The Law Commission’s report on leasehold valuation Jan 2020 – the salvation for leaseholders or a damp squib?

For centuries, freeholders have controlled the terms of leasehold by setting the laws that govern it and consistently squashing any planned reforms to it thus securing the fat profit they make from this deeply iniquitous feudal land tenure.

However, on the crest of an unprecedented wave of leaseholder’s protests about freeholder’s abuses, a growing voice of MPs calling for leasehold reform and extraordinary media interest, the government instructed the Law Commission to investigate the leasehold system with the remit to “examine the options to reduce the premium (price) payable by existing and future leaseholders to enfranchise whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interest”

 We always knew that the Law Commission had been set nigh on impossible task with that controlled remit. The current opaque leasehold system and the profit it spits out is what the freeholders believe IS their human right to receive In perpetuity and therefore even minor proposed changes to that system would have freeholders crying in their Foie gras and litigating against the government faster than you can say Dom Pérignon Rosé 1959.

The Law Commission’s report on leasehold valuation is the most hotly anticipated document in leasehold for the last 20 years. Leaseholders across the country have waited with bated breath for it, many putting their lives on hold and not extending their lease or buying their freehold until it was released. Would this report make leasehold fairer, easier and cheaper for leaseholders? Well, it was released today so what’s the verdict?

We were all hoping for a radical document full of proposed reforms that would really help leaseholders, one that proposed a whole new way of valuing the costs for leaseholders. One would make it impossible for freeholders to distort and use loopholes to extort extra cash from leaseholders. On first reading of the highly complex 322-page document, it seems leaseholders are going to be disappointed with what has been produced.

For me, having waded through the complex tome, it is disconcerting to see the number of times deference has been given to the freeholder’s human rights under A1P1 (Article one of the First Protocol) when the leaseholder’s human rights were dealt with early on in the document and dismissed as not relevant. The weight of the endless and tautological references to the freeholder’s human rights to own someone else’s property purely for their personal financial gain is crushing. It also frames the whole document in a manner which puts the freeholders centre stage when we hoped it would be leaseholders occupying this space.

The document considers and then rejects outright a couple of options for reform that have been proffered and were very popular with leaseholders. For example, the proposal from Justin Madders MP, that the cost of enfranchisement could be a simple multiplication of the current ground rent, say 10 times, was dismissed by the Law commission as it “would be difficult to justify under A1P1. The option of deciding the premium by using a percentage of freehold value of the property was also dismissed on the same grounds.

So, what did the Law Commission recommend as a way to reduce the cost of enfranchisement for leaseholders? They have three separate options they have recommended to government.

  1. Term and reversion.

In simple terms, this means they ignore the marriage value option of an enfranchisement valuation and just calculate the ground rent and reversion element. This would help leaseholders whose lease length had already fallen below 80 years and remove the artificial increase in the costs once a lease falls below 80 years.

According to our database around 30% of all leasehold properties in this country have already fallen below 80 years but 70% have not and would not be helped by this proposal.

  1. Term reversion and hope value.

This is a half-way-house option on the first proposal. Some cost is attached to a property for falling below 80 years but instead of marriage value being due (which has a large effect on the cost payable by leaseholders) instead a much smaller amount will be payable, usually 20% of what marriage value would be. Again, this will help 30% of leaseholders but will do nothing for the majority.

  1. Term, reversion and marriage value.

Depressingly, this third option is the system we have already in place.

However, the LC’s three proposals have a further seven sub options the gov could choose to implement (or not) in conjunction with the three main ones. It’s a veritable Smörgåsbord of leasehold reform!

Sub-option (1) Prescribing rates

They propose that it may be possible to prescribe the current variables we argue about today while valuing enfranchisement. There is then a discussion on how these rates could be prescribed at “market value or below market value” (they don’t mention the above market value option but this threat is a real one) or how much leaseholders pay today.

Sub-option (2) Capping the treatment of ground rent

They propose that there could be a cap on the level of the ground rent that is taken into account when calculating the value of “the term”. That cap could be set at 0.1% of the freehold value of the property. This would help leaseholders that had onerous or high ground rents. I really like this proposal!

