Options for reforming valuation in leasehold enfranchisement published by Law Commission

The Law Commission of England and Wales has today [09 January 2020] published a report setting out options to reduce the cost that leaseholders have to pay to buy the freehold or extend the lease of their homes (known as “enfranchisement”). The reforms have the potential to make the process easier and more affordable for millions of leaseholders across England and Wales.

The Law Commission’s report puts forward a range of options to make it cheaper for leaseholders to buy their freehold or extend their lease. As well as reducing the price, these options can clarify and simplify the law, making the process of leasehold enfranchisement easier and less expensive to operate.

The Government asked the Law Commission to review the law of leasehold enfranchisement in order to promote transparency and fairness in the residential leasehold sector and provide a better deal for leaseholders. On valuation, the Law Commission was asked to provide options to reduce the premium (price) payable for existing and future leaseholders to enfranchise their homes, whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests. The report examines the method by 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 the landlord’s property interests.

The options for reform

The report puts forward three key schemes for determining the premium, each of which 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. A detailed explanation of the schemes and the options for reform can be found in the attached Briefing Document.

The report also explains the role that simple formulae – such as a multiple of ground rent – could play in delivering reforms, while explaining that their wider use is not possible under the UK’s human rights laws.

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.
• The creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process.
• 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.

Professor Nicholas Hopkins, Property Law Commissioner said:

“We were asked to provide options for reform that save leaseholders money when buying their freehold or extending their lease, while ensuring that sufficient compensation is paid to landlords. This is what we’ve done.

“We are ready to help the Government in implementing whichever options for reform they choose.”

Housing Secretary Rt Hon Robert Jenrick MP said:

“I welcome these proposals from the Law Commission which provide options to make it simpler and faster for leaseholders to buy their freehold or extend their lease.

“I will consider the proposals outlined in this report carefully and set out our preferred way forward in due course.

“We have already committed to addressing the abuses of leasehold seen in recent years, by reducing ground rents to a peppercorn level and limiting new leasehold to apartments, save in the most exceptional circumstances. The Competition and Markets Authority is examining the alleged misselling of leasehold properties and I will also await their findings with interest.”

Next steps

We consulted widely in putting together the options for reform. Leaseholders have advocated sweeping reform to lower the cost of enfranchisement of their homes. We have heard contrary arguments from landlords and investors – including charities and pension providers – the value of whose interests would fall if premiums are reduced.

The Law Commission doesn’t hold views on which scheme and which other options for reform should be adopted, as this is ultimately a decision for Government.

The Law Commission will be making further recommendations in the coming months for reforms to improve the current complex enfranchisement system.

We will also be publishing reports on reforms to make commonhold a viable alternative to leasehold, and on improvements to the law that gives leaseholders the right to manage their properties.

You can read the full report, summary and other supporting documents here.