Leasehold home ownership: buying your freehold or extending your lease [2020] EWLC 387 (January 2020)

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Law Commission

Reforming the law

Leasehold home ownership: buying your freehold or extending your lease

Report on options to reduce the price payable

HC13


Law Com No 387


Law

W Commission

Reforming the law

(Law Com No 387)

Leasehold home ownership: buying your freehold or extending your lease

Report on options to reduce the price payable

Presented to Parliament pursuant to section 3(2) of the Law Commissions Act 1965

Ordered by the House of Commons to be printed on 8 January 2020.

HC 13

© Crown copyright 2020

This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-govemment-licence/version/3.

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.

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ISBN 978-1-5286-1706-2

CCS 1019368652

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Printed in the UK by the APS Group on behalf of the Controller of Her Majesty's Stationery Office

The Law Commission

The Law Commission was set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Right Honourable Lord Justice Green, Chairman

Professor Sarah Green

Professor Nick Hopkins

Professor Penney Lewis

Nicholas Paines QC

The Chief Executive of the Law Commission is Phil Golding.

The Law Commission is located at 1st Floor, Tower, 52 Queen Anne's Gate, London SW1H 9AG.

Professor Sarah Green and Professor Penney Lewis were appointed Law Commissioners on 1 January 2020. The terms of this report were agreed on 12 November 2019 when Professor David Ormerod QC and Stephen Lewis were Law Commissioners.

The text of this report is available on the Law Commission's website at http://www.lawcom.gov.uk.

All websites footnoted in this report were last visited on 16 December 2019.

Table of Contents

Glossary

Summary                                                       1 - 31

CHAPTER 1: INTRODUCTION

This Report

What is leasehold ownership?

What are enfranchisement rights?

What are premiums?

The views and opposing interests of landlords and leaseholders

Views on the fairness of enfranchisement premiums

The difference between premiums and professional costs

Two broad methods of calculating premiums

Our project

Our Terms of Reference: options for reducing premiums, not recommendations

Sufficient compensation and human rights

Leaseholders’ human rights

Landlords’ human rights

The options for reducing premiums in this report

The Consultation Paper and consultation events

How we have dealt with consultation responses

Issues beyond our Terms of Reference

Welsh devolution

Structure of this Report

Summary of the options for reducing premiums in this Report

Publications accompanying this Report

Acknowledgements

The project team

Introduction

(A): The current valuation methodology

Summary

Development value, additional value and other loss

Potential alternative bases for assessing market value

(B): The current valuation process

Introduction

Stage 1: valuations for advice

Stage 2: valuations for negotiation

Stage 3: valuations for Tribunal determination

Conclusion

Introduction

Problems with the current law

Practical consequences of those problems

Problems for leaseholders with onerous ground rent obligations in

their leases

Summary

The competing interests of leaseholders and landlords

Different types of leaseholders and landlords

Landlords’ arguments against reducing premiums

Leaseholders’ arguments in favour of reducing premiums

ROLE

Introduction

Setting the legal framework and process for valuation

The route to valuation reform

Consultation responses about valuation methodology

The correct method for assessing market value

The correct rate or relativity graph

Conclusion

PREMIUMS

Introduction

Overview of the “schemes” set out in this chapter

Setting premiums by reference to a simple formula

A multiplier of ground rent: Option 1A in the Consultation Paper

Set percentage of freehold value: Option 1B in the Consultation Paper 93

Setting premiums by reference to market value

The Consultation Paper

Consultation responses

A revised approach: from “components” to “assumptions”

Who would benefit from Schemes 1, 2 and 3?

Scheme 1: assumption that the leaseholder is not in the market and will never be in the market

Scheme 2: assumption that the leaseholder is not in the market, but may be in the market in the future

Scheme 3: assumption that the leaseholder is always in the market 116 The potential role of a simple formula

PREMIUMS

Introduction

Overview of the sub-options set out in this chapter

Reform to elements that would (or could) reduce premiums

Sub-option (1): Prescribing rates

What do we mean by prescription of rates?

The benefits of prescribing rates (at, or below, market levels)

The benefits of prescribing rates below market levels

Consultation responses concerning prescription of rates

A culture change: moving from individual tailored valuations to general valuations

Prescription of capitalisation rates

Prescription of deferment rates

Prescription of relativity (or the no-Act deduction)

Compatibility with A1P1 of prescribing rates

Conclusion: options for Government relating to prescription of rates 148

Can FHVP values be prescribed?

Sub-option (2): Treatment of ground rent

The significance of ground rents for landlords and leaseholders

The Consultation Paper

Consultees’ views

Compatibility with A1P1 of a cap on ground rent in the enfranchisement valuation

Conclusion: options for Government

Sub-option (3): Development value

The Consultation Paper

Consultees’ views

Alternative mechanisms to provide an election restricting development 169 Compatibility with A1P1 of enabling leaseholders to elect to take a restriction on development

Conclusion: options for Government

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

The Consultation Paper

How can a distinction be drawn in practice?

Consultees’ views on differential pricing

Compatibility with A1P1 of differential pricing for different types of leaseholder

Conclusion: options for Government

Reform to elements that would, by themselves, increase premiums

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

The Consultation Paper

Consultees’ views

Conclusion: options for Government

Sub-option (6): Discount for leaseholders’ improvements

The Consultation Paper

Consultees’ views

Conclusion: options for Government

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

Current position

Consultees’ views

Conclusion: options for Government

Conclusion

Introduction

The benefits of an online calculator

Reducing the variables by prescribing rates

The remaining variable: FHVP value

How is the FHVP value relevant to the calculation of enfranchisement premiums?

Conclusion

The status of an online calculator

Consultation responses

Consultees in favour of an online calculator

Consultees opposed to an online calculator

Conclusion

How should an online calculator be established?

Conclusion

THE DIFFERENT “SUB-OPTIONS” FOR REFORM

Introduction

Summary of the schemes and sub-options

Adopting one scheme with a combination of sub-options

Introduction

The current law

Current qualification criteria: when does the original valuation basis apply?

Current valuation methodology: what is the original valuation basis? 213

Applying section 9(1) in practice

Problems with the current law

Ascertaining which houses qualify for valuation under section 9(1):

problems with the current qualification criteria

Calculating the premium under section 9(1): problems with the current valuation methodology

The Consultation Paper

Consultees’ views

Should the section 9(1)

Discussion and options for reform

Options not put forward for Government

section 9(1) be extended across all enfranchisement claims?

Options put forward for Government

EXAMPLES (HOUSES 1 TO 4)

GLOSSARY

“1967 Act”: the Leasehold Reform Act 1967, which gives leaseholders of houses the right to buy their freehold or extend their lease.

“1993 Act”: the Leasehold Reform, Housing and Urban Development Act 1993, which gives leaseholders of flats (a) the right to extend their lease, or (b) the right, acting with the other leaseholders in their building, to purchase the freehold of their block.

“2002 Act”: the Commonhold and Leasehold Reform Act 2002, which made various changes to the enfranchisement regime.

“A1P1”: Article 1 of the First Protocol to the ECHR (see below), which provides for the peaceful enjoyment of property.

“Assumption”: when assessing the market value of an asset, it is necessary to make “assumptions” about the market in which the asset is being sold or about the nature of the asset. For example, it is assumed that the leaseholder has complied with any repairing obligation in the lease.

“Capitalisation/capitalisation rate”: “capitalisation” refers to the calculation of a capital sum which reflects the right to receive income (such as ground rent) in the future. The “capitalisation rate” is the rate of return applied to calculate a capital sum that reflects the value of such an income stream. It is derived from market evidence. See paragraph 2.19.

“Collective enfranchisement”: the statutory right for leaseholders of flats, acting with the other leaseholders in their building, to purchase the freehold of their block.

“Compensation”: see “premium”.

“Consultation Paper”: our consultation paper “Leasehold home ownership: buying your freehold or extending your lease”, published on 20 September 2018, and available at https://www.lawcom.gov.uk/project/leasehold-enfranchisement/.

“Decapitalisation”: the process of deriving an annual income which is equivalent to a given capital sum. See paragraph 9.17.

“Deferment rate”: the annual discount applied, on a compound basis, to reflect the fact that money due to be received in the future (assessed at current prices) will instead be received now. In this context, a deferment rate is used to ascertain the present value of an asset that consists of the right to have a property back at the end of the lease. See paragraph 2.34.

“ECHR”: European Convention on Human Rights.

“Enfranchisement rights”: leaseholders have a statutory right to extend their lease. In addition, leaseholders of houses have a statutory right to purchase their freehold, and leaseholders of flats have a statutory right, acting with the other leaseholders in their building, to purchase the freehold of their block (“collective enfranchisement”).

“Freehold ownership”: freehold ownership is property ownership that lasts forever, and which generally gives fairly extensive control of the property.

“Freehold vacant possession (FHVP) value”: the amount that a property is worth held on a freehold basis and not subject to any leasehold interests. See paragraph 2.32.

“Find R test”: the test relies on a formula set out in section 1(1)(a)(ii) of the Leasehold Reform Act 1967, the purpose of which is to calculate, if the premium payable upon the grant of a lease were instead paid as an annual rent, what that rent would be. The test is used in section 1(1)(a)(ii) to determine whether a lease granted on or after 1 April 1990 (and not pursuant to a contract made before that date) qualifies for a valuation under the “original valuation basis” (under section 9(1) of the Leasehold Reform Act 1967) and, in that section, the outcome (“R”) cannot exceed £25,000 on the date that the lease was entered into or contracted for. See paragraph 9.91 onwards.

“Ground rent”: a regular payment which a leaseholder is required by his or her lease to pay to the landlord. Ground rents can be “fixed” (for instance, £300 per annum), subject to a simple review (for example, increasing by £50 per annum every 25 years), or subject to a “dynamic” review (for instance, increasing in line with the Retail Prices Index).

“Hope value”: a deferred form of marriage value (see below). If a freehold interest is sold to someone other than the leaseholder, marriage value will not be realised as a result of that sale. However, the purchaser might “hope” that they will sell the freehold to the leaseholder in the future, which will realise marriage value. The purchaser may therefore pay an additional amount now (“hope value”) to reflect that future possibility. In the context of collective enfranchisements, hope value may be payable in respect of non-participating flats, to reflect the fact that the leases of those flats may be extended (at a premium) in the future. See paragraph 2.51.

“Landlord”: a person who owns an interest in property out of which a lease has been granted. A landlord may be either the freeholder of the property, or hold a leasehold interest in the property himself or herself.

“Lease”: the legal device (usually a written document) that grants a person a leasehold interest in a property and sets out the rights and responsibilities of the leaseholder and landlord. A leasehold interest is a form of property ownership (see “leasehold ownership”).

“Leasehold ownership”: leasehold ownership of property is time-limited ownership (for example, ownership of a 99-year lease), and control of the property is shared with, and limited by, the landlord.

“Leaseholder”: a person who owns property on a long lease.

“Mainstream valuation basis”: the basis for valuing the enfranchisement premium for all flats, and for those houses which do not fall within the “Original valuation basis” (see below). It is based on an assessment of the market value of the landlord’s interest. See paragraphs 1.30 and 2.8 onwards.

“Market value”: the amount that an asset is worth if sold in the open market. See paragraphs 2.10 and 5.80.

“Marriage value”: the additional value that is gained when the landlord’s and leaseholder’s separate interests are “married” into single ownership. It is the difference between:

The value of (1) is often more than (2). Marriage value is “realised” or “released” by an enfranchisement claim because the freehold and leasehold interests, previously in separate ownership, are now in single ownership. See paragraph 2.40 onwards.

“Modern ground rent”: the rent determined under section 15 of the Leasehold Reform Act 1967, payable during the additional term of a 50-year lease extension of a house (under the current law). It is calculated by valuing the “site”, and then decapitalising that value. See paragraphs 2.5 and 9.15.

“No-Act deduction”: when calculating marriage value, it is necessary to establish the value of the existing lease, on the assumption that the leaseholder’s statutory enfranchisement right does not exist. Valuers commonly value the existing lease by finding the real-world value of a comparable short lease, and then deducting from this the estimated value of the benefit of enfranchisement rights. This approach is also referred to as a “deduction for Act rights”. See paragraph 2.44 onwards.

“Original valuation basis”: the basis for valuing the freehold of a house under section 9(1) of the Leasehold Reform Act 1967, based largely on an assessment of the market value of the land on which the house is situated, but not the value of the house itself. It applies to houses which fall below certain financial limits. It does not apply to any flats. See paragraph 1.30 onwards and Chapter 9.

“Peppercorn rent”: many long leases specify an annual ground rent of a peppercorn. Strictly, the landlord in these cases could require the leaseholder to provide him or her with a peppercorn annually, but invariably this is not demanded. A peppercorn rent is used in circumstances where it is intended that there should be no substantive rent payable. Under the current law, any lease extension of a lease of a flat under the 1993 Act must be granted at a peppercorn rent.

“Premium”: the premium is the sum a leaseholder or nominee purchaser must pay to the landlord(s) in order to exercise enfranchisement rights, namely in order to obtain a lease extension or to acquire the freehold of property. The premium is also referred to as the “price” or “compensation”. In other contexts, “premium” is used to describe the capital sum paid by a leaseholder when they purchase a lease of a property: it is the sale price for the property. See para 6.148.

“Price”: see “premium”.

“Prime Central London”: Savills Residential Research produce a Prime London Index which is designed to reflect the price movements of prime property in London. The Index is divided into five areas: Central, North West, North & East, South West and West. The “Prime Central London” Index includes Notting Hill, Kensington, Chelsea, Knightsbridge, Marylebone, Mayfair, Westminster and Pimlico. Whilst the term Prime Central London (“PCL”) is not necessarily used with precision, it generally refers to these areas.

“Rateable Value” or “Domestic rateable value”: a value attributed to a property, based on an assessment of the annual rental value of the property. Part of a system of local taxation that was used by local authorities for domestic (residential) properties between 1967 and 1990 (and which was a predecessor to council tax). Assessments of rateable values were carried out by the District Valuer’s Office. Rateable values for domestic properties were abolished on 1 April 1990 when a new scheme of local taxation was introduced.

“Relativity”: the relative value of (a) a leasehold interest in a property, and (b) the freehold interest of that same property with vacant possession (the FHVP value), expressed as a percentage. See paragraph 2.44 onwards.

“Reversion”: we use “the reversion” to refer to the value of the right to have the property back when the lease expires (sometimes referred as the right to have “vacant possession”). See paragraph 2.28 onwards.

“Schemes”: we present three overall “schemes” as options for a reformed valuation methodology in Chapter 5. In Chapter 8, we explain how the adoption of one of the schemes can be combined with the various “sub-options” for reform discussed in Chapter 6.

“Section 9(1) valuation basis”: see “Original valuation basis”.

“Sub-options”: we present various “sub-options” for reform in Chapter 6. They are individual component parts of calculating enfranchisement premiums, which could feature in one or more of the overall valuation “schemes”. In Chapter 8, we explain how the sub-options could be combined with one of the new valuation schemes discussed in Chapter 5.

“Sunset period”: a temporary period of time following the introduction of new legislation (where such new legislation is intended to replace existing legislation), during which the existing law remains in force before being abolished. A sunset period is generally intended to assist those whose rights would be negatively affected by the introduction of the new legislation by giving them a period of time to exercise their rights under the existing law before it is abolished.

“Site value”: under the Leasehold Reform Act 1967, the value of the land on which a house is situated, not including the value of that house. Site value is decapitalised to calculate the modern ground rent payable during the additional term of a lease extension. See paragraph 9.15.

“Term”: we use “the term” to refer to the value of the right of the landlord to receive the ground rent for the duration of the lease. See paragraph 2.12 onwards.

“Term and reversion”: we use “term and reversion” to refer to the value of the right of the landlord to receive the ground rent for the duration of the lease (“the term”) and the right of the landlord to have the property back when the lease expires (“the reversion”). See paragraphs 2.12 and 2.28 respectively.

“Tribunal”: the First-tier Tribunal (Property Chamber) in England and the Residential Property Tribunal in Wales.

“Unexpired term”: the remaining amount of time left until the end date specified in a lease. A lease granted for a period of 50 years will, after 10 years, have an unexpired term of 40 years.

“Valuation”: the process of calculating the premium by putting a financial value on the interest the landlord has that will be acquired by the leaseholder.

“White knight”: a third party who contributes to the premium payable on a collective enfranchisement in respect of the non-participating leaseholders’ share of that premium.

“Years’ purchase”: years’ purchase is tied to inflation, and the fact that, in general, money will buy less in the future than it does now. It is a multiplier which is calculated through the setting of a yield (or other variable) and a number of years (for instance, until the expiry of a lease). See paragraph 2.16.

“Yield rate”: yield rate has the same meaning as “capitalisation rate”.

Law Commission

Reforming the law


LEASEHOLD HOME OWNERSHIP: BUYING YOUR FREEHOLD OR EXTENDING YOUR LEASE

Report on options to reduce the price payable

Summary

No 387

Introduction

Leasehold enfranchisement is the process for people who own property on a long lease (“leaseholders”) to extend the lease, or buy the freehold. In order to exercise enfranchisement rights, leaseholders must pay a sum of money (“a premium”) to their landlord.

This paper summarises our “Report on options to reduce the price payable”, published on 9 January 2020 (“the Report”), and available at www.lawcom. gov.uk/project/leasehold-enfranchisement/. The Report concerns how premiums are calculated.

The Report follows our consultation on wide-ranging reforms to the enfranchisement regime. Our Consultation Paper is available at the same address.

Our Terms of Reference, agreed with Government, asked us:

“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 interests” (emphasis added).

In accordance with our Terms of Reference, therefore, in the Report:

  • 1. we set out options for reducing premiums and for simplifying the way in which premiums are calculated; but

  • 2. we do not make a recommendation as to how premiums should be calculated. That is a not just a legal question: it involves considerations of law, valuation, social policy, and political judgement, and is therefore for Government and ultimately Parliament to decide.