Sub-option (3) Development value

They propose that instead of having to pay freeholders, the largely spurious, development value on freehold purchases leaseholders could agree to accept a restriction on future development of their block (by way of an overage clause) when they acquire the freehold and they would not have to pay the landlord any development value. Again, I like this, and it has been something we have tried successfully when we help leaseholders buy their freeholds.

Sub-option (4) Differential pricing for different types of leaseholder

Enfranchisement rights were originally introduced in order to benefit owner‐occupiers but have since been expanded to all leaseholders including buy‐to‐let landlords and other non-residential investors. It is proposed that the government could apply a different higher valuation model for non-residential leaseholders. This is brutal and unworkable. Should someone who buys a second property for a retirement pot, who inherited the leasehold property through their family, and such be penalised? I don’t know the answer, but it doesn’t look good.

Sub-option (5) 80-year cut-off in respect of marriage value

Here they ponder whether the artificially constructed marriage value should be removed but conclude that the 80‐year cut‐off should be retained in its current state. This is depressing, marriage value isn’t real, it isn’t a thing, it isn’t accepted and entrenched in the property market, it was invented by freeholder’s solicitors and valuers. It is, and I hate to use a technical enfranchisement term here, total bollox.

Sub-option (6) Discount for leaseholders’ improvements

In the Report, we conclude that the discount should be retained, otherwise premiums will be increased for some leaseholders. However, we conclude that the discount could be simplified, limited or even removed in order to reduce disputes if such a reform were combined with other reforms to reduce premiums overall.

Sub-option (7) Discount for the risk of holding over

In the Report, they conclude that the discount for holding over should be retained, otherwise premiums will be increased for some leaseholders. However, they conclude that the discount could be removed, limited or prescribed in order to reduce disputes if such a reform were combined with other reforms that would reduce premiums overall.

Finally, they do propose that it would be desirable for the government to create an online calculator for leaseholders to be able to ascertain the cost payable for enfranchisement. Normally I would welcome this news with open arms but the whole document seems more weighted to freeholder’s interests than to those of leaseholders. For example, in one of the LC’s examples they use a 4% cap rate on a lease with RPI linked ground rent increases. Although they caveat it by saying this is not the rate they are recommending, it seems irresponsible to pick a ‘random’ cap rate example to be one that hugely favours freeholder’s interests. If I tell you now not to picture a pink elephant in your head, you will immediate picture a pink elephant. If I tell you I’m not suggesting what the cap rate should be and then give an example with a 4% cap rate…. Well, you get the picture.

If an online calculator was designed that prescribed the various valuation rates so it was unchallengeable but those rates favoured freeholders and increased the cost of enfranchisement, then it would be disastrous for leaseholders for ever more!

I felt uncomfortable reading this report. I was hoping for a leaseholder friendly document full of proposals that would help leaseholders and reduce the cost of enfranchisement, instead there are endless options, and areas put forward for discussion and various figures that must be debated and agreed on. For me here lies the very heart of the problem with the LC’s proposals.

The choices proposed are so numerous to be paralysing and will be largely indecipherable to leaseholders. However, the LC were originally tasked by government to make this whole thing simpler. Instead we are presented with a complex set of choices that can be mixed and matched and there are various computations which must be examined and debated. Who will ultimately decide on the various rates to be used in the complex valuation of enfranchisements? However well-educated Boris is, I doubt he is an expert in enfranchisement and the same goes for the Secretary of State, so who will decide and influence these rates? Will it be working groups of leaseholders who decide? Not on your Nelly, they would never allow that.

When the time comes for these decisions to be made, they will have to turn to enfranchisement professionals. If we are basing any future changes on the existing leasehold system, these guys and gals are the only people who really understand it. Therefore, the voices that will be consulted when it’s time to prescribe these various rates will be the professionals of the freeholders. Leaseholders don’t pay lawyers and valuers on retention to protect their political interests, only the freeholders can afford that. Leaseholders are not experts on the complex minutia of leasehold valuation principles, freeholders and their representatives are. Leaseholders are not a well-funded cohesive group prepared to pay lobbyists to influence potential reform, they are just individuals looking to live their lives free from the rapacious machinations of their freeholder.

