Last Thursday the Law Commission published its report into leasehold reforms. The Commission puts forward three schemes for determining the premium to be paid by flat owners wanting to extend their lease. Each of them will make enfranchisement cheaper, saving leaseholders money. Each scheme uses a different method to determine the price of enfranchisement and allow further reforms to make the process simpler and to reduce uncertainty.
The report also examines the way in which the value of the landlord’s interest is calculated, to identify reforms that could lower premiums without breaching the UK’s human rights legislation that protects landlords’ property interests.
Alongside the three schemes, the Law Commission has 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.
- Developing an online calculator for determining the premium, making it easier to find out the cost of enfranchisement, and make the process more transparent.
- 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.
What is being proposed are ‘cash and carry’ lease extensions, which would lead to fewer referrals to the over-worked first-tier tribunal. While the legislative change is not retrospective, it would have the retroactive effect of devaluing existing landlords’ interests that arise from the lease. All freehold reversionary properties are valued by chartered surveyors on the basis of the lease length and terms and, as the RICS definition of ‘market value’ includes hope value, in effect the valuation today includes the probability of some lease extension income. If this is to be curtailed in law, then the effect is a reduction in the value of the landlord’s asset.
So while this proposed change does not alter the lease contract itself, it has two impacts: devaluation of the reversionary freehold interest and reduction in the premium payable to the landlord for each specific lease extension.
Ultimately, any proposals that make leasehold extensions cheaper can devalue the asset. This will be very unpopular with landlords And while these reforms would save leaseholders money, the erosion of the benefits of being a freeholder would likely see an increase in non-professionally managed blocks, absentee freeholders and other court processes.
However, there may be additional upsides for leaseholders by removing the ability of unscrupulous freeholders or their agents to put pressure on leaseholders by refusing to negotiate until the 11th hour in order to extract more money than would be reasonably expected.
To read the full Law Commission report go to: https://www.lawcom.gov.uk/project/leasehold-enfranchisement/