The Report enables Government and Parliament to decide how premiums should be calculated, informed by the consultation responses that we received and by our own expertise and analysis.

In the Report, we set out three alternative options for a new regime to calculate premiums. Within each of those three schemes, there is a series of further sub-options for reform. In this Summary, we explain those three schemes, and the sub-options, for reform. At each stage, we explain which leaseholders would benefit from the reforms. A diagram representing the schemes and sub-options, and the relationship between them, is then provided at page 23.


Depending on which options for reform are pursued, it would be possible to create an online calculator for the calculation of premiums. Whilst valuation is complex, it does not have to be complex for the user. An online calculator would be simple for leaseholders to use, and would provide them with certainty about what their enfranchisement premium will be.

Valuation is a technical subject, but we have tried to make this Summary, and the Report, as accessible as possible. We have included a glossary at the end of this Summary.

What is leasehold ownership?

Forthcoming Law Commission reports

We will shortly publish three further reports:

  • a separate report addressing all other aspects of a reformed enfranchisement regime - such as who qualifies to make an enfranchisement claim and the process that they must follow to exercise their rights. In that report, we will make recommendations as to how the regime should be reformed.

  • a report on our project on the right to manage, which is a right for leaseholders to take over the management of their building without buying the freehold. They can take control of services, repairs, maintenance, improvements, and insurance.

  • a report on our project on commonhold, which allows for the freehold ownership of flats, offering an alternative way of owning property which avoids the shortcomings of leasehold ownership.

In England and Wales, property is currently almost always owned on either a freehold or a leasehold basis.

  • 1. Freehold is ownership that lasts forever, and generally gives fairly extensive control of the property.

  • 2. Leasehold provides time-limited ownership (for example, a 99-year lease), and control of the property is shared with, and limited by, the freehold owner (that is, the landlord).


The purpose of a leasehold home




Capital investment


Capital investment


For leaseholders



Income generation


Lease extension payments


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What are enfranchisement rights?

Legislation has been enacted that gives leaseholders “enfranchisement rights”.

Lease extension

Leaseholders have a right to extend their lease (“the right to a lease extension”), which provides them with longer-term security in their home. Leaseholders’ security in their home, and the value of their asset, is far better protected if, as the current law allows, they can extend, say, a 60-year lease to 150 years.

Freehold purchase

Leaseholders of houses have a right to purchase their freehold, and leaseholders of flats have a right, acting with the other leaseholders in their building, to purchase the freehold of their block. Freehold acquisition provides leaseholders with the same advantages as a lease extension (namely, security in their home and protecting the value of their asset), but also allows leaseholders to gain control of their property from an external landlord.


What are premiums?

(see Chapter 2 of the Report)

The result of an enfranchisement claim is that the leaseholder acquires from the landlord an enhanced interest in their property. Put another way, an enfranchisement claim involves the transfer of a property right (a longer lease or the freehold) from the landlord to the leaseholder.

The landlord’s entitlement under the lease, which is lost on enfranchisement, is valuable to the landlord. Equally, the enhanced interest acquired by the leaseholder through the enfranchisement claim is valuable to the leaseholder.

Leaseholders must make a payment to their landlord to reflect the value of the enhanced interest that they acquire from the landlord. We use the term “premium” to describe this payment, but it is sometimes also referred to as a “price” or “compensation”.


An example: why must leaseholders pay a premium?

A leaseholder has 60 years remaining on his or her lease, and is required by the lease to pay the landlord a “ground rent” of £200 per year.

The landlord is entitled to have the property back in 60 years’ time, and to receive the ground rent each year.

Result of an enfranchisement claim under the current law

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I Flats


I Houses


The lease is extended by 90 years, so the landlord will not now be entitled to have the flat back for 150 years.

The ground rent is reduced to nothing, so the landlord will no longer be entitled to the ground rent of £200 per year for the next 60 years.

The leaseholder acquires the freehold, so the landlord will not now be entitled to have the house back at all and will no longer be entitled to the ground rent of £200 per year for the next 60 years.


Requirement to pay a premium

The landlord is no longer entitled to the property in 60 years, and is no longer entitled to the ground rent each year. The leaseholder must make a payment to the landlord to reflect the fact that the landlord’s entitlements under the lease are reduced or removed.

Calculating the premium is known as “valuation” as it involves putting a financial value on the interest the landlord has that will be acquired by the leaseholder. Broadly speaking, enfranchisement premiums are intended to reflect the “market value” of the landlord’s asset - which we discuss further below. The market value is the amount that an asset is worth if sold in the open market.

There are two main bases of valuation:

  • 1. The “mainstream valuation basis” is based on an assessment of the market value of the landlord’s interest. It applies to all flats and many houses.

  • 2. The “original valuation basis” includes an assessment of the market value of the land on which the house is situated, but not the value of the house itself, and results in lower premiums for leaseholders. It applies to houses (not flats) which fall below certain financial limits.

We discuss the current law and the methods used to calculate premiums in Chapter 2 of the Report. We deal specifically with the original valuation basis in Chapter 9 of the Report.

Throughout the Report, we refer to a number of example enfranchisement claims. We use these examples to demonstrate how premiums are currently calculated under the “mainstream valuation basis”, as well as to show the impact that our options for reform may have on those premiums. In this Summary, we include just one of the examples from the Report (which we call House A in this Summary -and which is “House 2” in the Report): the purchase of the freehold of a house, worth £250,000 and with 76 years remaining on the lease.

House A

Value on a freehold basis: £250,000

Valuation date: 2019

Details of existing lease:

Granted in 1995 for 100 years Unexpired term: 76 years

Value of lease: £226,250

After freehold purchase:

No lease

No ground rent

Value of freehold £250,000

Ground rent: £50 a year, increasing by £50 every 25 years:

  • - £50 per annum from 1995

  • - £100 per annum from 2020

  • - £150 per annum from 2045

  • - £200 per annum from 2070

The enfranchisement premium would comprise three elements:

  • 1. the value of the right to receive the ground rent over the next 76 years, which is referred to as “the term” +

  • 2. the value of the right to have the property back when the lease expires, which is referred to as “the reversion” +

  • 3. half of the “marriage value”, which is an additional payment to reflect the fact that the value of owning the freehold outright is worth more than the sum of the freehold and leasehold interests in separate ownership. (We discuss marriage value, and the related concept of “hope value”, further below.)

The exact enfranchisement premium for House A would depend on various factors. In particular, each of the three elements of the premium is calculated by using certain “rates” which will vary from case to case. We have given indicative rates in our worked examples, and the result of using those rates is that the premium that the leaseholder would have to pay in order to acquire the freehold of House A is £16,453.


House A

The total premium is:

the term (£1,806)

+ the reversion (£7,349)

+ the payable share (50%) of marriage value (£7,298)

= £16,453

In Appendix 3 to the Report, we explain in detail how each element (the term, the reversion, and the payable share of marriage value) is calculated under the current valuation methodology.

We refer back to House A when we discuss our options for reform below.

What is “marriage value” and “hope value”?

The combined value of the leaseholder’s interest and the landlord’s interest in a property is often less than the value of those interests if they were held by the same person.

House A

In separate ownership

The leaseholder’s interest is worth £226,250.

The landlord’s interest (which is the value of “the term” and “the reversion”) is worth £9,155.

So in separate ownership, the lease and the freehold are worth a total of £235,405.

In single ownership

The freehold to House A is worth £250,000.

So if the lease and freehold were owned by the same person, they would be worth £250,000.


The difference between those two figures is the “marriage value”, here £14,595.

When the leaseholder acquires the freehold, that marriage value is “realised” or “released” because the leaseholder now owns a house worth £250,000.

Where the lease has 80 years or less to run, the legislation requires the leaseholder to pay half of the marriage value to the landlord. Where the lease has more than 80 years to run, the legislation states that the leaseholder does not have to pay any marriage value to the landlord.

“Hope value” is a deferred form of marriage value. If the freehold is sold to someone other than the leaseholder, marriage value will not be realised as a result of that sale. However, the purchaser might “hope” that they will sell the freehold to the leaseholder in the future, which will realise marriage value. The purchaser may therefore pay an additional amount now to reflect that future possibility. That additional amount is “hope value”.

Hope value is always less than marriage value. A purchaser would not pay the full marriage value because the marriage value may not in fact ever be realised (if the lease simply runs its course and expires) or the marriage value may not be realised for a long time.

An individual leaseholder never pays both marriage value and hope value; only one of these elements of the premium is ever relevant to calculating the premium in an enfranchisement claim.

Market value and the role of assumptions

Enfranchisement premiums under the “mainstream valuation basis” (and, to some extent, under the “original valuation basis”) are intended to reflect the “market value” of the landlord’s asset. The valuation of any asset, whether in the context of an enfranchisement claim or in any other context, involves various “assumptions” being made. Assumptions are made about the market in which the asset is being sold or about the nature of the asset that is being sold. For example, in the calculation of enfranchisement premiums, it is assumed that the leaseholder has complied with any repairing obligation in the lease - otherwise a leaseholder would benefit from a lower premium by allowing the property to get into a state of disrepair in breach of the repairing obligation.

Under the mainstream valuation basis, there is an assumption (which reflects the reality of the transaction) that the leaseholder is the purchaser of the asset. Since the leaseholder is the purchaser, the enfranchisement transaction will result in the marriage value being realised. The legislation therefore requires the marriage value to be split between the landlord and leaseholder (where the lease has 80 years or less to run) - so the leaseholder must pay half of the marriage value to the landlord. That split is based on the view that - in a negotiation - the landlord and leaseholder would agree to split the marriage value between themselves equally.

It is possible to make different hypothetical assumptions about the transaction being valued: for example, that the leaseholder is or is not the purchaser (known as “being in the market”) and/or that the leaseholder will or will not be in the market at some future time.

As we go on to explore below when discussing our options for reform, the assumption about the presence of the leaseholder in the market has a significant effect on the enfranchisement premium. It determines whether or not marriage value or hope value is payable.




PROBLEMS WITH THE

CURRENT LAW

We explore various problems with the current law in Chapter 2 of the Report.

Complexity

Uncertainty being used as a negotiating chip

Unpredictable outcomes


The stakes are high


Delays


REDUCING PREMIUMS

Views on the fairness of enfranchisement premiums

During our project, we have heard opposing views from landlords and leaseholders about the fairness of the requirement to pay a premium in order to enfranchise, and the level of that premium. We summarise those views in the Report. Our Terms of Reference require us to examine the options to reduce premiums, and we take that as our starting point.


Sufficient compensation and human rights (see Chapter 1 of the Report)

The law governing human rights is highly relevant to valuation reform. Article 1 of the First Protocol (“A1P1”) to the European Convention on Human Rights (“ECHR”) provides for the peaceful enjoyment of property.

Article 1 of the First Protocol (“A1P1”) to the ECHR

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. ...


A1P1 and most other rights under the ECHR (“the Convention rights”) have been incorporated into English law by the Human Rights Act 1998 (“the 1998 Act”). The Convention rights therefore form part of English law, and any reforms to the enfranchisement regime that we set out, which Government seeks to implement, and which Parliament enacts, need to be compliant with the Convention rights.

The 1998 Act allows courts to declare that a provision of an Act of Parliament is incompatible with the Convention rights, and to award damages for any breach of Convention rights. In addition, a challenge can be brought in the European Court of Human Rights which can decide that there has been a breach of the Convention rights and which can make an award of compensation.

Accordingly, if legislation that reduces premiums is not compatible with the Convention rights, a challenge could be made and Government could be required to pay compensation to landlords whose rights have been infringed. The legislation is also likely to be amended in order to make it compatible with the Convention rights.

Our project, and the options for reform that we present, must therefore operate within human rights law. Some consultees asserted that any reduction in enfranchisement premiums would be unlawful under A1P1 and it is clear that any reforms will be carefully scrutinised. Given the necessity for a reformed valuation regime to be lawful under A1P1, we have obtained the independent opinion of Catherine Callaghan QC, a specialist human rights barrister, on the compliance with human rights law of our options for reducing premiums (which we refer to as “Counsel’s Opinion”). We have published Counsel’s

Opinion alongside the Report, and we quote Counsel’s Opinion throughout the Report.

Leaseholders’ human rights

During our consultation events, and in their consultation responses, leaseholders often asked us why we were focusing on landlords’ human rights, and what consideration was being given to their own human rights.

How are leaseholders’ human rights under the ECHR relevant? (Taken from Counsel’s Opinion)

It is important to bear in mind that leaseholders also enjoy rights that are protected under the ECHR. Leaseholders enjoy the right to the peaceful enjoyment of their possessions under A1P1. Residential leaseholders who are owneroccupiers also benefit from the right to respect for their home under Article 8 [Article 8 provides that “Everyone has the right to respect for his private and family life, his home and his correspondence.”] However, leasehold enfranchisement legislation does not interfere with leaseholders’ property rights under A1P1. Leaseholders’ interests are taken into account when determining the amount of compensation payable to landlords, as the exercise of assessing whether a fair balance has been struck necessarily entails balancing the interests of landlords against the interests of leaseholders, both in their own right and when considering the general interest of society.

Article 8 is not concerned with the right to own or occupy property as such. Article 8 is not engaged or violated either by the ordinary operation of a lease (which limits a leaseholder’s occupancy of the property to the term of the lease) or by requiring the leaseholder to pay for the extension of the lease or purchase the freehold to avoid that result.


The law is clear that leaseholders cannot rely on their human rights under A1P1 or Article 8 to challenge the ordinary operation of their lease, including the fact that they must make an enfranchisement claim, and that they must pay a premium to do so.

Landlords’ human rights

As we set out above, our Terms of Reference require us to consider valuation options that ensure “sufficient compensation is paid to landlords to reflect their legitimate property interests”. Views will invariably differ on what constitutes sufficient compensation. In legal terms, a central issue in determining whether compensation is “sufficient” is whether it is compatible with A1P1.

So landlords’ human rights do not prevent leaseholders from buying their freeholds or extending their leases against the wishes of their landlord. But they do require leaseholders to pay for the freehold or lease extension in order to justify the interference with the landlord’s property rights.

The enfranchisement premium that is paid by leaseholders to landlords is relevant when assessing the compatibility with A1P1 of any options for reform that would reduce those premiums.

How are landlords’ human rights under A1P1 relevant? (Taken from Counsel’s Opinion)

A1P1 protects the right to the peaceful enjoyment of possessions, and in substance guarantees the right of property. “Possessions” include real and immovable property, and therefore A1P1 protects any proprietary interest in land.

A1P1 can be invoked by any “natural or legal person” who has suffered an interference with their possessions for which the state is responsible, and can therefore be invoked not only by an individual but also by a company or other legal entity (whether based in the UK or elsewhere).

A1P1 is a qualified right. An interference with a person’s property rights can be justified where a legitimate aim is pursued by reasonably proportionate means. This involves an assessment of whether a fair balance has been struck between the demands of the general interest of the community and the requirements of the protection of the individual’s rights. The payment of compensation is relevant to the fairness of the balance struck.

Legislation which permits a leaseholder to compulsorily acquire the freehold or extend the lease of a house or flat interferes with a landlord’s property rights under A1P1 and will only be lawful if the level of compensation payable to the landlord is sufficient to justify the interference with those property rights.

It is not necessary for landlords to be provided with full market value for their interest; there is some discretion within which property rights can be interfered with to achieve a legitimate aim. But generally the further away from market value the compensation is, the more difficult it is likely to be to justify the interference.

In the Report, we only put forward options for reform that are likely to be compatible with landlords’ rights under A1P1. We have not, therefore, put forward options that are unlikely to be compatible with landlords’ rights under A1P1. Our assessment of the compatibility of the options for reform that we put forward in the Report is based on Counsel’s Opinion.

Our role (see Chapters 1 and 4 of the Report)

As we have explained above, our task is to set out the options that are available for reducing premiums payable by leaseholders. The question of whether and how premiums should be reduced is not solely a question of law: it involves considerations of law, valuation, social policy, and political judgement. It is a question for Government, and ultimately Parliament, to decide.


We have worked within our Terms of Reference to devise, consult on, analyse, and present the options for reform that exist, taking into account the views of consultees and working within the parameters of A1P1. The Report is the culmination of our work, setting out in detail the options for reducing premiums that are available, to allow Government and Parliament to decide which option(s) to pursue.

Implementing reform

Once Government has decided how valuation should be reformed, it will then be necessary to implement that reform by means of primary legislation (an Act of Parliament). A Bill will need to be prepared, which could create a new enfranchisement regime, covering both the valuation issues included in the Report and all other issues which will be included in our forthcoming report on enfranchisement reform.

CONSULTATION PERIOD

AND EVENTS

On 20 September 2018, we published a Consultation Paper setting out our provisional proposals for wide-ranging reforms to the enfranchisement regime.

We asked for views on valuation reform, and made proposals for reform designed to provide a new scheme of qualifying criteria for enfranchisement rights, to enhance and improve the enfranchisement rights themselves, and to provide a new unified procedure for all claims.

Following publication of our Consultation Paper, we held various public consultation events around England and Wales in order to explain our proposals for reform, encourage discussion and debate about our proposals, gather attendees’ views and encourage people to provide written responses to the Consultation Paper. We also met with different groups of stakeholders to hear their views about reform.

In response to requests from consultees, we extended our consultation period to 7 January 2019. We received over 1,100 responses to our Consultation Paper and over 1,500 responses to our online survey about leaseholders’ experiences of the enfranchisement process.

This Summary (and the Report) only concerns valuation reform. We will subsequently publish a separate report with our recommendations for reforming all other aspects of the enfranchisement regime.

We have published the consultation responses, in so far as they relate to valuation, alongside the Report. All other consultation responses will be published alongside our forthcoming separate report.

As explained above, there were many strongly-held views about leasehold reform, from leaseholders, landlords, professionals, and others. We have taken those views - expressed to us at consultation events and in written consultation responses - into account as we have developed the options for reform that we set out in the Report, and the recommendations for reform that we will set out in our forthcoming reports.



