament to now decide how premiums should be calculated informed by the consultation and the Law Commission’s expertise and analysis.

Likewise, this is one of a series of reports due from the Law Commission and deals primarily with valuation in enfranchisement claims. It is continuing to put together its recommendations for reforming and improving all other aspects of the enfranchisement regime including the eligibility criteria to qualify for enfranchisement rights and the statutory procedure to be followed when exercising those rights. A further enfranchisement report is anticipated shortly alongside separate reports relating to residential projects on the Right to Manage and re-invigorating Commonhold.