So, after all the consultations we have filled out, all the meetings we attended to let our voices be heard and all the nervous waiting we endured over the last year for the Law Commission’s report on valuations, we have this door-stopper of a document to show for it. We wanted clear simple radical reform and it looks like we have tinkering around the edges of the god-awful old feudal leasehold system.

I personally find it wholly disappointing and hugely underwhelming, a big flaccid damp squib.I could well be wrong though and I really hope that I am.

The Law Commission have completed their task and it now sits firmly in the lap of the Government to decide just how radical their reforms will be. It has been our willingness to raise our voices and let the world know of our anger and disgust that has made leasehold political and given us a chance of meaningful legislative reform. We have one more push we have to do, one more effort we have to make to put sustained and continuous pressure on the government and your local MP to ensure that the government see leasehold as a political issue and realise that they have no option but to reform it.

Keep the faith x

4 Comments

  1. Always enjoyable but I thought I’d share my tuppence on a couple of technicalities. Just to state my allegiances up front. I advise 75% leaseholders to 25% freeholders and my allegiance is leaseholder slanted. This bias is a result of my belief there were technical errors in setting fundamental rates (inequitably) in favour of freeholders in valuation legal guidance from 2006 onwards. As it happens one case that I did agree with was the notable FTT decision which, using good data, determined RPI ground rents at 4% initial yield. Not really a pink elephant so much as a reflection of the market supported by good data and backed by the FTT (this latter perhaps not the highest endorsement but still). As a side note 4% initial yield is about the same as the conventional 6% – 7% based on a fixed review patterns, people often forget that. So I think the 4% placeholder was right. As for the rest of your article I agreed with much of it but I do think it is inconsistent to champion leasehold pensioners who own leases for profit while in the same breath vilifying any freehold pensioners who ever purchased a freehold reversion for profit. I’m not swinging in behind fat cats here just pointing out that the law commission is obliged to recognize that if you throw the bathwater of ‘human rights for freeholders’ out the window; out goes the baby of ‘human rights for private landlords’ too. It opens a Pandora’s box of unintended consequences. Lastly what kind of argument is “marriage value is not a thing”. Valuation 101 a vase is worth £100 an identical vase £100. The pair together is worth £250, hey presto marriage value is a thing. If freeholder’s paid it on purchase they ought to be compensated accordingly. Not all freeholders are aristos you know. For these reason I liked the subset of proposals that offers nothing but hope !

    1. Thanks Rupert. I have a couple of comments. Why is everyone so keen to have leaseholders pay for other people’s pensions? Why not people with ginger hair, people under 5’6″? People from Manchester? Investments go up and down, pension funds know that it’s the risk of investment. Also you say “what kind of argument is “marriage value is not a thing”? You then tell a story of two vases to prove your point? lol. Do you know the history of MV and how it came in law? Have a look at that then tell me if it’s not total bollox or not…..

  2. This is depressing to read. The resident leaseholders in my block of flats had been hoping that there would be real change as a result of this report that would allow us to get out from under the crushingly high ground rent charged by our parasitic freeholder.

    Instead it looks as though we’ll be stuck in unsaleable flats for the foreseeable future. Unless we can somehow raise the capital to either buy the freehold/extend the lease (likely >£30k per leaseholder due to the £1500 ground rent premium and long lease) or save enough for a deposit + extra stamp duty on a second home!

    Ranting about it makes it feel slightly better at least…

  3. I just realised I didn’t answer your question. Why do leases contain reversionary investments? They shouldn’t. The practice should be abolished for being opaque and unnecessary. Even if management costs will inevitably rise the sector will at least become more transparent and easier to regulate. As for having pensioners invest in a financial market for the deferred ownership of 5’6 red headed Mancunians? Well (the legality of owning persons aside) you could; and (if the contracts were legal and fair) the participants would have to be compensated if the market was closed by legal means for being preposterous. Markets don’t fail to exist because they are arbitrary there is a thriving market in virtual cats! I’m obviously not saying all lease contracts are legitimate or fair but where they aren’t they should be brought under contemporary consumer legislation where unfair contracts are not enforceable.

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