OUR OPTIONS FOR REFORM

Our Report sets out various options for reducing premiums and for improving the enfranchisement valuation process, such as increasing certainty or reducing delays.

Overall schemes: three options (see Chapter 5 of the Report)

In the Report, we set out three alternative options for a new regime to calculate premiums: Scheme 1, Scheme 2 and Scheme 3. They would set the general framework for the reformed enfranchisement valuation regime. As we go on to explain, within each of those schemes, there is a series of further sub-options for reform.

The enfranchisement premium under all three schemes would include an amount to reflect the value of “the term” and “the reversion”. The main difference between the three schemes is whether or not the premium includes marriage value or hope value.

4*

We explain above the role of “assumptions” when calculating the market value of the landlord’s asset. The three schemes that we put forward reflect three different assumptions about the market in which the landlord’s interest is being valued. Those assumptions are about the presence of the leaseholder in the market, and they affect whether or not marriage value or hope value is payable.

Each scheme results in a premium that can be described as the “market value” of the landlord’s asset, by reference to that assumed market. It is what the landlord could expect to receive for his or her interest in that market.

Technical explanation of the schemes

Under Scheme 1, it is assumed that the leaseholder is never in the market.

The result is that no marriage value or hope value is payable.

Under Scheme 2, it is assumed that the leaseholder is not now in the market but may be in the future.

The result is that hope value (but not marriage value) is payable.

Under Scheme 3, it is assumed that the leaseholder is in the market.

The result is that marriage value is payable.

What is the effect of the schemes?

Under Scheme 1, the enfranchisement premium would be: Term + Reversion

Under Scheme 2, the enfranchisement premium would be: Term + Reversion + Hope value

Under Scheme 3, the enfranchisement premium would be: Term + Reversion + Marriage value

How do the schemes compare with the current law?

Schemes 1 and 2 would reduce enfranchisement premiums. Scheme 3 reflects the current law. But all three schemes can be used as a framework for other reforms to reduce premiums (which we discuss below).

Who would benefit from the schemes?

All leaseholders would benefit from the schemes if they are used as the framework to implement other reforms to reduce premiums (which we discuss below).

Leaseholders with 80 years or less to run on their lease would also benefit directly from Scheme 1 or Scheme 2 since those schemes would lead to a reduction in their enfranchisement premiums by removing the requirement to pay marriage value.




Scheme 1

Under Scheme 1, it is assumed that the leaseholder is not in the market at the time the premium is calculated and will never be in the market.

This assumption produces a premium based on the value of “the term” and “the reversion” only. The extra value attributable to the leaseholder being in the market (marriage value and hope value) is therefore not payable.

Scheme 1 reflects what the landlord would receive if the lease ran its course and the leaseholder never chose to extend the lease or acquire the freehold: the landlord would receive the ground rent (“the term”) and would get the property back at the expiry of the lease (“the reversion”).

Scheme 2

Under Scheme 2, it is assumed that the leaseholder is not in the market at the time the premium is calculated, but may be in the market in the future.

This assumption produces a premium based on the value of the term, the reversion, and (in certain cases) hope value. The extra value attributable to the leaseholder being in the market on the valuation date (marriage value) is therefore not payable.

Scheme 2 reflects what the landlord would receive if his or her interest were sold to a third party. An investor purchasing the freehold would not pay marriage value (because the leasehold and freehold interests would remain in separate ownership, so marriage value would not be realised). But an investor might pay hope value, to reflect the fact that he or she might in the future be able to realise the marriage value by selling the interest to the leaseholder.

Scheme 3

Under Scheme 3, it is assumed that the leaseholder is in the market at the time the premium is calculated.

This assumption produces a premium based on the value of the term, the reversion and marriage value (where it exists).

Scheme 3 reflects what the landlord would receive for his or her interest if sold to the leaseholder. By acquiring the landlord’s interest, the leaseholder realises the marriage value, and so would pay the landlord for it.

Scheme 3 reflects the way in which premiums are calculated under the current law, but when combined with other reforms Scheme 3 can still be used to reduce premiums.



Effect of the three schemes on the enfranchisement premium for House A

Details of existing lease

Unexpired term

76 years

Ground rent

£50 per year rising to £200 per year

Value on freehold basis

£250,000

Enfranchisement premiums

Valuation under:

Current law

Scheme 1

Scheme 2

Scheme 3

Part (1): term

£1,806

£1,806

£1,806

£1,806

Part (2): reversion

£7,349

£7,349

£7,349

£7,349

Part (3): marriage / hope value

£7,298

(marriage value)

£-

(no marriage value)

£1,460 (hope value)

£7,298

(marriage value)

Total premium

£16,453

£9,155

£10,615

£16,453

The role of “rates” in calculating the premium


Within each of the overall schemes: seven sub-options (see Chapter 6 of the Report)

Within each of the three schemes, there is a series of further options for reform. These options could feature in any of the three overall schemes.

Reforms that would (or could) reduce premiums

  • To value “the term”, it is necessary to calculate a capital sum which reflects the right to receive the ground rent income in the future. A “capitalisation rate” is a rate of return which is used to calculate a capital sum that reflects the value of that income stream.

  • To value “the reversion”, it is necessary to calculate a capital sum which reflects the value of the right to have the property back at the end of the lease. A “deferment rate” is used to discount the value of the freehold interest, to reflect the fact that instead of receiving the benefit of vacant possession of the property in the future, the landlord will receive money now.

  • To assess “marriage value” and “hope value”, it is necessary to establish the relative value of the leasehold interest in a property compared to the freehold interest in the property. The percentage that is used in the valuation is called “ relativity ”.


Those rates will continue to have a role under each of the three overall schemes that we set out above. That is because enfranchisement premiums under each scheme would continue to include an amount to reflect “the term” and “the reversion”. The schemes differ in their treatment of marriage value and hope value, but under Schemes 2 and 3, the rate that is used to calculate those sums (“relativity”) would continue to be relevant.

Leaseholders and landlords (and their professional representatives) will frequently disagree on the appropriate rates in their case. The rates that are used, and therefore the enfranchisement premium, in any case depend on the outcome of negotiations between the landlord’s valuer and the leaseholder’s valuer or (if agreement cannot be reached) on the outcome of litigation between the parties. The rates that are used can have a significant impact on the enfranchisement premium.

Effect of different rates on the enfranchisement premium for House A

The enfranchisement premium of £16,453 for House A is calculated using a capitalisation rate of 6%, a deferment rate of 4.75% and relativity of 90.5%.

If each of those rates are changed by 1% in favour of the leaseholder (to 7%, 5.75% and 91.5% respectively), the enfranchisement premium would reduce to £13,166.

If those rates were changed by 1% in favour of the landlord (to 5%, 3.75% and 89.5% respectively), the enfranchisement premium would increase to £21,852.

Leaseholders and landlords therefore face significant uncertainty about what the enfranchisement premium in any given case is likely to be.

In the Report, we conclude the enfranchisement process would be made more certain and predictable, simpler, more consistent, and cheaper if these rates were prescribed. The level of prescription could be at, or below, market value.


Benefits of prescribing rates (at any level)

Certainty and predictability

Simplicity

Consistency

Removing unfair incentive structures

Reduced scope for inequality of power, and litigation tactics, to influence the outcome

Reducing costs, delays and litigation

Benefits of prescribing rates (below market levels)

All of the benefits listed above, plus leaseholders would pay lower enfranchisement premiums.

Who would benefit?

Prescription at market rates would have benefits for all leaseholders and (in some cases) landlords.

Prescription at below-market rates would benefit all leaseholders.

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

One of the three main elements of an enfranchisement premium is “the term”. Under each of the three schemes that we put forward, enfranchisement premiums would continue to include an amount to reflect the value of “the term”.

The value of “the term” depends on the level of the ground rent. The higher the ground rent, the higher the premium.

Some leases contain very high ground rents, or ground rents that will become very high in the future. Ground rents are generally considered to be onerous when they exceed 0.1% of the freehold value of the property.


Currently, the existence of an onerous ground rent makes it particularly important for leaseholders to be able to exercise their enfranchisement rights in order to escape from the liability, but the presence of the onerous ground rent makes the enfranchisement premium very high.

In the Report, we conclude 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. In so far as the ground rent under a lease exceeds that cap, it would be ignored when calculating the enfranchisement premium.

This option for reform would benefit leaseholders whose leases contain an obligation to pay an onerous ground rent. The ground rent for House A is not onerous, so a cap would not affect the premium. But for other leaseholders, a cap would significantly reduce premiums. We give an example in the Report of a lease which includes an onerous ground rent (starting at £300 per annum and doubling every 10 years). A ground rent cap would reduce the enfranchisement premium from £79,425 under the current law to £6,253. (As with all of our examples, the precise figures would depend on the rates that are used in that case.)


Benefits of capping ground rent in the valuation calculation

Reducing premiums for leaseholders with onerous ground rents.

Who would benefit?

Leaseholders who currently have onerous ground rents or whose ground rents may or will in the future (following review) become onerous, regardless of the length of their lease.

Sub-option (3) Development value

In some enfranchisement claims, the premium may be increased in order to reflect the development potential of the land being acquired. Most enfranchisement claims by individual leaseholders (for a lease extension, or to acquire the freehold of their house) would not include development value. But a requirement to pay development value can arise in an enfranchisement claim by a group of leaseholders in a block of flats to purchase the freehold of that block; they may be required, for example, to pay an additional sum to reflect the value of building further floors of flats on top of the block. Development value is payable even if the leaseholders acquiring the freehold have no intention to carry out any development.

This additional value would continue to be payable under each of the three schemes that we set out above.

In the Report, we conclude that leaseholders could be given a power to decide to accept a restriction on future development of their block when they acquire the freehold. If they chose to accept that restriction, they would not have to pay the landlord any development value in the enfranchisement claim -so their enfranchisement premium would be reduced. If the leaseholders subsequently decided that they wanted to develop the block and therefore “realise” the development value, they could negotiate with the former landlord to release the restriction. They would, at that stage, have to make a payment to the former landlord in respect of the development value.


Benefits of restricting development

Premiums would be reduced at the time of the enfranchisement claim.

Who would benefit?

Leaseholders of flats acquiring the freehold of their block, as they would not be required to pay the landlord an additional sum to reflect the potential to develop their properties.

Leaseholders and landlords, as disputes, negotiation and litigation about development value would be reduced.


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, for example, buy-to-let landlords and other investors).

It would be possible to reform the valuation regime so that owner-occupiers benefit from reduced premiums, but commercial investors do not. Such an approach might be one way to ensure compliance with landlords’ human rights, since the aim of enabling people to exercise enfranchisement rights in relation to their homes (rather than in relation to a financial investment) could justify a lower premium.

In the Report, we conclude that there are significant drawbacks to a regime that differentiates between different categories of leaseholders. But it would be possible. And if Government wishes to reduce premiums to a level that cannot be justified under A1P1 if it applies to all leaseholders, then it could be necessary for Government to create such a distinction.


Benefits of differential pricing

Who would benefit?

Owner-occupiers would benefit from a lower enfranchisement premium.

The policy of reducing premiums for leaseholders may be easier to justify under A1P1.

Leaseholders who are owner-occupiers, regardless of the length of their lease.

Reforms that would only reduce premiums if adopted alongside other reforms

We set out three further sub-options for reform. By themselves, they would increase premiums for particular leaseholders - which would be contrary to our Terms of Reference. In accordance with our Terms of Reference, we only present them as options if they are pursued alongside other measures, so that the overall effect is to reduce premiums. The potential advantages of these three sub-options do not relate to the reduction of premiums, but other benefits such as simplifying the process or removing inconsistencies.

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

Leaseholders must pay 50% of the marriage value if their lease has 80 years or less left to run. If the lease has more than 80 years left to run, they do not have to pay any marriage value.

Under Scheme 1, marriage value would not be payable in any event and so the 80-year cut off would become redundant. Under Schemes 2 and 3, marriage value or hope value would be payable, and there would still be a role for the 80-year cut-off.

If rates are prescribed, the time and expense of calculating marriage value would be reduced, and it would be possible to remove the 80-year cut off. But the result would be that leaseholders with more than 80 years left to run would have to pay marriage value or hope value.

We conclude that the 80-year cut-off should be retained, otherwise premiums would increase for leaseholders with more than 80 years unexpired. That conclusion is subject to the possibility of removing the 80-year cut-off in combination with other reforms that would have the overall effect of reducing premiums.


Benefits of removing the 80-year cut-off

For landlords, an arbitrary cut-off for the payment of marriage value would be removed.

Distortion of the market would be avoided, and the artificial cliff edge faced by leaseholders approaching the 80-year point would be removed.

Who would benefit?

Landlords of leases with more than 80 years left to run, because removing the cut-off would increase premiums.

Leaseholders would not benefit unless this option is combined with other measures that would have the overall effect of reducing premiums.

Sub-option (6) Discount for leaseholders’ improvements

The freehold value of a property is relevant to the valuation of “the reversion” and “marriage value”. It therefore remains relevant under each of the three overall schemes that we set out above.

Any increase in the value of the property which is the result of an improvement carried out by the leaseholder can be discounted from the freehold value. The effect is to reduce the premium. But identifying relevant improvements, and the appropriate discount, can be the source of much dispute between the leaseholder and landlord, leading to professional and litigation costs.

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.



Benefits of removing the discount for leaseholders’ improvements

Simplification, reducing the potential for disputes.

Who would benefit?

Landlords, because the effect of the discount is always to reduce premiums. Landlords and leaseholders would no longer incur costs when there are disputes about leaseholders’ improvements.


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

When a long lease comes to an end, the leaseholder often has statutory rights to remain in the property paying a rent to the landlord. It is known as a right to “hold over”.

Similarly to the discount for leaseholders’ improvements, the right to hold over can reduce the value of the freehold, and therefore also reduce the enfranchisement premium. But the discount also creates some problems.

In the Report, we conclude that the discount for holding over should be retained, otherwise premiums will be increased for some leaseholders. However, we 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.


Benefits of removing the discount for the risk of holding over

Simplification, reducing the potential for disputes.

Who would benefit?

Landlords, because the effect of the discount is always to reduce premiums. Landlords and leaseholders would no longer incur costs when there are disputes about the discount for holding over.


Summary of options for reform




How would leaseholders benefit from the options set out in the Report?

Sub-option 3: no payment for development value (if the claim is for the freehold of a block of flats)

Every leaseholder (regardless of lease length) benefits from...

Sub-option 4: favourable premiums for owner-occupiers (if they are owner-occupiers)

Sub-option 5:

removal of 80-year cut-off for marriage value

Sub-option 6:

removal of discount for leaseholder’s improvements

but only if the reform is combined with other measures to reduce premiums

Sub-option 7:

removal of discount for holding over


Working towards an online calculator (See Chapter 7 of the Report)

In Chapter 7 of the Report, we explore the possible role of an online calculator in a new enfranchisement valuation regime.

Whilst valuation is complex, it does not have to be complex for the user. It would be possible for an online calculator to be made available which could tell leaseholders and landlords - in certain circumstances - what the enfranchisement premium will be.

An online calculator would deliver significant benefits.

  • 1. It would be simple to use.

  • 2. It would increase certainty and predictability for the parties to an enfranchisement claim, so leaseholders and landlords would know where they stand.

  • 3. It would remove the layers of complexity and inaccessibility which many consultees argued surround valuation.

  • 4. It would significantly reduce the current scope for argument between the parties, consequential delays and associated professional costs.

Each of the three overall schemes that we put forward would accommodate an online calculator. But an online calculator could only be produced if rates are prescribed (see Sub-option 1 above).

Benefits of an online calculator

Simplicity and accessibility

Certainty and predictability

Reduced professional costs

Reduced scope for inequality of power, and litigation tactics, to influence the outcome

Reduced disputes, costs and delays

Who would benefit?

Leaseholders (regardless of the length of their lease) and landlords.




The role of a simple formula (see Chapter 6 of the Report)

In the Consultation Paper, we discussed the possibility of introducing a reformed valuation scheme which set enfranchisement premiums according to a simple formula, rather than by assessing the market value of the asset being acquired.

  • 1. We discussed the regime in Scotland, which sets a formula which is based on a “capitalised ground rent”. That regime only applies to very long leases which have a low ground rent.

  • 2. We discussed suggestions that had been made for the introduction of a “ground rent multiplier”, so that enfranchisement premiums could be calculated based on (say) ten times the ground rent.

  • 3. We discussed the possibility of calculating enfranchisement premiums based on a percentage of the freehold value of the property.

These schemes could result in enfranchisement premiums reducing for all leaseholders, regardless of the remaining length of their leases.

The majority view of leaseholders responding to our consultation was that enfranchisement premiums should be based on the ground rent multiplied by 10. The views expressed by these leaseholders were strongly-held and unequivocal. Many leaseholders’ responses demonstrated their exasperation with the current regime, and their view that a simple formula of 10 times ground rent was an obvious and fair solution to many of the problems associated with calculating enfranchisement premiums.

If enfranchisement premiums were to be based on a ground rent multiplier in all cases, the regime would be very unlikely to be compatible with A1P1. We do not, therefore, put it forward as an option for reform in the Report.

Counsel advised as follows:

Under this valuation method, the only factor that would be used to determine the premium is the ground rent. The ground rent figure itself may be an arbitrary amount which bears no relation to the capital value of the property. This means that the resulting premium on enfranchisement would be arbitrary. The valuation method would take no account of the reversionary value (which may be substantial) or the length of the lease. Consequently, a premium based solely on the ground rent is likely to be arbitrary, bear no relation to the value of the landlord’s asset and be too inflexible to take account of differing situations.

I consider that such a valuation method is unlikely to be compatible with A1P1, and I estimate the risk of a successful challenge to such a valuation method as High. It should be disregarded.

Similarly, if enfranchisement premiums were to be based on a percentage of freehold value in all cases, the regime would be very unlikely to be compatible with A1P1. We do not, therefore, put it forward as an option for reform in the Report.

