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24 Feb 2021

Government’s proposals for leasehold enfranchisement reform

For some time, those advising clients on leasehold property, and specifically in relation to potential enfranchisement claims (that is to say, claims made by leaseholders for an extended lease of their flat, or for the freehold of their building), have had to temper their advice due to the fact that the law is likely to be the subject of change.

It has been the stated policy of the Government to reform the law relating to leasehold property. This was originally ostensibly in response to the practice of some developers and landlords selling leasehold properties subject to escalating ground rents and the financial consequences flowing from that, but it has evolved into something much wider than that. There has followed a series of consultations on, and papers recommending or setting out options for, reform, culminating in the Law Commission’s reports relating to valuation (issued on 9 January 2020) and legal aspects (issued on 21 July 2020).

The latest in the line of such papers arrived with the Government announcement, published on 7 January, heralding the advent of the first of the reforms, but one which, unfortunately, raises more questions and which leaves it unclear as to precisely how the law will change and when.

A brief summary of the proposed reforms, as we understand them, is as follows:

The introduction of a new right to claim an extended lease for an additional term of 990 years

This is not particularly ground-breaking. Although the law currently provides for a 90-year extension, it also allows a tenant to make a succession of such claims (one after the other, and without the need for any gap between one claim concluding and the next beginning), so that the tenant can effectively construct a 990-year leasehold interest anyway.

Reference to the rent payable under a new lease being restricted to a peppercorn

This is not clearly expressed in the Government paper, but it seems to refer to restricting the ground rent in any new long lease to a peppercorn. Again, this is not particularly newsworthy, because it has been the stated policy of the Government for some time and it is already the case that any new lease extension granted under the enfranchisement legislation will result in a peppercorn rent being payable.

A cap on the level of ground rent when forming part of the calculation of an enfranchisement premium

This refers to an element of the valuation of a premium payable upon a claim for an extended lease or a claim for the freehold. How much it might affect a particular property will vary from case to case, and is something on which the client’s valuer would need to advise, but, in general, it is unlikely to have a significant effect in the majority of claims.

“Abolishing” marriage value as an element in the calculation of such premiums

This is the part of the stated reforms which has the potential for the largest impact. Marriage value is an element of the calculation of an enfranchisement premium and, where it applies, it can form a significant proportion of the overall premium payable. It should be noted that the law currently provides that the tenant must only pay marriage value where the term of its current lease has less than 80 years remaining. Therefore, if the existing lease has more than 80 years left to run, this proposed change will have no effect on value. If the existing lease has less than 80 years left to run, then the claimant tenant would be well advised to speak to its valuer to discuss whether it is worth waiting to make the enfranchisement claim until after the proposed change becomes law (although see my later comments on this below).

Fixing the rates applied in the calculation of such premiums

This is more difficult to quantify. The calculation of enfranchisement premiums involves, in part, applying a capitalisation rate and a deferment rate. At present, those rates are open to debate amongst valuers and can lead to dispute, thereby leaving the premium more open for negotiation. However, there is no indication in the Government paper as to which of the rates are to be fixed, nor at what level.

Offering tenants the option of relinquishing rights to develop their property in exchange for avoiding the payment of any development value

This is only likely to be of relevance if the subject property has the potential for development. At present, that might result in the claimant tenant being obliged to pay a higher premium to compensate the landlord for that development value. The proposal is that a tenant will be able to forego paying that additional value in exchange for giving up rights to develop the property.

The introduction of an online calculator to assist tenants in calculating the premium they might pay.

It is unclear as yet as to quite how much this might improve the process!

The continued reinvigoration of commonhold, with the promise of the introduction of a Commonhold Council.

Whilst this demonstrates the Government’s commitment to commonhold, it is, for now, very much a case of “watch this space”.

On the face of this announcement, some of these measures may lead a potential claimant tenant to consider postponing its claim until after the reforms are brought into effect. However, there ae one or two points which also need to be taken into account in this regard.

The proposed reforms affecting valuation derive from the Law Commissions report of January 2020. It should be noted that, in line with the task set for the Commission, it did not, in that report, set out recommendations as to reform, but rather options which the Government might consider. However, in setting out those options, the Commission also highlighted the possibility for challenge, under human rights legislation, by landlords due to deprivation of their property rights. Some of the measures proposed in the Government’s announcement (in particular, the fixing of rates and the abolition of marriage value) could if introduced wholesale and without other reform weighing more in favour of the landlord, provide greater scope and possibility for such a challenge.

There is also the question of “when”. There is no indication in the announcement as to when the Government will seek to implement any of these changes. In addition, there is a suggestion that it will seek to do so in stages, but there is no proper indication as to the order in which it might do so. Trying to find sufficient Parliamentary time in which to introduce any of these measures (especially whilst dealing with the important issues of COVID and Brexit means that it could be years before any of them actually become law. There is the additional question of whether reform, when it does come, will be confined, for now, to just these matters, or together with any others, either as suggested by the Law Commission (whose reports contain far more suggested measures than just these) or otherwise.

It is, therefore, clear that change, and possibly significant change, is almost inevitable, but until the Government provides some further clarification, the advice must be “watch this space”.