Counsel advised as follows:

Under this valuation method, the premium would be set at a percentage of the capital value of the freehold. The premium would not reflect the length of the lease or any difference in the ground rent payable. It would therefore be equally as inflexible as a ground-rent multiplier. Depending on what percentage was set, it may result in higher premiums. I consider that such a valuation method is unlikely to be compatible with A1P1, and that the risk of a successful challenge to such a valuation method is High. It should also be disregarded.

Given the risk of a successful challenge on human rights grounds to either of these valuation approaches, we conclude that they should not be pursued as an option for reform in all enfranchisement claims.


In more detail: the problems with a simple formula if used in all cases

The problems with a ground rent multiplier, if used in all cases:

  • a universal ground rent multiplier would not reflect the true value of “the term”. For example, a premium based on 10 times ground rent would be the same whether the lease had 10 years or 200 years unexpired, but the value of the right to receive an annual ground rent for 10 years is far less than the value of the right to receive that annual ground rent for 200 years.

  • a universal ground rent multiplier would not reflect the true value of “the reversion” or marriage value, because the value of those elements of the premium depend on the length of the lease (not on the ground rent). The right to receive the property back in 200 years is far less than the value of the right to have the property back in 10 years.

In House A, the vast majority of the total enfranchisement premium of £16,453 comprises “the reversion” (£7,349) and the marriage value (£7,298). The value of “the term” (£1,806) is relatively low.

So a multiplier of ground rent, if applied in all cases, would not be reflective of the true value of the asset to the landlord. That is mainly because a ground rent multiplier takes no account of the length of the lease and it does not reflect the value of the reversion or marriage value.

The problems with a percentage of freehold value, if used in all cases:

  • an enfranchisement premium based on freehold value would not reflect the value of “the term”, because the value of that element of the premium depends on the ground rent (not on the freehold value). If a lease has 100 years to run, a premium based on (say) 1% or 10% of the freehold value would be the same whether the ground rent was £5 or £500 per annum. But the right to receive £500 per annum is worth more than the right to receive £5 per annum.

  • similarly, a percentage of capital value does not reflect the true value of “the reversion”. A premium based on (say) 1% or 10% of the freehold value would be the same whether the lease had 10 years or 200 years unexpired, but the value of the right to have the property back in 200 years is far less than the value of the right to have the property back in 10 years.

So a percentage of capital value, if applied in all cases, would not be reflective of the true value of the asset to the landlord. That is because it takes no account of the length of the lease or the level of the ground rent.

However, that is not to say that a simple formula has no potential role in a reformed valuation regime.

For a limited category of cases, a simple formula could be used either:

  • 1. to implement one of the three overall schemes set out above; or

  • 2. (in the event that there is no wholescale reform and Government rejects the three schemes set out above) as a stand-alone regime for straightforward and low-value enfranchisement claims.


In more detail: using a simple formula

A scheme similar to the Scottish legislation could be introduced. It could apply to leases which are similar to the leases to which that regime applies, namely very long leases (so the value of the reversion is minimal) and where the ground rent is fairly low and is not subject to review. Alternatively, a ground rent multiplier could be used for similar leases - very long leases (so the value of the reversion is minimal) where the ground rent is fairly low and not subject to review.

The main problem with such an approach is that many leases would not fall within the scheme. That is because there is a wide range of leases in England and Wales, including short leases (where the value of the reversion is high) and leases with high ground rents or complex review structures (where the value of the term is high). Consequently, the applicability and, therefore, benefit of such a scheme is likely to be limited.

Nevertheless, we put this approach forward as an option that Government might wish to consider, particular in light of the support and attention that simple formulae have attracted.

  • 1) A simple formula as a mechanism to implement (in part) one of the three overall schemes

A scheme along these lines could be used to implement one of the three overall schemes set out above for a limited category of leases.

But doing so would add complexity to the law and would not produce any different results. That is because, if rates are prescribed and an online calculator is introduced, then the schemes that we put forward could be made as accessible and easy to apply as a regime based on the Scottish legislation or a ground rent multiplier. It does not therefore seem necessary if Government adopts a new overall scheme.

  • 2) A simple formula as a stand-alone regime for straightforward and low-value claims

If the current valuation regime stays the same, there would still be scope for the introduction of a simple formula for a limited category of straightforward and low-value claims.


The “original valuation basis” (see Chapter 9 of the Report)

In Chapter 9, we discuss the “original valuation basis” of calculating the premium and set out the options for how that basis of valuation could be reformed.

The original valuation basis applies to some leaseholders of houses who are purchasing their freeholds, where the house falls under certain financial limits.

The responses to our consultation have suggested that it is still widely used, particularly in areas such as the Midlands and South Wales.

Valuations under the original valuation basis are attractive to leaseholders because they produce a premium which is always significantly lower than a premium calculated under the mainstream valuation basis.

On the other hand, the original valuation basis gives rise to problems for leaseholders, as well as for landlords. There are problems both with the qualification criteria (working out which houses qualify for a valuation under the original valuation basis) and the valuation methodology (working out how to calculate the premium). These problems mean that the original valuation basis is outdated and difficult to use, which can increase costs for leaseholders and landlords, as well as increasing the risk of the premium being calculated incorrectly.


The main problems with the original valuation basis

Qualification criteria

Valuation methodology

Unworkable

Whether a house qualifies under the original valuation basis can often depend on the house’s historic “rateable value” (a predecessor to council tax) which can be difficult or impossible to trace.

Too complex

The way the premium is calculated under the original valuation basis is very difficult to understand and implement, especially for leaseholders.

Arbitrary

The original valuation basis originally applied only to low value houses. Today, however, it no longer applies to all low value houses (some low value houses do not qualify for the more favourable valuation) or only low value houses (some high value houses qualify for the more favourable valuation).

Unfair on landlords

Some people argue that the original valuation basis fails to compensate landlords properly when leaseholders purchase their freeholds. This is mainly because (in contrast to the mainstream valuation basis) a landlord is compensated primarily for the loss of the site, but not the loss of the building built on the site.

In the Report we put forward two options for Government for reform of the original valuation basis:

  • 1. Retain the original valuation basis indefinitely and largely in its current form: it could be retained as an exception to the mainstream valuation basis. Whilst this approach would not solve the problems set out above, it is the only way to ensure that all leaseholders who currently qualify under the original valuation basis would continue to benefit from this more favourable valuation (as opposed to having to pay a higher premium under the mainstream valuation basis). Prescribing rates would simplify the calculation and may even enable the use of an online calculator.

  • 2. Replace the original valuation basis with an entirely new scheme: a more fundamental and far-reaching reform would be to replace the original valuation basis with an entirely new scheme designed accurately to identify (all and only) low value properties and provide them with a more favourable way of calculating premiums than higher value properties. A new scheme could apply to low value flats as well as houses, and so incorporate all low value homes. The new scheme would aim to be easier to understand and more suited to the realities of modern leasehold ownership than the original valuation basis. For example, leaseholders would not have to locate their rateable values to qualify for a valuation under the new scheme. The new scheme would also operate consistently to ensure that it includes all low value properties and excludes all higher value properties.


CONCLUSION

We have set out the options for wholescale reform of the valuation regime in order to reduce enfranchisement premiums for leaseholders whilst ensuring that landlords receive sufficient compensation. Landlords will oppose any reforms that would reduce premiums, and we expect that some leaseholders will say that the options that we set out do not go far enough. The options that we have set out are detailed and nuanced, and reflect the limitations of human rights law. It is now for Government to decide which of the options to pursue, and then for Parliament to pass an Act of Parliament to implement that reform.

Find out more at designl02.co.uk

Design that makes a difference

Leasehold home ownership: buying your freehold or extending your lease

Report on options to reduce the price payable

To the Right Honourable Robert Buckland QC MP, Lord Chancellor and Secretary of State for Justice

THIS REPORT

would require primary legislation to implement.

Government has asked us “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 interests”.

premiums are calculated; but

WHAT IS LEASEHOLD OWNERSHIP?

Flats are almost universally owned on a leasehold, as opposed to freehold, basis. That is because, for historic reasons, certain obligations to pay money or perform an action in relation to a property (such as to repair a wall or a roof) cannot legally be passed to future owners of freehold property. These obligations are especially important for the effective management of blocks of flats. For instance, it is necessary that all flat owners can be required to pay towards the costs of maintaining the block, which is important since flats are structurally interdependent. There are therefore good reasons, under the current law, why flats are sold on a leasehold basis.

But leasehold ownership is not limited to flats. Sometimes houses are sold on a leasehold basis. That has been the case for some years. 4 The first piece of enfranchisement legislation enacted in 1967 - the Leasehold Reform Act 1967 (“the 1967 Act”) - granted enfranchisement rights to leaseholders of houses. More recently, new-build houses have been sold on a leasehold basis. That allows developers to sell the property subject to an ongoing obligation to pay a ground rent. The right to receive a ground rent (in respect of both houses and flats) is a valuable asset, which can then be sold to an investor. Concerns have been raised about the sale of houses on a leasehold basis, and the UK Government has announced its intention to ban the sale of leasehold houses. 5

The reasons for selling houses on a leasehold basis are less apparent than those for leasehold flats. One reason might be the need to impose positive obligations on house owners in relation to the upkeep (management) of an estate, but that does not apply in all cases.

The reasons why, for legal purposes, houses and flats may be sold on a long lease do not, however, require the lease to provide income streams to the landlord, beyond those needed to maintain the property, the block, or the estate.

In many countries, leasehold ownership does not exist. Instead, forms of strata or condominium title are used so that flats can be owned on a freehold basis. In England and Wales, commonhold was introduced as an alternative to leasehold in 2002 (by the Commonhold and Leasehold Reform Act 2002), to enable the freehold ownership of flats. Commonhold allows the residents of a building to own the freehold of their individual units and to manage the shared areas through a company. Commonhold has not, however, taken off - fewer than 20 commonholds have been created since the law came into force. 6

Alongside our work on enfranchisement, we are carrying out a separate project to consider the various legal issues within the current commonhold legislation which affect market confidence and workability. We will recommend reforms that would allow commonhold to be reinvigorated as a workable alternative to leasehold, for both existing and new homes. 7 We will publish our final report later this year.

WHAT ARE ENFRANCHISEMENT RIGHTS?

WHAT ARE PREMIUMS?

A leaseholder has 60 years remaining on his or her lease, and is required by the lease to pay the landlord a ground rent of £200 per year.

The landlord is entitled to have the property back in 60 years’ time, and to receive the ground rent.

Result of an enfranchisement claim under the current law: flats

The lease is extended by 90 years, so the landlord will not now be entitled to have the flat back for 150 years.

The ground rent is reduced to a peppercorn (nil monetary value), so the landlord will no longer be entitled to the ground rent of £200 per year for the next 60 years.

Result of an enfranchisement claim under the current law: houses

The leaseholder purchases the freehold, so the landlord will not now be entitled to have the house back at all, and will no longer be entitled to the ground rent of £200 per year for the next 60 years.

Requirement to pay a premium

The landlord is no longer entitled to the property in 60 years, and is no longer entitled to ground rent. The leaseholder must make a payment to the landlord to reflect the fact that the landlord’s entitlements under the lease are reduced or removed.

The views and opposing interests of landlords and leaseholders

Views on the fairness of enfranchisement premiums

Leasehold ownership is inherently unfair for leaseholders.


It is unfair that a third-party landlord should make a profit from owning the freehold to my home.

Enfranchisement is too expensive.

We purchased our home and should have outright ownership.

The difference between premiums and professional costs

Two broad methods of calculating premiums

OUR PROJECT

OUR TERMS OF REFERENCE: OPTIONS FOR REDUCING PREMIUMS, NOT RECOMMENDATIONS

Government has asked us “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 interests” (emphasis added).

SUFFICIENT COMPENSATION AND HUMAN RIGHTS

A1P1 to the ECHR (quoted in part)

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. ...

Leaseholders’ human rights

How are leaseholders’ human rights under the ECHR relevant? (Taken from Counsel’s Opinion)

It is important to bear in mind that leaseholders also enjoy rights that are protected under the ECHR. Leaseholders enjoy the right to the peaceful enjoyment of their possessions under A1P1. Residential leaseholders who are owner-occupiers also benefit from the right to respect for their home under Article 8. [Article 8 provides that “Everyone has the right to respect for his private and family life, his home and his correspondence.”] However, leasehold enfranchisement legislation does not interfere with leaseholders’ property rights under A1P1. Leaseholders’ interests are taken into account when determining the amount of compensation payable to landlords, as the exercise of assessing whether a fair balance has been struck necessarily entails balancing the interests of landlords against the interests of leaseholders, both in their own right and when considering the general interest of society.

Article 8 is not concerned with the right to own or occupy property as such.15 Article 8 is not engaged or violated either by the ordinary operation of a lease (which limits a leaseholder’s occupancy of the property to the term of the lease) or by requiring the leaseholder to pay for the extension of the lease or purchase the freehold to avoid that result.16

Landlords’ human rights

How are landlords’ human rights under A1P1 relevant? (Taken from Counsel’s Opinion)

A1P1 protects the right to the peaceful enjoyment of possessions, and in substance guarantees the right of property.17 "Possessions" include real and immovable property, and therefore A1P1 protects any proprietary interest in land.

A1P1 can be invoked by any "natural or legal person" who has suffered an interference with their possessions for which the state is responsible, and can therefore be invoked not only by an individual but also by a company or other legal entity (whether based in the UK or elsewhere).

A1P1 is a qualified right. An interference with a person's property rights can be justified where a legitimate aim is pursued by reasonably proportionate means. This involves an assessment of whether a fair balance has been struck between the demands of the general interest of the community and the requirements of the protection of the individual's rights. The payment of compensation is relevant to the fairness of the balance struck.

Legislation which permits a leaseholder to compulsorily acquire the freehold or extend the lease of a house or flat interferes with a landlord's property rights under A1P1 and will only be lawful if the level of compensation payable to the landlord is sufficient to justify the interference with those property rights.

THE OPTIONS FOR REDUCING PREMIUMS IN THIS REPORT

THE CONSULTATION PAPER AND CONSULTATION EVENTS

How we have dealt with consultation responses

Different categories of consultee and different interests

Our approach to analysing consultation responses

Responses concerning valuation

Inequality of arms

ISSUES BEYOND OUR TERMS OF REFERENCE

WELSH DEVOLUTION

2006. 25 Following the Wales Act 2017, rather than expressly devolving competence in certain areas, competence is devolved unless expressly reserved. The Welsh Assembly cannot modify “the private law”, which includes the law of property. But that does not apply if the modification “has a purpose (other than modification of the private law) which does not relate to a reserved matter”. 26

STRUCTURE OF THIS REPORT

SUMMARY OF THE OPTIONS FOR REDUCING PREMIUMS IN THIS REPORT

PUBLICATIONS ACCOMPANYING THIS REPORT

ACKNOWLEDGEMENTS

THE PROJECT TEAM

Three alternative options for valuation framework


Scheme 1

Assume leaseholder never in the market


Scheme 2

Assume leaseholder not now in the market, but may be in the future


Scheme 3

Assume leaseholder is in the market



+ Hope value


Sub-option 1

Sub-option 2

Sub-option 3

Sub-option 4

Sub-option 5

Sub-option 6

Sub-option 7

Prescribe rates

Cap the

No payment

Favourable

Remove

Remove

Remove

for certainty

treatment of

for

premiums

80-year cut-off

discount for

discount for

and

ground rent

development

for owner

for marriage

leaseholders’

holding over

predictability

at 0.1%

value

occupiers

value

improvements


Online calculator for enfranchisement premiums


INTRODUCTION

House 1

Value on a freehold basis: £250,000

Valuation date: 2019

Details of existing lease:

After freehold purchase:

No lease

No ground rent

Value of freehold: £250,000

Granted in 1995 for 125 years

Unexpired term: 101 years

Value of lease: £245,00030

Ground rent: £50 per annum, increasing by £50 every 25 years:

House 2 (which we refer to as “House A” in the Summary)

Value on a freehold basis: £250,000

Valuation date: 2019

Existing lease value is based on the Gerald Eve 1996 graph of unenfrachiseable relativities, available at www.geraldeve.com/services/leasehold-enfranchisement. See further para 2.44 onwards below.

Existing lease value is based on guidance in Contractreal Ltd v Smith [2017] UKUT 178 (LC), at [70], and Earl Cadogan v Erkman [2011] UKUT 90 (LC). If the lease was under 80 years, and marriage value payable, it would be subject to an onerous ground rent adjustment. See further n 44 below.

Existing lease value is based on guidance in Contractreal Ltd v Smith [2017] UKUT 178 (LC), at [70], and Earl Cadogan v Erkman [2011] UKUT 90 (LC). If the lease was under 80 years, and marriage value payable, it would be subject to an onerous ground rent adjustment. See further n 44 below.


31


32


33


Details of existing lease:

After freehold purchase:

Granted in 1995 for 100 years

No lease

Unexpired term: 76 years

No ground rent

Value of lease: £226,25031

Ground rent: £50 per annum, increasing by £50 every 25 years:

  • - £50 per annum from 1995

  • - £100 per annum from 2020

  • - £150 per annum from 2045

  • - £200 per annum from 2070

House 3

Value on a freehold basis: £250,000

Valuation date: 2019

Value of freehold: £250,000

Details of existing lease:

After freehold purchase:

Granted in 2010 for 250 years

No lease

Unexpired term: 241 years

No ground rent

Value of lease: £247,50032

Ground rent:

- £300 per annum, increasing in line with the

Retail Prices Index (“RPI”) every 10 years

House 4

Value on a freehold basis: £250,000

Valuation date: 2019

Value of freehold: £250,000

Details of existing lease:

After freehold purchase:

Granted in 2010 for 250 years

No lease

Unexpired term: 241 years

No ground rent

Value of lease: £247,50033

Ground rent:

- £300 per annum doubling every 10 years for 50 years

Value of freehold: £250,000

lease which is 90 years longer than the current lease (so it “extends” the lease by 90 years),33 and under which the ground rent is a peppercorn (in place of whatever the ground rent is under the existing lease). Although the worked examples are freehold house purchases, the principles apply equally to lease extensions of a flat. 34

(A): THE CURRENT VALUATION METHODOLOGY

Replacing the ground rent income with a capital sum

Future rent reviews

Selecting the capitalisation rate

£50 per annum every 25 years (as with Houses 1 and 2); or

A ground rent which is inflation-proof to some degree because it increases over time is more attractive to investors than a ground rent that is fixed over time. So a ground rent that is subject to review, particularly a dynamic review, will usually be capitalised at a lower rate than a static ground rent, resulting in a higher premium. There is a wide range of different types of ground rent review. Each, arguably, justifies a different capitalisation rate, because they are of variable attractiveness to investors.

Selecting the capitalisation rate: the effect of high ground rents

Selecting the capitalisation rate in our examples

Figure 4: Calculation of the “term” for Houses 1, 2, 3 and 4

House 1: The current value of the right to receive £50 per annum rising to £250 per annum over the next 101 years of the lease based on a capitalisation rate of 6% is £1,844.

House 2: The current value of the right to receive £50 per annum rising to £200 per annum over the next 76 years of the lease based on a capitalisation rate of 6% is £1,806.

House 3: The current value of the right to receive £300 per annum, increasing in line with RPI every 10 years of the term, for the remaining 241 years of the lease based on a capitalisation rate of 4% is £9,554.

House 4: The current value of the right to receive £300 per annum, doubling every 10 years for the first 50 years of the term, for the remaining 241 years of the lease based on a capitalisation rate of 4% is £79,422.

years.

Freehold vacant possession (FHVP) value

The deferment rate

As explained at paragraph 2.32(2) above, relativity is the value of a property sold on a lease relative to its freehold value. Various organisations, predominantly firms of valuers, have devised graphs of relativity. To do this they have taken a data set, for example, settlements reached on enfranchisement claims,49 and plotted the relativities derived from that data set on to a graph where the horizontal axis shows the length of the lease and the vertical axis shows the value of that lease relative to the freehold value of the same property expressed as a percentage, “the relativity”.

For example, if the data set being used is settlements and a particular settlement shows that the freehold value of a property was agreed to be £100,000 and the value of the property held on an existing lease with 63 years remaining was agreed to be £83,000 (that is, 83% of the freehold value), that relativity of 83% would be plotted on the graph at 63 years.

Having plotted all the relativities derived from the data set, a curve is drawn through the coordinates to link them. This means that anyone reading the graph can derive a relativity for any given lease length.

discuss further in paragraph 3.17 onwards below; and

In The Trustees of the Sloane Stanley Estate v Mundy, the Upper Tribunal considered the method which is generally to be used in order to value an existing lease of a flat on the assumption that the existing lease of the relevant flat does not have Act rights. 50 In particular, it was asked to consider the use of the “Parthenia model” to calculate relativity. The Parthenia model was based upon sales of properties between 1987 and 1991 - that is, before the distortion of the market caused by the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) and the prospect of the 1993 Act being brought into force. That data was then analysed using a statistical technique known as “hedonic regression”, a technique which extrapolates the effect of the lease length on the value of the lease. 51

The Mundy case is significant because when the Parthenia model was used to value the short leases in that case, it produced lower premiums for the lease extensions than the more commonly used relativity graphs. It is therefore claimed by Parthenia that use of its model is a way of reducing the premium payable by leaseholders to enfranchise. However, the model was rejected by the Upper Tribunal.

The main problem that the Upper Tribunal found with the Parthenia model was that it produced an impossible result. In the case of one of the flats, the value of the lease in the real world (with rights under the Act) was agreed at £2m. It was also agreed that a lease with rights under the Act was more valuable than a lease without rights under the Act. However, the Parthenia model produced a higher figure of £2.2m for the same lease without rights under the Act. The Upper Tribunal described the Parthenia model as “a clock that struck 13”: “Even if the application of the model produced an answer in another case which was not impossible, that does not mean that the model has been shown to be reliable. If a clock strikes 13, it is broken. It is not a reliable time piece. It cannot be relied upon as a reliable means of telling the time even when it strikes an hour, such as 11 or 12, which are possible times of day.”

The Tribunal heard a substantial amount of evidence in relation to a large number of other graphs of relativity which have been prepared over the years and summarised the effect of that evidence and the Tribunal’s reaction to it. The Tribunal found that the market was using a graph of relativity produced by the firm Gerald Eve (“the Gerald Eve graph”) and that the graph was the least unreliable. The main difference between the Gerald Eve graph and the Parthenia model is that the Gerald Eve graph is based on relativities derived from settlements reached on enfranchisement claims (between 1974 and 1996) whereas the Parthenia model derives relativity from sales in the market (between 1987 and 1991) using hedonic regression.

On appeal it was argued that the comparison between the value of the lease in the real world (with rights under the Act) and the value of the lease without such rights, as shown by the Parthenia model, was an illegitimate comparison. 52 The two interests were fundamentally different. The legal effect of the assumptions that the Act requires precludes the valuer (and the Tribunal) from having regard to any leasehold transaction in the real world where the lease attracts rights under the Act. In other words, there is no direct relationship between the no-Act and subject-to-Act valuations, and, therefore, a comparison of the two is illegitimate as a matter of law. Further, the reason why the value of the lease in the real world is an impermissible comparator is that the market itself had been "corrupted" by the Gerald Eve graph. This argument was rejected. Among other things, the Court of Appeal said that whether to accept or reject the Parthenia model was a question of fact for the Tribunal, which could only be interfered with on appeal if the decision was perverse.

Houses 1,3 and 4: The current leases have more than 80 years unexpired, so no marriage value is payable.

House 2: The current lease has less than 80 years unexpired so marriage value is payable.

Marriage value payable by the leaseholder is £7,298 (being half of the marriage value).

The effect of high ground rents

The effect on enfranchisement premiums of high or onerous ground rents

There are three compounding factors that result in leaseholders with high or onerous ground rents being required to pay very high enfranchisement premiums:

Hope value

Summary

Collective freehold acquisition claims

Development value, additional value and other loss

Potential alternative bases for assessing market value

(B): THE CURRENT VALUATION PROCESS

Introduction

Stage 1: valuations for advice

Stage 2: valuations for negotiation

Valuing the term

Valuing the reversion

Assessing marriage value

Extent of the disagreement between valuers

Many consultees gave us their views about what the appropriate capitalisation rate should be. The suggestions ranged from 3% to 10%.

Worked examples

Figure 10: different valuations that could have been prepared for Houses 1, 2, 3 and 4 for the purposes of negotiating the premium

House 1

Initial valuation prepared by the leaseholder’s valuer

Agreed or determined valuation

Initial valuation prepared by the landlord’s valuer

Figures and rates adopted

FHVP value

£230,000

£250,000

£270,000

Capitalisation rate

8%

6%

4.5%

Deferment rate

6%

4.75%

3.5%

Relativity

100%

98%

96%

Enfranchisement premiums

Part (1): term

£1,301

£1,844

£2,620

Part (2): reversion

£639

£2,303

£8,364

Part (3): marriage value

£-

£-

£-

Total premium

£1,940

£4,147

£10,984

House 2

Initial valuation prepared by the leaseholder’s valuer

Agreed or determined valuation

Initial valuation prepared by the landlord’s valuer

Figures and rates adopted

FHVP value

£230,000

£250,000

£270,000

Capitalisation rate

8%

6%

4.5%

Deferment rate

6%

4.75%

3.5%

Relativity

93%

90.5%

88%

Enfranchisement premiums

Part (1): term

£1,293

£1,806

£2,489

Part (2): reversion

£2,745

£7,349

£19,765

Part (3): marriage value

£6,031

£7,298

£5,073

Total premium

£10,069

£16,453

£27,327

House 3

Initial valuation prepared by the leaseholder’s valuer

Agreed or determined valuation

Initial valuation prepared by the landlord’s valuer

Figures and rates adopted

FHVP value

£230,000

£250,000

£270,000

Capitalisation rate

8%

4%

2.5%

Deferment rate

6%

4.75%

3.5%

Relativity

100%

99%

98%

Enfranchisement premiums

Part (1): term

£4,739

£9,554

£15,296

Part (2): reversion

£-

£3

£68

Part (3): marriage value

£-

£-

£-

Total premium

£4,739

£9,557

£15,364

House 4

Initial valuation prepared by the leaseholder’s valuer

Agreed or determined valuation

Initial valuation prepared by the landlord’s valuer

Figures and rates adopted

FHVP value basis

£230,000

£250,000

£270,000

Capitalisation rate

8%

4%

2.5%

Deferment rate

6%

4.75%

3.5%

Relativity

100%

99%

98%

Enfranchisement premiums

Part (1): term

£18,736

£79,422

£183,991

Part (2): reversion

£-

£3

£68

Part (3): marriage value

£-

£-

£-

Total premium

£18,736

£79,425

£184,059

Stage 3: valuations for Tribunal determination

CONCLUSION

INTRODUCTION

(1) OPPOSING VIEWS ON WHETHER LEASEHOLD OWNERSHIP IS INHERENTLY UNFAIR

3.4 A very firmly held view among a great many leaseholders is that leasehold ownership is inherently unfair to leaseholders. That perceived underlying unfairness then exhibits itself when enfranchisement premiums are discussed. The view has been expressed to us at consultation events, in consultation responses, and in correspondence, and we are aware that similar views have been expressed to Government, Parliamentarians and other organisations.

How representative of all leaseholders are the views that we have heard?

We have heard from or spoken to thousands of leaseholders during the course of our project, and over 1,500 leaseholders responded to our online survey to tell us about their experiences of the enfranchisement process. Similarly, Government’s consultations about leasehold reform have resulted in many thousands of responses from leaseholders complaining about leasehold.

We acknowledge that these leaseholders make up only a fraction of leaseholders - of whom there are at least 4.2 million in England, plus many in Wales (but about whom there are no data). Some landlords have suggested that the strong views that we have heard from leaseholders are not representative of all leaseholders, and that reform should not be based on the unrepresentative view of an aggrieved minority. We do not agree with that view. Although we do not have data that gather the views and experience of all of the millions of leaseholders in England and Wales in a representative way, there are various indications that dissatisfaction with leasehold is widespread. For example:

177 Parliamentarians indicated their concern about leasehold by joining an All-Party Parliamentary Group (“APPG”) on Leasehold and Commonhold Reform.65 The APPG is one of the largest in Parliament.

Problems with the current law

Complexity

“Current methodology undoubtedly makes claims much more expensive, complex, costly and worrying for both parties, unless they are very practised in these ‘arts’”. (Jennifer Ellis, a surveyor)

“The current methodology is so complex that it must scare off most leaseholders. Very few professionals understand the different bases for valuation of a freehold in an enfranchisement claim in respect of a low value house: what chance does a layman have”? (Tapestart Limited, a commercial investor)

Unpredictable outcomes

“The methodology was misused by both sets of surveyors to reach wildly different amounts in my claim. This slowed down the whole process while they negotiated - why did they need to negotiate? The value should have been fixed using one method... This delay cost me thousands more in legal fees.” (Catherine Williams, leaseholder)

Room for argument

There is ample room to argue about what the various inputs into a valuation calculation should be. Different valuers will take different views when giving advice, during negotiations, or when giving evidence at the Tribunal. The parties, or their valuers, will therefore argue about, and litigate over, what the inputs should be. For example, disputes can arise in respect of the following.

Inconsistency and irrationality in the regime

A mews house in London with a freehold vacant possession value of £2,528,750 fell within the financial limits and qualified for a valuation under the original valuation basis.

A flat above a shop (outside London) which we have been told about, with a freehold vacant possession value of £275,000, fell above the financial limits and therefore fell to be valued under the mainstream valuation basis.

A 3-bedroom semi-detached house in Sutton Coldfield, with a freehold vacant possession value of £285,000, fell above the financial limits and the enfranchisement premium was valued under the mainstream valuation basis.

3.16 Whether a property falls within the original or the mainstream valuation basis can make a significant difference to the premium: see Figure 12.

In the case of the mews house in Figure 11 above, which was valued under the original valuation basis, the premium was £45,000. Had the enfranchisement premium been valued on the mainstream valuation basis, the premium would have been in the region of £275,000.

In the case of the flat above a shop in Figure 11 above, which was valued on the mainstream valuation basis, the premium was around £82,000. Had the enfranchisement premium been valued under the original valuation basis, the premium would have been in the region of £20,000.

In the case of a property in Wales which we have been told about, with a freehold vacant possession value of £55,000, and which was valued under the original valuation basis, the premium was around £16,500. Had the enfranchisement premium been valued on the mainstream valuation basis, the premium would have been in the region of £46,000.

Artificiality

“As most of the comparable evidence ... [is] derived from transactions in a market where the effects of the legislation are prevalent and ubiquitous, it is difficult to determine and isolate the effect of the legislation to adjust sales evidence to derive an accurate "no Act world" value, as required by the legislation. Both practitioners and tribunals continue to struggle with this impossible task.” (Cerian Jones, surveyor)

Artificiality: hypothetical valuation

Artificiality: circularity

There is a strong element of circularity.

freehold value, existing lease value, and lease

In Kosta the Tribunal held that a prospective purchaser of an existing leasehold interest, acting prudently, would have taken an average of the relevant graphs contained in the RICS 2009 report when assessing relativity. We have had the benefit of hearing detailed evidence about the construction and use of those graphs. From such evidence we are satisfied that at the valuation dates a prospective purchaser would not have taken an average relativity from those graphs. It is most likely that they would have referred to the [Gerald Eve] graph first and foremost. The evidence was that the market had only started to adopt an average relativity from the graphs following the decision in Kosta.

Other technical problems

Practical consequences of those problems

Uncertainty

by Tribunal determination). Taking those figures, the leaseholder and landlord will not know what figure the premium is going to be:

whereas the landlord’s valuer contended that the correct figure was £10,000. The

Tribunal determined a premium of £185.73

“A Lease Valuation Expert provided estimates for the cost of lease extension in May 2017. With a remaining sub-lease of 97.56 years, a ground rent of £450 which doubles every 25 years, and assuming a wholly positive profit rent situation, the estimate to extend the sub-lease of our flat was £15,600. The second estimate of £59,100 assumed a wholly negative profit rent situation”. (A leaseholder responding to our survey)

“I looked into enfranchisement but I was quoted that it could cost between 15K and 60K to buy my share of the freehold and no one could say exactly how much until we had spent the money on the surveyors to get a ballpark, and this wouldn't even give us legal costs (landlady's and ours)”. (A leaseholder responding to our survey)

“Have no idea what the premium is going to be and whether such figure would be reasonable. This has prevented exercising enfranchisement rights.” (Graham Foster, leaseholder)

The stakes are high

Expensive procedure

“Firstly the leaseholder has to pay for 2 surveyors and 2 solicitors to even get a price of the leasehold extension. After spending £4-5,000 on the surveyors and solicitors the leaseholder may well not be able to afford the lease extension so will have wasted time and a lot of money ... . The calculation is too complicated which is why the leaseholder needs to pay for 2 surveyors and 2 solicitors”. (Jeanette Allen, a leaseholder)

Delays

Potentially arbitrary outcomes

“My problem was with my choice of surveyor. His report recommended a fair price for the premium to be between £58,000 to £68,000 with an opening figure of £42,000 and the landlord’s counter notice was for £69,000. After we served the notice I discovered that my immediate neighbours who had exactly the same lease and landlord as me had settled a premium of £51,000 in January 2018, just before I started the process. At the time my notice was served my lease was ten months shorter than theirs, but I was hopeful that I would pay the same as them as they had a larger maisonette due to a loft extension. However, four months into the process my surveyor informed me that he had managed to negotiate down to £61,000 and tried to insist I settle at that. I told him about my neighbours and asked him to negotiate further. The landlord claimed that a similar flat had sold in my road for £705,000, that my lease was ten months shorter than my neighbours had been at the time of application and that the Appeal court’s ruling in January 2018 in the Sloane Stanley versus Mundy had favoured the way landlords calculate premiums. I discovered that the £705,000 flat had a share of the freehold and a double width garden so was not comparable. My surveyor again tried to insist I accept £61,000 but I refused.

As the deadline for applications to Tribunal approached I heard nothing new from my surveyor so I went ahead with the application in October and requested 3 month’s abeyance. Within a week my surveyor informed me that the landlord had agreed a figure of £55,500 which I reluctantly accepted.

My neighbour’s surveyor’s report included his calculations and yet my surveyor told me I had to trust him when I asked to see his. In March 2017 one surveyor calculates £45,000 to be a fair price to pay and nearly one year later another calculates it to be £61,000. The market value of these flats has not increased in the last two years. In hind sight I wish I had asked my neighbours for their surveyor who would have been through negotiations with the landlord but I assumed all surveyors worked on the same principles and would have arrived at similar figures in their calculations”.

(A leaseholder responding to our survey)

Undesirable incentive structures

a sale or remortgage until the deal is done. The costs and delays have got out of control and history shows that this is cyclical and requires Government control to bring the bargaining positions back into balance.” (Beth Rudolf, Rupert Houltby and the Conveyancing Association)

Inequality of arms

In a block of 100 flats, one leaseholder claims a lease extension.

The landlord’s valuer argues for a premium of £10,000. The leaseholder’s valuer argues for a premium of £6,000.

From the leaseholder’s point of view, the dispute is worth £4,000.

From the landlord’s point of view, if the claim sets a precedent in the block, it could be worth £400,000 (that is, £4,000 multiplied by 100 flats in the block).

If the legal and valuation costs of a Tribunal hearing would be £8,000 for each party:

The decision in Mundy involved a 9-day hearing, with numerous experts giving evidence. The case concerned three leaseholders. For them, the difference between their own valuer’s calculations (based on the Parthenia model) and the landlord’s valuer’s calculations (based on the Gerald Eve graph) was significant: in respect of two of the cases, the differences between the parties’ suggested premiums at the Tribunal were £89,750 and £54,000. But for the landlords involved, if the Parthenia model had been accepted, their income from other enfranchisement premiums would have greatly reduced, and therefore the value of their estates as a whole would have significantly reduced. So as far as the implications of the decision were concerned, the dispute at the Tribunal was worth £89,750 to one party (a leaseholder) but it was worth significantly more to the other party (a landlord).

In cases such as this: (1) leaseholders and landlords around the country have much to gain or lose from individual decisions, but (2) as for the individual parties themselves involved in the litigation, frequently it is the landlord who has the most to gain or lose, and so the greater financial incentive to litigate (and to spend significant sums of money on such litigation), owing to the wider implications of the decision for the landlord’s portfolio. The professional costs in such cases can be considerable.

In more typical enfranchisement claims, where the premiums are much lower than in Mundy (but which are still significant for the leaseholders concerned), the ability to instruct an array of professionals might be possible for landlords with a large portfolio, but is beyond the grasp of most leaseholders.

Uncertainty being used as a bargaining counter

Problems for leaseholders with onerous ground rent obligations in their leases

Summary

A key factor affecting the compatibility of the scheme with A1P1 will be the aims and objectives of the eventual scheme. For example, if the primary aim of the scheme is to remedy perceived injustice faced by leaseholders, that will have a bearing on the scope of the reforms (including the identity of those who are to benefit from the reforms) and will feed into the assessment of proportionality, including the degree of scrutiny (or conversely, deference) the courts will apply to the scheme. If the Government’s aim is to reform the leasehold enfranchisement system in order to make enfranchisement more simple, quick and cost-effective, that will change the scope of the scheme and the proportionality assessment accordingly. If the Government’s aims are more ambitious - for example, deliberate redistribution of wealth from one group (landlords) to another (leaseholders) or even ending the system of leasehold altogether - that will also feed into the nature and scope of the scheme and the assessment of where the fair balance is to be struck in terms of compensation.

The competing interests of leaseholders and landlords

Different types of leaseholders and landlords

Landlords’ arguments against reducing premiums

(A) Unfairness

“... as a retired property developer, my pension is the ground rents on 53 flats. All of these flats were bought by [buy-to-let] investors. The ground rents were set at £150 pa or £250pa, increasing by RPI .. Thus, our ground rents are reasonable, and will stay reasonable in the future. All of our buyers had professional advisors - in every case. In the past I have been offered 36 times the ground rent to sell the freehold of this estate, and so any formula to reduce this value is a direct confiscation of my property. There is no justification for the Government to arbitrarily take money from my pension fund and give it to [buy-to-let] investors”. (Bretton Green Ltd, a commercial investor)

(For a counter-argument, see paragraphs 3.88 to 3.90 below.)

“All options suggested by the Law Commission, other than Option 2C [which is Scheme 3 in this Report], will have a considerable impact on the Wellcome’s charitable giving. That Option 1A [a ground rent multiplier] will be considered at all is abhorrent because of the significant negative impact that it would have on the value of Wellcome’s ground rented freehold investment assets: on the basis of a ten times multiplier, the day one value of the ground rented freehold properties in the Estate would fall by 97% (in excess of £100m). Even a multiplier of 100 times would reduce the day one value of the ground rented freehold properties by 71%”. (The Wellcome Trust, charitable sector)

“The Charity only exists to give grants to benefit children and young people up to the age of 25 who live in nine boroughs in North and West London. To date, we have given over £110 million since 1991 to a range of organisations that seek to encourage the aspirations of children and young people through education in its widest sense. Enfranchisement proceeds make up a significant part of the capital required for our charitable giving. The proposed changes from the Law Commission would dramatically affect our annual grant giving programme. While the Charity is a landlord, it is not profiting in the true sense from leaseholders as all proceeds are granted to charities, thereby performing a public benefit to the local community in London. Our fundamental objection to the proposals is on valuation. ... I have undertaken detailed analysis on the Charity’s residential estate in St John’s Wood. All options are financially detrimental to the Charity. This would be catastrophic for the Charity and would result in the Charity’s activities being cut back at a time when demand for its services has never been greater.” (The John Lyon Charity, charitable sector)

“On behalf of its clients, Long Harbour has invested in UK ground rent portfolios valued in excess of £1.6bn, comprising over 160,000 leasehold properties, including some specialist age-restricted retirement housing. The funds invested are provided by regulated UK pensions and insurance companies and the income derived from the ground rents is used to service the retirement income of many thousands of pensioners.

The proposals for reducing premiums generally, and thus reducing what is currently fair compensation payable to Landlords enshrined in legislation are neither proportionate nor reflective of the current realities of the residential leasehold market. They would also result in a significant detriment to, and deprivation of reversionary interest value held by major institutional investors as UK pension assets for the ultimate benefit of a much larger body of private pensioner consumers.

We believe that the significant detriment that would result from reducing reversionary values, and thus appropriating value away from, amongst others, significant UK pension fund holdings benefitting hundreds of thousands of ordinary pensioners is a disproportionate response to address the need for reform of enfranchisement.” (Long Harbour and HomeGround, commercial investors)

Prescribing a capitalisation rate to reduce premiums “would have a catastrophic effect on the freehold ground rent sector and to the stakeholders that depend upon it, principally pension funds and insurance companies who would be required to impair their assets and reduce payments to their pensioners or annuity holders.” (Consensus Business Group, a commercial investor)

(For a counter-argument, see paragraph 3.91 below.)

we continue to use to calculate lease extension premiums, being 6.5% capitalisation and 5% deferment), the premium would be £12,785 (before any allowance for expenses), comprising £9,091 for the ground rent stream and £3,694 for the reversion. That compares to £2,000 under [Option 1A in the Consultation Paper]”. (Southlands College Estate Wimbledon Limited, a leaseholder-owned freehold company)

(For a counter-argument, see paragraph 3.91 below.)

“As in other areas of Prime Central London those buying leasehold properties on the John Lyon Estate are not ill-advised, naive buyers but sophisticated, professionally-advised customers often with a detailed knowledge of the Prime Central London property market who understand that they are buying a time limited interest. Given the nature of the Charity’s residential portfolio if the valuation changes are introduced, a small, very wealthy percentage of its inhabitants will pay substantially less for extending their leases or obtaining their freeholds, directly impacting upon the Charity’s ability to help those children and young people most in need”. (John Lyon Charity, charitable sector)

“For the numerous commercial investors who use enfranchisement to disenfranchise a different class of commercial investor then the current methodology of calculating premiums works massively in their favour. It speeds up the number of enfranchisement cases, prevents none and the profits the investors will make far outweigh the costs of so doing.” (Geraint Evans, surveyor)

Figure 17: reducing premiums benefitting existing, but not future, leaseholders

Take a leasehold flat which would be worth £225,000 if held on a long lease.

In fact, only 70 years remain and the premium for a lease extension will be £20,000.

A purchaser will therefore only pay £205,000 for the lease. That is because the purchaser will have to pay to extend the lease, and so the total cost of acquiring a long lease of the flat will be £225,000 - namely a £205,000 purchase price plus £20,000 enfranchisement premium.

If enfranchisement premiums are reduced, so that the lease extension will now only cost £10,000, then the purchaser would pay £215,000 for the lease. The total cost to the purchaser of acquiring a long lease of the flat will still be £225,000. But the existing leaseholder will have sold the flat for a higher sum (£215,000 rather than £205,000). That increased sale price reflects the fact that the incoming purchaser will be paying a reduced enfranchisement premium.

(For a counter-argument, see paragraph 3.92 below.)

3.75 Sixth, it was argued that standardising the rates used in the valuation process at either market-rates or below-market rates would fail to take into account the low-risk nature of investing in freeholds.

“The income from reversions is essentially risk free, because non-payment of rent can lead to forfeiture. An assiduous (and litigious) landlord will nearly always get his or her rent from the leaseholder and, if he or she does not, he or she will end up with a windfall gain through forfeiture. The windfall gain will usually exceed the capital value of the reversion many times over: for example, if a landlord has paid in the wholesale market, say, £6,250 for a reversion generating a fixed ground rent of £250 p.a. and the leaseholder fails to pay the rent so that the leaseholder’s interest is forfeited, the landlord could end up with a property worth (say) £150,000, which would be 24 times the landlord’s original investment. Nothing like that can happen in the world of bonds. Essentially the income from reversions is risk free: indeed, a mercenary landlord may well welcome default on the part of leaseholders as an opportunity to maximise returns on his or her investment”. (Tapestart Limited, a commercial investor)

(B) Impact on the economy

Leaking of wealth out of England and Wales if reforms benefit commercial investors

“Pursuing an option which makes the enfranchisement price cheaper, will result in a one-off transfer of equity from present freeholders to present leaseholders. For central London, which is a market that is overrepresented by overseas investors, there may be a resulting leakage of wealth out of the UK”. (Cluttons, surveyors)

Reducing enfranchisement premiums would increase the value of existing leases, which in many cases would “disproportionately benefit overseas and domestic investors given the make-up of our market” (Cadogan Estate, landlord).

Reputation of the property market

“The UK is (so far rightly) widely perceived throughout the world as a country subject to a stable legal system and therefore a safe place to do business. Any legislation which in effect tears up contracts which have been freely entered by willing buyers and sellers will put the UK in the same category of the many foreign countries that cannot be trusted to provide a stable environment in which to do business”. (Consensus Business Group, a commercial investor)

“There are also a number of foreign controlled funds who have invested on the basis of stable law and stable institutions in this country, and it is likely to be the case that any shift in value from landlords to lessees is likely to damage this country's international reputation as a safe haven for investors”. (Morgoed Investments Ltd, a commercial investor)

Tax revenue for Government through Stamp Duty Land Tax

“A further consequence of reducing enfranchisement premiums would be to depress the amount of Stamp Duty Land Tax which the Government receives”. (The Wellcome Trust, charitable sector)

Leaseholders’ arguments in favour of reducing premiums

Cost is prohibitive

“We wanted to enfranchise but were dissuaded by costs and the time it would take ... ”. (A leaseholder responding to our survey)

“The current methodology has prevented thousands of leaseholders from enfranchising”. (National Leasehold Campaign, a leaseholder representative body)

The current valuation methodology “has had an incalculable [e]ffect on the cost of lease extensions and the legal costs payable by leaseholders . . Freeholders have made billions using the courts to extort money from leaseholders for hundreds of years. It is a national embarrassment”. (Leasehold Knowledge Partnership, a leaseholder representative body)

The current valuation methodology “has made it far too contentious and the increased professional fees have deterred many leaseholders from extending their lease or enfranchising”. (Parthenia, surveyors)

“The cost of extending this lease would be totally unaffordable although I have owned this property since 1976 (lease length was 98 years at time of purchase). I have used lease extension calculator available online . and the cost including paying for the freeholder and my solicitor plus surveyor would be around £65,000!!!!” (A leaseholder responding to our survey)

“It was far too expensive!!! My 97 year old partner bought this flat in 1994 for £95,000. Now after living in our home for 25 years, the landlord claimed he was 'retiring' last January 2017 and offered to sell us the freehold for almost £20,000!!! So we have invested and protected our home for that time and now we are expected to buy our home yet again for almost 20% of the original purchase price. How is that even fair or moral?” (A leaseholder responding to our survey)

Inherent unfairness of leasehold ownership

Political and social policy arguments

“We leaseholders had no idea that we were somebody's investment and nowhere in any lease is such a situation referred to.” (A leaseholder responding to our survey)

“We do not think it is appropriate to use home owners as a source of continuing profit simply because they are leaseholders rather than freeholders ... ”. (National Housing Federation)

Leaseholders are not voluntarily acquiring an enhanced asset

(For a counter-argument, see paragraph 3.70 above.)

Identity of landlord irrelevant for leaseholders

(For a counter-argument, see paragraphs 3.71 and 3.72 above.)

Reducing premiums does benefit future leaseholders

(For a counter-argument, see paragraph 3.74 above.)

The value of landlords’ assets can already go up or down

there can be consequential changes to (say) capitalisation rates, which in turn will change the value of landlords’ assets.

The valuation of enfranchisement premiums - through the capitalisation rate - reflects the level of risk of investing in that particular asset. Some consultees argued that prescribing the capitalisation rate risked de-valuing landlords’ assets by failing to reflect the risk-free nature of the asset: see paragraph 3.75 above.

We noted in paragraph 3.96 above the risk of regulatory intervention in respect of onerous ground rents. The risk of regulatory intervention in fact goes further.

The argument set out in paragraph 3.75 above is that investing in freeholds is currently a riskfree investment since leaseholders who do not pay their ground rent can have their lease forfeited by their landlord, which results in a windfall gain to the landlord.

We have in the past recommended that forfeiture be abolished and replaced with a proportionate regime to address any failure by leaseholders to comply with the terms of their lease.84 So, for example, if leaseholders do not pay their ground rent, landlords would have to commence a process to enforce the payment obligation against the leaseholder, and the ultimate sanction would be an order requiring the lease to be sold to pay the debt to the landlord, but with the equity going to the leaseholder; landlords would no longer receive windfall gains. The consequence of implementation of our recommendations would be to remove the windfall gain for landlords and the sword of Damocles that currently looms over leaseholders. That would, on the argument set out in paragraph 3.75 above, reduce the risk-free nature of investing in freeholds.

So the level of risk associated with investing in freeholds, from a landlord’s point of view, is already liable to change at any point - indeed, we have recommended a change that would have that effect.

“If professional freeholders invest in a morally questionable asset class they should not be surprised if the value of that asset class reduces when people wake up to the underlying issues; this is no different to any other equity type investment value falling where the company or industry is involved in a scandal. It will doubtless form part of their responses but role of the morally questionably practices needs to be remembered. No compensation should be paid for loss of permission fees. The primacy of the home "owner" needs to be foremost over the speculator using that home as an asset class. Ground rent fees other than peppercorn serve no purpose beyond creating an asset class out of a home”. (Michael Kelly, a leaseholder)

Requirement to pay marriage value

“Our lease had 61 years remaining which incurred the further legal penalty of 'Marriage Value'. This is an inexplicable artifice of no merit other than to serve as a penalty to longstanding leaseholders”. (A leaseholder responding to our survey).

INTRODUCTION

SETTING THE LEGAL FRAMEWORK AND PROCESS FOR VALUATION

enfranchisement premiums, including the process that must be followed to set enfranchisement premiums. Therefore, we comment on what the legal framework should seek to achieve and how it should do that. By contrast, it is not for us to comment on the precise answer that the framework should generate in given cases. Accordingly, we do not comment (for example) on what is the correct valuation technique to assess the “market value”, nor on what figure is the correct capitalisation rate, save in relation to questions of whether such techniques are legal. For the purposes of explanation, we reflect that distinction by referring to:

THE ROUTE TO VALUATION REFORM

4.11 If Government decides to require the conventional valuation methodology to be used in all cases, and decides to prescribe the rates within it, the third question is: by what process should the rates be set? This is a legal question on which we comment in Chapter 6 in so far as (a) it goes to what the legislation needs to say in order to achieve the aim of prescribing rates, and (b) it involves the identification, as a matter of law, of what process and procedure must be followed in order to make that decision. We discuss who could set rates and how they could do it. It is then for Government to make a final decision about what process to adopt.

CONSULTATION RESPONSES ABOUT VALUATION METHODOLOGY

The correct method for assessing market value

The deferment rate can be simply estimated from the net rental income from the property (i.e. gross income net of management, void and maintenance costs), using the standard dividend discount model. A simpler method benefits lessees who typically find the cost of subjective ‘professional’ advice prohibitive”.

He concluded that the deferment rate should be between 3.3% (in Durham, Southampton, Cumbria (Carlisle) and Leeds) and 6.9% (in Sunderland).

Rothesay Life PLC also made specific suggestions relating to the valuation methodology.

First, Rothesay Life PLC said that capitalisation and deferment rates should be prescribed, and that “to facilitate the prescription of the capitalisation rate, and to improve the accuracy of the term valuation for inflation linked leases, we propose that, when determining the capitalised ground rent for an inflation linked lease, inflation-linked leases are treated in the same manner as leases with other types of review. This approach would require that the expected future rent for inflation linked leases (i.e. leases that are linked to CPI, RPI or the capital value of the property) be projected through assuming a long-term inflation rate for that index. We recommend that such long-term inflation rates are also prescribed and updated with the same frequency as other rates (capitalisation, deferment etc)”.

Second, it was argued that marriage value for lease terms of less than 80 years could be replaced with an altered deferment rate:

“Our suggestion is that a lower deferment rate of x% could be used at 21 years, interpolating upward linearly to the current deferment rate of 5% at 80 years and above (with each rate being updated from time to time). As for the setting of a lower deferment rate x, we would favour the selection of 2.25% based on the independent recommendation from Oxford Economics for what would currently be the appropriate deferment rate (for all tenors) based on the same framework as used in Sportelli. The proposal to interpolate up to 5% at 80 years (rather than introduce a rate of 2.25% for all tenors, as Oxford recommend is appropriate) is made in recognition of the Law Commission’s terms of reference to provide a better deal for leaseholder as consumers (i.e. to ensure decreases, rather than increases, in premium for the vast majority of leaseholders)”.

The correct rate or relativity graph

Comments on capitalisation rates

“We think the capitalisation rate should initially be set for PCL at 5%, and reviewed by a panel of experts at five-yearly intervals”. (Grosvenor, landlord)

“If capitalisation rates are set, they need to reflect the capitalisation rates that have been used in recent years for valuation purposes; 7-8% to ensure that enfranchisement premiums are attainable for leaseholders”. (National Leasehold Campaign, a leaseholder representative body)

“Cap rates need to be prescribed as a matter of urgency.... The rates should be prescribed as

they have historically been at between 8-9%”. (Leasehold Knowledge Partnership, a leaseholder representative body)

“Capitalisation Rates should be fixed at 10%”. (Millbrooke Court Residents Association, a leaseholder representative body)

“We believe the capitalization rate should be set according to long term financial data and correspond to the lease term. We know investors require a premium over and above the Bank of England rate and this may be circa 3%. Therefore, rates should be reflective i.e. average interest rate over the last ten years is circa 0.5% and therefore for a lease of ten years the rate is set at 3.5% and for a lease of 100 years it might be 9% (long term average Bank base rate of circa 6% for last l00 years plus 3% premium). This would mean capitalization rates will vary for short leases according to fluctuations in the Bank base rate, which is what happens now”. (Parthenia, surveyors)

“If you start with the premise the RPI reviews should be linked to the risk free rate, say for 30 year GILTS (currently 1.5%). Add in cost of collection at another 1.5% so 3% is lowest cap rate. So for example

“We think the deferment rate should initially be set for PCL at 2.25% (in line with current residential market yields in PCL) and reviewed on the same basis as the prescribed capitalisation rate. It would be fair to adopt higher deferment rates for properties outside PCL to reflect the lower historic growth rates and the greater risk of deterioration and obsolescence, which has been acknowledged in a number of Tribunal cases”. (Grosvenor, landlord)

“The easiest way to prescribe is to adopt one of the graphs of relativity which have been devised by firms that specialise in this area. Following the test case of Mundy, where all the graphs were considered, we would favour the adoption of the Gerald Eve 1996 graph”. (John Lyon’s Charity, charitable sector)

“Relativity may have changed, but we do not know how and the freeholders continue to rely upon the Gerald Eve graph which uses data from the 1970s. We have offered the Parthenia dataset to the Government and this would allow them to set relativity for the entire market (relativity is a ratio and is therefore not geographically dependent)”. (Parthenia, surveyors)

CONCLUSION

INTRODUCTION

OVERVIEW OF THE “SCHEMES” SET OUT IN THIS CHAPTER

SETTING PREMIUMS BY REFERENCE TO A SIMPLE FORMULA

A multiplier of ground rent: Option 1A in the Consultation Paper

Consultees’ views

Many leaseholders’ responses demonstrated their exasperation with the current regime, and their view that a simple formula of 10 times ground rent was an obvious and fair solution to many of the problems associated with calculating enfranchisement premiums.

“Mr Justin Madders proposal of 10 x annual ground rent as a valuation method for buying freehold is simple and fair, and should be adopted”. (David McArthur, consultee)

“I fully believe a simple formula such as 10x ground rent to buy the freehold would bring a sigh of relief to many leasehold properties as many uncapped costs would then be eradicated. Additionally freeholders would still obtain money back for their investments”. (Jason Smith, a leaseholder)

“Freehold valuations should be prescribed. That way no room for abuse or arguments. Justin Madders bill x10 ground rent is a simple formula that many will agree with”. (Malgorzata Zymla, consultee)

Some consultees suggested different multipliers.

“I propose following the multiplier used for Northern Ireland of 9 times ground rent”. (Lee Dickinson, a leaseholder)

“A simplified method for calculation of the cost of a lease extension should be as it is in Northern Ireland and Scotland, it should be 9 times the leaseholder’s starting ground rent”. (Jeanette Allen, a leaseholder)

Figure 19: enfranchisement premiums based on the ground rent multiplied by 10

The enfranchisement premium:

The current use of ground rent multipliers

Taking House 1, a capitalisation rate of 6% gives rise to a valuation of “the term” at £1,844. (See Figure 4 above.) That calculation could, just as easily, be done by using a ground rent multiplier of 36, since £50 multiplied by 36 gives (approximately) the same premium (£1,800). For any lease of more than around 100 years, with a ground rent that is similar (in terms of amount and review structure) to that of House 1, then a valuation of “the term” based on (a) a 6% capitalisation rate or (b) a ground rent multiplier of 36 would give rise to very similar premiums.

Taking House 3, a capitalisation rate of 4% gives rise to a valuation of “the term” at £9,554. (See Figure 4 above.) That calculation could, just as easily, be done by using a ground rent multiplier of 32, since £300 multiplied by 32 gives (approximately) the same premium (£9,600). For any lease of more than around 100 years, with a ground rent that is similar (in terms of amount and review structure) to that of House 3, then a valuation of “the term” based on (a) a 4% capitalisation rate or (b) a ground rent multiplier of 32 would give rise to very similar premiums.

Problems with a ground rent multiplier, if used in all cases

Under this valuation method, the only factor that would be used to determine the premium is the ground rent. The ground rent figure itself may be an arbitrary amount which bears no relation to the capital value of the property. This means that the resulting premium on enfranchisement would be arbitrary. The valuation method would take no account of the reversionary value (which may be substantial) or the length of the lease. Consequently, a premium based solely on the ground rent is likely to be arbitrary, bear no relation to the value of the landlord’s asset and be too inflexible to take account of differing situations. I consider that such a valuation method is unlikely to be compatible with A1P1, and I estimate the risk of a successful challenge to such a valuation method as High. It should be disregarded.

depends on the unexpired term. A premium based on 10 times ground rent would be the same whether the lease had 10 years or 200 years unexpired, but clearly the value of the right to receive an annual ground rent for 10 years is far less than the value of the right to receive that annual ground rent for 200 years.

In September 2009, leaseholders of flats in 82 Portland Place, London made a collective enfranchisement claim.95 82 Portland Place is a purpose-built 1920's mansion block comprising 25 units of accommodation. The flats in the building included one used to accommodate the resident porter. Twelve of the remaining flats were held on leases which, at the valuation date, had unexpired terms of 11.8 years, and an obligation to pay ground rents of between £70 and £170 per annum. Most of the value of those flats was therefore in the reversion and the marriage value. The value of the reversion to those 12 flats based on their market value was determined as being £16.8 million. An enfranchisement premium in relation to those flats based on 10 times the ground rent would have been £15,410, which is 0.09% of the value of their reversions.

Analogy with the position in Scotland and with rentcharges

with more than 175 or 100 years left to run, and where the annual rent is fixed and less than £100. In other words, the Scottish legislation applies to leases with little or no reversionary value and with a very low annual rent, since this allows a simple formula (analogous to a ground rent multiplier) to be applied. The formula involves the ground rent being capitalised by reference to the “2.5% Consolidated Stock”,97 so it can be described as a market rate.

Using a simple formula for certain types of lease

Conclusion

Set percentage of freehold value: Option 1B in the Consultation Paper

Consultees’ views

“I agree that there should be a simple formula for the valuation of the freehold as a percentage i.e 10% of the value of the house”. (Brenda McMahon, consultee)

“I think a simplified regime would be hugely beneficial as the domain is so complex. Perhaps it could be based on the price of properties with an exception made to areas such as London where they may be disproportionately high”. (Stephen Heslop, a leaseholder)

“Personally it should be a set value compared to the value of the property: 3% cap max of the property value”. (Chris Burns, a leaseholder)

Problems with a set percentage of freehold value, if used in all cases

Under this valuation method, the premium would be set at a percentage of the capital value of the freehold. The premium would not reflect the length of the lease or any difference in the ground rent payable. It would therefore be equally as inflexible as a ground-rent multiplier. Depending on what percentage was set, it may result in higher premiums. I consider that such a valuation method is unlikely to be compatible with A1P1, and that the risk of a successful challenge to such a valuation method is High. It should also be disregarded.

Conclusion

SETTING PREMIUMS BY REFERENCE TO MARKET VALUE

The Consultation Paper

In some cases, there will be further components:

Option 2A in the Consultation Paper

Option 2B in the Consultation Paper

Option 2C in the Consultation Paper

Summary

Consultation responses

Fairness

“Option 2C ... is the only proposed option which sufficiently compensates the landlord for their interest being acquired”. (Grosvenor, a landlord)

“Making enfranchisement cheaper “cannot be achieved simply by penalising one party to the advantage of the other”. (Wallace Partnership Group Ltd, a commercial investor)

“Ultimately the government needs to decide . if it is right to transfer asset value from one class of owner (i.e. freeholders) to another (i.e. leaseholders including buy to let landlords).” (Richard Stacey, a surveyor)

Options 2A and 2B “would be catastrophic for the industry and create overnight devaluations for landlords including pension funds, family investors and put many companies out of business”. (Trowers and Hamlins LLP, solicitors)

Compliance with A1P1

Marriage value

“This combining of the interests creates the marriage value, and it seems fair and reasonable that this should be shared equally between the landlord(s) and the tenant.” (John Lyon’s Charity, charitable sector)

“The exclusion of such a logically necessary component of the valuation to reflect what has long been accepted as an element of the landlord’s legitimate interests, will be viewed as arbitrary and as failing to strike a fair balance.” (Cadogan, a landlord)

“The concept of marriage value is a fundamental and well-established part of the property market both for commercial and residential properties, where two or more parties with an interest in the same property are seeking to release value by the merger of their interests as part of a sale to one of the parties.” (The Portman Estate, a landlord)

“The price paid to the freeholder should reflect the price he would obtain if selling in the open market to an investor. That purchaser would not benefit from marriage value, which is only available to the leaseholder. It has been suggested ... that as the leaseholder had a special interest in buying, marriage value should be taken into account. However if the freehold were being sold in the open market, the leaseholder would only need to pay one pound more than an investor to secure the purchase, not half of the marriage value. Therefore marriage value should be excluded. . In the analogy in paragraph 14.53 [of the Consultation Paper] the seller is selling one Chinese vase, the purchaser will therefore pay the value of one vase; if the owner of the other vase is interested he only has to outbid the next highest bidder by £1.” (Caxtons Commercial Ltd, surveyors)

“. it seems to me that the simplest way of making the cost cheaper is to stop lessees paying marriage value. I think that is justified because: (a) the freeholder cannot sell to any other party/investor and expect to receive marriage value, and (b) so far as I am aware, no other compulsory purchaser pays marriage value”. (Jennifer Ellis, a surveyor)

“In my opinion, the guiding principle should be that the landlord should be compensated for damage (as with other compulsory purchase situations) and not for damage plus profit. .

In reality, the hypothetical buyer for the landlord’s interest will pay hope value, and therefore that is an item of damage. 50% marriage value is an item of profit and I really do not see why the landlord should receive that.” (Bruce Maunder-Taylor, a surveyor)

Development value and other additional value

“[Additional] value can be significant ... There is no justification given for excluding this element of the valuation and it is difficult to think of one” (Cadogan, a landlord)

“Where this element of value exists, there is no reason why the landlord should be deprived of it or why the tenants should get something for nothing.” (The Alan Mattey Group, a commercial investor)

“If there is retained property or development value, then its loss would be a matter of damage and the landlord should be paid a reasonable sum for it. But not one which reflects the potential for profit. Damage only.”

“I would like to purchase the freehold of the house which contains my flat and extend my flat into the roof space, which is not currently demised ... Why should my local authority freeholder be due approximately half of the development value in respect of the roof space, as I believe it could under [Option] 2C? It is an accidental owner of these spaces, which are useless on their own. It does nothing with them. The leaseholders are responsible for paying for maintenance of this space through service charges, including compensating the freeholder for managing the maintenance. This is a free lunch for the freeholder.

If the local authority freeholder released these spaces freely to leaseholders who could use them, they would quickly be made useful. This might create a windfall for the leaseholder, but it would extend and improve the housing stock. .

Consider the difference in risk and effort in developing these spaces. The leaseholder has to go through the planning process, building control, find a builder, perhaps an architect and an engineer, supervise works and budget, work around issues, and fund the whole thing, during which the property will be uninhabitable, all in their spare time. Meanwhile the freeholder is paid its half share of the expected increase in value, less the expected development costs, up front, for taking no risk and expending no effort. This is not fair.

The Chinese vases analogy used to describe marriage value is misleading in this instance. There is no equal pair coming together. Instead it is as though the freeholder holds one tea cup and the leaseholder has the other eleven”. (an anonymous leaseholder responding to our consultation)

A revised approach: from “components” to “assumptions”

Market value and assumptions

the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.105

Various assumptions are required to be made when enfranchisement premiums are calculated. For example, there is a need to assume that the leaseholder has complied with the covenants in the lease, otherwise a leaseholder could rely on his or her own wrong in order to obtain a cheaper price. That is because if the leaseholder has let the property get into a very poor state of repair, then the current market value, and therefore the premium, would be lower. Conversely, an assumption that a property is in repair and no more106 would prevent a landlord benefiting from work carried out by the leaseholder at the leaseholder’s expense: if the leaseholder spends money on works of improvement such that the market value of the property is higher, then -without that assumption - the resultant premium would also be higher.

Our revised approach

Using the conventional valuation methodology, this assumption produces a premium based on the term and the reversion only (plus in some cases additional value and/or other loss). The value attributable to the leaseholder being in the market (marriage value and hope value) is therefore not payable.

Scheme 1 is similar in effect to Option 2A in the Consultation Paper, except that additional value may be payable (see further below).

Using the conventional valuation methodology, this assumption produces a premium based on the term, the reversion, and possibly hope value (plus in some cases additional value and/or compensation for other loss). The value attributable to the leaseholder being in the market on the valuation date (marriage value) is therefore not payable.

Scheme 2 is not an option that we put forward in the Consultation Paper.

Using the conventional valuation methodology, this assumption produces a premium based on the term, the reversion, and marriage value (where it exists) (plus in some cases additional value and/or other loss).

Scheme 3 is, in effect, the same as Option 2C in the Consultation Paper.

Why have we adopted the revised approach based on assumptions?

There are differences in outcome between the use of assumptions and the use of components. For example, in contrast to Options 2A and 2B in the Consultation Paper, all three schemes that we now put forward could - in appropriate cases - include additional value (including development value). Some consultees argued that development value, where it genuinely exists, is a loss sustained by the landlord as a result of the enfranchisement claim for which he or she should be compensated. The schemes that we propose, being based on assumptions, allow such compensation to be paid. Any additional value would be assessed applying the relevant assumption and in this way the amount which might presently by payable in respect of such value could be reduced. And in any event, as explained in Chapter 6, we think that a better way to avoid leaseholders having to pay development value altogether would be by way of leaseholders electing to take a restriction on future development, thereby protecting any development value (if it exists) for the landlord.

What are the consequences of our revised approach?

Who would benefit from Schemes 1, 2 and 3?

Scheme 1: assumption that the leaseholder is not in the market and will never be in the market

Many consultees - in particular landlords and valuers - referred to enfranchisement as a form of compulsory purchase. If it is analogous, then an assumption that the leaseholder is never in the market would most closely fit with the compulsory purchase regime. It is a principle of compulsory acquisition that any increase or decrease in the value of the land acquired, which is attributable solely to the scheme under which the particular land is acquired, is to be disregarded in the assessment of open market value for the purposes of compensation. This principle is known as the Pointe Gourde principle. 110 The current enfranchisement valuation methodology partially reflects the Pointe Gourde principle by including a “no-Act” assumption. But the enfranchisement regime does not reflect the Point Gourde principle in relation to the identity of the purchaser; in fact, it does the opposite. Enfranchisement premiums are valued on the basis that the special purchaser (the leaseholder) is acquiring the interest. By contrast, in compulsory purchase law, the Point Gourde principle requires the valuation to be conducted on the basis that the special purchaser (the authority acquiring the land) is ignored. Accordingly, the assumption in Scheme 1 that the leaseholder is not in the market could be viewed as simply an extension of the Pointe Gourde principle.

There is, however, an argument that, despite the compulsory nature of the transaction, enfranchisement claims are not properly analogous with compulsory purchase orders. We discuss the competing views about the analogy with compulsory purchase in paragraphs 3.70 and 3.88 to 3.90 above.

under pressure to enfranchise, as the alternative is that the lease runs out and the leaseholder is left without their home or any financial asset. When the commercial necessity of enfranchisement is properly considered, the analogy with compulsory purchase orders -the prospect of which do not loom over ordinary properties in a comparable fashion - is not as convincing as is sometimes supposed.

If it is accepted that enfranchisement and compulsory purchase are not analogous, then the analogy with the Pointe Gourde principle falls away, and the question of whether the leaseholder, as a special purchaser, should be included or excluded must be decided on its own.

Benefits of Scheme 1

Provides compensation to landlords based on a market value of their interest.

Directly reduces premiums for leaseholders with 80 years or less left to run. These leaseholders would no longer have to pay marriage value.

If combined with other reforms (from Chapter 6), could be used to reduce premiums for all leaseholders.

Who would benefit?

Scheme 1 would only directly benefit leaseholders with 80 years or less left to run.

But all leaseholders could benefit if Scheme 1 is combined with other reforms to reduce premiums.

Development value and other additional value

Compatibility with A1P1 of enfranchisement premiums based on Scheme 1

In my view, the question of whether this option is compatible with A1P1 is fairly finely balanced. Marriage value comprises the additional value an interest in land gains when the landlord’s and the leaseholder’s separate interests are ‘married’ into single ownership. The aggregate value of those two interests held separately is often significantly less than the value of both where both are held by the same person. The analogy often used is that of a pair of Chinese vases: the vases are worth more as a pair than the sum of their individual values if owned separately. The additional value, where they are owned as a pair, is equivalent to marriage value. Marriage value can make a significant difference to the premium payable, as evident from the calculations in Figures 14 and 15 of the Consultation Paper. The shorter the lease (below the 80-year cut-off), the greater will be the marriage value. The effect of this scheme will therefore be to deprive landlords of a significant portion of what they otherwise would have received where a leaseholder acquires the freehold or extends the lease. Therefore, this scheme does not reflect the true market value where the leaseholder is in the market.

On the other hand, although the leaseholder under this scenario will gain the enhanced value from marrying the freehold and leasehold interests, arguably, the landlord loses nothing under this scenario. The value payable to the landlord reflects the minimum that a third-party investor would pay the landlord to purchase his or her interest (without any hope that the leaseholder would acquire the freehold or extend the lease in future). It is the equivalent of smashing the leaseholder’s vase, so far as the landlord is concerned: the landlord still holds his or her vase, but there is no additional value referable to the possibility of it being reunited with its pair. It is, in this sense, still a ‘market value’, just a market in which a special purchaser (i.e. the leaseholder) does not exist and the lease simply runs its course.

Ultimately, this issue is unlikely to turn on semantics as to whether this option results in a premium that reflects ‘market value’; on any view, the landlord will be deprived of at least part of the premium that otherwise would have been paid by the enfranchising leaseholder. The question will ultimately turn on whether the UK or Strasbourg Courts would regard this reduction in compensation as upsetting the fair balance between landlords’ interests and those of general society, and whether it will result in landlords shouldering an excessive burden. This will ultimately depend on the strength of the public interest or interests at stake. If the aim of the legislation is the wholesale reform of UK property laws affecting leasehold enfranchisement, and deliberate re-distribution of wealth from one part of society to another, then the Courts are likely to be more willing to conclude that the legislation strikes a fair balance, despite the reduction in compensation. It would be possible to distinguish between legislation based on this option, and the impugned measure in Lindheim, under which the compensation payable to lessors bore little relation to any form of market value and where the compulsory lease extension was for an indefinite duration.

I can also see that there would be strong practical reasons for adopting this scheme. Calculation of marriage value is complex and controversial. If marriage value were no longer payable, the need to calculate relativity (or a deduction for Act rights) would fall away. This would also have the knock-on effect of reducing professional fees.

The risk of a Court finding that this option violates A1P1 would also be reduced if the option includes development or additional value (albeit that any such value would also be assessed on the assumption that the leaseholder was not and would never be in the market). The example provided by the Law Commission in its written instructions to me is that of a freehold interest which includes a basement, which could be developed by incorporating it into an existing ground floor flat or by creating a separate lower ground floor flat. If there was an assumption that the ground floor leaseholder was not and would never be in the market, then any development value which could only be realised by granting a lease of the basement to the leaseholder could not be taken into account, but development value which could be realised by independently developing the basement could be. This value would be calculated by reference to what a hypothetical third-party purchaser of the freehold interest would pay the current freeholder, in addition to the value of the term and reversion, for the potential to develop the basement in the future. In this example, the freeholder would receive something on enfranchisement in respect of development value, even though this might be less than would be paid at present.

Without knowing the final shape of legislation based on this option, it is difficult to advise on prospects of a successful A1P1 challenge. However, if the aim of the legislation is the wholesale reform of UK property laws affecting leasehold enfranchisement and the option were to include development or additional value, then on balance, I consider that it is marginally more likely than not that the option would be compliant with A1P1. In other words, the risk of a successful A1P1 challenge to this option is slightly less than 50% i.e. towards the upper end of Medium Low.

Option 1.

Scheme 2: assumption that the leaseholder is not in the market, but may be in the market in the future

It would not reduce the premium in these cases to the same extent as Scheme 1 above.

respect of leases of any of the non-participating leaseholders that have 80 years or less left to run. That is because, at present, the participating leaseholders need to pay hope value in respect of those leases, and under Scheme 2 hope value will continue to be payable in respect of these leases.

Benefits of Scheme 2

Provides compensation to landlords based on a market value of their interest.

Directly reduces premiums for leaseholders with 80 years or less left to run (but not by as much as Scheme 1). These leaseholders would pay hope value instead of marriage value.

If combined with other reforms (from Chapter 6), could be used to reduce premiums for all leaseholders.

Who would benefit?

Scheme 2 would only directly benefit leaseholders with 80 years or less left to run.

But all leaseholders could benefit if Scheme 2 is combined with other reforms to reduce premiums.

Development value and other additional value

Compatibility with A1P1 of enfranchisement premiums based on Scheme 2

If it is assumed that the leaseholder is not in the market, but may be in the market in the future, then the ‘market value’ of the landlord’s interest is the value of the term and reversion, plus potentially an amount to reflect the hope of doing a deal with the leaseholder in the future. This is what the landlord would receive in the open market, if the landlord’s interest was sold to an investor as opposed to the leaseholder. As the investor would not be a special purchaser, no marriage value would be realised on the sale to the investor. However, the investor would anticipate the possibility of releasing marriage value by a sale to the leaseholder in the future, and may pay something in addition to the value of the term and reversion to reflect the hope of this happening. This scheme would reduce premiums where the current lease has less than 80 years unexpired, but not to the same extent as in Scheme 1 above. Further, it would not reduce the premium on a collective enfranchisement in so far as it relates to the leases of any non-participating leaseholders who have less than 80 years left to run because hope value is already payable in respect of such leases (see para 14.69 of the Consultation Paper). According to the Law Commission, this scheme therefore produces a ‘market value’; it is the market value which would be paid by an investor.

I consider that it is more likely than not that this option is compatible with A1P1, although it remains reasonably finely balanced. The risk of a successful A1P1 challenge is lower than it would be for Scheme 1 because the premium payable is closer to the amount that the landlord would receive if the leaseholder was in the market, and is therefore closer to the true ‘market value’ in the circumstances of leaseholder enfranchisement. Again, the risk of a Court finding that this option violates A1P1 would also be reduced if the option includes development or additional value. In this scenario, the development value would be calculated by reference to what an investor would pay the landlord for the prospect of doing a deal with the leaseholder in the future (which would be less than the development value in the hands of that leaseholder, as a discount would need to be applied to reflect the risk that the leaseholder may never seek to do a deal). On balance, I consider that the risk of a successful A1P1 challenge under this option is Medium Low.

Option 2.

Scheme 3: assumption that the leaseholder is always in the market

Benefits of Scheme 3

Provides compensation to landlords based on a market value of their interest.

If combined with other reforms (from Chapter 6), could be used to reduce premiums for all leaseholders.

Who would benefit?

Scheme 3 would not benefit any leaseholders directly.

But all leaseholders could benefit if Scheme 3 is combined with other reforms (from Chapter 6) to reduce premiums.

Development value and other additional value

Compatibility with A1P1 of enfranchisement premiums based on Scheme 3

The assumption that the leaseholder is always in the market leads to a premium which includes the value of the term and reversion, as well as marriage value, where it exists. Applying this assumption to development and other additional value means that value in the hands of the leaseholder can be considered, whether or not he or she chooses to realise it. This scheme, on its own, would not reduce premiums for leaseholders. As a result, this scheme is highly likely to be compatible with A1P1 as it most closely resembles the current valuation methodology. The risk of a successful challenge to this valuation method is Low.

Option 3.

Option 4.

The potential role of a simple formula

We explained why a simple formula could not be used in all cases as a basis for calculating enfranchisement premiums. But we also said that a simple formula could have a potential role in a limited category of cases. We now explain what that role could be.

A simple formula as a mechanism for implementing Schemes 1, 2 or 3

Benefits of a simple formula as a mechanism for implementing (in part) Schemes 1, 2 or 3

Simple formula supported by leaseholders.

Easy to understand (in those cases to which it would apply).

Who would benefit?

Leaseholders whose leases fall within the limited category to which the simple formula would apply.

Option 5.

A simple formula as a stand-alone regime for straightforward or low value claims

Benefits of a standalone regime for low value or straightforward cases

If Government rejects the options for reform in this Report and concludes that the general valuation regime cannot be made simpler and more certain, then there would be scope to carve out a limited category of relatively simple and low-value claims which could be subject to a simple regime.

Who would benefit?

Leaseholders whose leases fall within the limited category to which the simplified regime applies.

Option 6.

INTRODUCTION

OVERVIEW OF THE SUB-OPTIONS SET OUT IN THIS CHAPTER

Reforms that would (or could) reduce premiums

Reforms that would, by themselves, increase premiums, but which could be adopted alongside other reforms to reduce premiums

off for marriage value should be retained, otherwise premiums will increase for some leaseholders. However, the cut-off could be removed as part of a package of reforms to reduce premiums overall.

REFORM TO ELEMENTS THAT WOULD (OR COULD) REDUCE PREMIUMS

SUB-OPTION (1): PRESCRIBING RATES

What do we mean by prescription of rates?

The benefits of prescribing rates (at, or below, market levels)

Simplicity

Agreeing or determining the freehold (FHVP) value of a property

The FHVP value, or capital value, of a property is relatively easy to ascertain for standard properties: see paragraph 2.32 above. In many cases, especially where properties are uniform, sufficient information can be obtained from internet research, from HM Land Registry, and/or from local estate agents. Where properties are unusual in character the assessment of FHVP value would be more involved, but no more so than at present.

Certainty

Houses 1, 2, 3 and 4 have a FHVP value of £250,000. If the rates are prescribed,123 then the leaseholder and landlord will know that the enfranchisement premium will be:

For Houses 1, 2, 3 and 4, if the FHVP is not yet agreed (or determined by the Tribunal), the leaseholder is still likely to know that it will be somewhere between £230,000 and £270,000.

If the rates are prescribed, 124 then:

Consistency

Removing unfair incentive structures and inequality of arms

Reduced costs and delays for leaseholders and landlords

Reduced costs for leaseholders

Reduced litigation

The benefits of prescribing rates below market levels

Consultation responses concerning prescription of rates

“We consider that deferment rates should not be prescribed with the objective of reducing the premiums payable. We consider that this will unlawfully interfere with the rights of landlords and contravene A1P1. We consider that rates can be set by a body of experts by reference to prevailing market rates which would take account of movements in other asset classes, such as LlBOR or gilts. The proposal to make the process cheaper for the leaseholder (unfair to the landlord) will result in a windfall profit to the leaseholder who is lucky enough to hold the lease at the time of enfranchisement, by reducing the cost on the one hand and increasing the market value of the property on the other. This compulsory transfer of value is unjust to the stakeholders represented by the landlords many of whom are institutions such as pension funds whose assets will consequently be impaired resulting in a reduction in capital available to pay their pension liabilities”. (Consensus Business Group, a commercial investor)

A culture change: moving from individual tailored valuations to general valuations

“To fail to take into account the complexities of the valuation process will result in a totalitarian style theft of assets and a massive injustice to the freehold investor. I am appalled that you can consider this sort of tyranny. Please apply the correct market values. Nothing more, nothing less will achieve fairness”. (Jupiter Investments Ltd, a commercial investor)

“Prescription of deferment rates would be too arbitrary given the variation in location and quality of property involved. I see nothing wrong with the current system whereby it has changed over time and location as a result of judicial determination”. (Carter Jonas LLP, surveyors)

“No no no! Valuations undertaken are an attempt to assess the market value and the rates used reflect this and are free to be adjusted and [tested] by tribunal decisions. Market and economic factors can change these. They should not be set”. (Sarah Foster, a surveyor)

“The capitalisation rate to apply to any ground rent income is a matter for valuation opinion, not prescription”. (Scrivener Tibbatts, surveyors)

Does the current approach lead to the “correct” valuation?

range of outcomes is the inevitable consequence of valuation being a matter of opinion, and a tailored enfranchisement premium has been found in the particular case. Equally, however, it is arguable that prescribing rates to remove that scope for argument is a more acceptable approach because it provides certainty and consistency.

outcome is not acceptable; the outcome is not the result of legitimate differences of expert opinion about market value, but instead the result of other factors (such as the parties’ relative bargaining powers) that should not be relevant to the true market value of the asset.133

Does prescription of rates give rise to arbitrary results?

Prescription of capitalisation rates

Consultees in favour of prescribing capitalisation rates

“We support the proposal to prescribe capitalisation and deferment rates. Doing so will promote transparency, simplicity and will reduce the scope for disputes. This will result in enfranchisements and lease extensions being simpler and more cost effective. Combined with an online calculator it will also enable a leaseholder to know the approximate cost of an enfranchisement prior to commencing the process as it won't be down to a tribunal to determine the rate (which is currently the case for the capitalisation rates)”. (Rothesay Life, a commercial investor)

“Capitalisation rates being legally set would save professional fees for all parties, and so are desirable”. (Bretton Green Ltd, a commercial investor)

“This is another area of valuation methodology that is incomprehensible to the average leaseholder. The scales are so heavily tipped in favour of the freeholder, who has the deep pockets to employ top barristers, economists, and others to set case law for low capitalisation rates to ensure high enfranchisement premiums. Leaseholders really have no defence against this. If capitalisation rates are set, they need to reflect the capitalisation rates that have been used in recent years for valuation purposes; 7-8% to ensure that enfranchisement premiums are attainable for leaseholders. Setting rates at this level will help leaseholders immensely and needs to be done quickly before freeholders successfully set case law for lower rates”. (Jo Darbyshire, a leaseholder)

“Cap rates need to be prescribed as a matter of urgency. It is only recently, with freeholders introducing onerous ground rents with very aggressive accelerators that disputes over [capitalisation] rates have arisen”. (Leasehold Knowledge Partnership, a leaseholder representative body)

“Leaseholders do not individually have the financial resources to compete against the freeholders”. (Parthenia, surveyors)

Consultees opposed to prescribing capitalisation rates

“In the current low interest rate environment there are good reasons, from both an academic and valuation perspective, for capitalisation rates to be lower than the current range generally adopted. Following the All Saints decision I suspect that a committee of economists, academics and valuers etc. may adopt prescribed rates that are lower than those currently adopted. This will increase rather than decrease the cost to leaseholders and is contrary to the Government's objectives.” (Richard Stacey, a surveyor)

“Given the current low base rates, there is good valuation argument for suggesting that even fixed ground rent income traditionally capitalised at between 6% and 8%, depending on location should be capitalised at a lower rate.” (Scrivener Tibbatts, surveyors)

“There are very few [tribunal] cases on [capitalisation] rates - one recent one All Saints but apart from that none for years. The reason is valuers agree these rates depending on the market and comparable evidence”. (Stewart Gray, a surveyor)

“As it is common place for capitalisation rate to not be a substantial issue in dispute and is one of the key issues most regularly agreed with minimal negotiations it would seem unnecessary to prescribe same. It would also seem to be a costly exercise as that will then require regular review and that would seem to be a waste of public money when there are so few disputed cases over this variable”. (Saul Gerrard, a surveyor)

How should capitalisation rates be prescribed?

“For short leases, the obvious capitalisation rate should be the equivalent gilt rates. For longer leases, then the 10-year gilt rate should be used.” (Bretton Green Ltd, commercial investor)

It should be “based on a long-term interest rate equivalent to the term of the lease”. (Philip Rainey QC, barrister)

“The appropriate capitalisation rate is dependent on the quantum, the frequency of payment, the opportunity for growth through the term, the rent review mechanism, all of which has to be compared to alternative types of investments. Therefore it is inappropriate to set a single rate for all rents”. (Prosper Marr-Johnson, a surveyor)

“Capitalisation rates in the market vary between income and property type. Hence it will be very difficult to prescribe a 'one size fits all' rate. Different types of income will need differing prescribed rates”. (JLL, surveyors)

Prescription of deferment rates

Preliminary point: the relevance of Sportelli

“Arguably Sportelli, by ascribing a UK wide rate in a case concerning central London evidence has caused some of the problems we see from the housebuilding sector. It has perhaps underwritten investment values outside of central London as a result and may have caused pension funds and other institutions to overpay for these assets.” (Cluttons, surveyors)

“Our suggested solution is therefore to prescribe deferment rates at the current Sportelli rates, on the basis that leaseholders would be protected from any potential increase in premiums resulting from a lower deferment rate applying in the future and landlords would have some security in so far as they would know that prescribed deferment rates would be no higher than the current Sportelli rates.” (Gerald Eve LLP, surveyors)

“... deferment rates have effectively been prescribed since the decision in Sportelli ... and therefore prescribing a deferment rate would not do anything to simplify the valuation process as it stands.” (Leasehold Forum, a body representing enfranchisement professionals)

“It would ... restrict valuers from deviating from a given rate in a situation where there is a compelling reason to adjust the rate either upwards or downwards. Further, the generic deferment rate of 4.75% for houses and 5% for flats determined in the Sportelli case applies to leases with more than 20 years remaining. Prescribing a deferment rate has the disadvantage of restricting valuers in claims with reversions with less than 20 years remaining, where useful market evidence may be available to assist in assessing the present value of the reversion.” (Leasehold Forum, a body representing enfranchisement professionals)

“. obsolescence in a building is relevant and a prescribed rate could not take this into account. This could be very unfair to leaseholders.” (Fanshawe White, surveyors)

“In complex cases there are situations where it is appropriate to deviate from the Sportelli rate, particularly if there is an intermediate interest with a set reversionary term. Therefore a certain amount of flexibility is necessary.” (Prosper Marr-Johnson, a surveyor)

Consultees in favour of prescribing deferment rates

“We agree with the principle that an easily discernible deferment rate is an important element in arriving at quicker, easier and more cost-effective valuations.” (British Property Federation)

“A prescribed method, which tracks market movements, reviewed frequently, geographically specific would simplify the process.” (Wellcome Trust, charitable sector)

leaseholders as this is clearly in the public interest. We suggest 6% in [Prime Central London] and 6.5% for the rest of the country”. (Leasehold Knowledge Partnership, a leaseholder representative body)

“No rates should remain immutable over time and changing circumstances should allow for amendment.” (British Property Federation)

Consultees opposed to prescribing deferment rates

“Prescribed rates will result in winners and losers, depending on whether they fall above or below the line / rate. In the current low interest rate environment there are good reasons, from both an academic and valuation perspective, for deferment rates to be lower than Sportelli. Following the Lord Chancellor’s decision in 2017 to change the discount rate, from 2.5% to -0.75%, I suspect that a committee of economists, academics and valuers etc may adopt prescribed rates that are lower than Sportelli. This will increase rather than decrease the cost to leaseholders and is contrary to the Government's objectives.” (Richard Stacey, a surveyor)

“The general consensus, certainly within [Prime Central London], is that the rate ... would now warrant review and any such review would likely lead to a rate that is substantially less than the rate in Sportelli. It follows therefore that seeking to adopt a rate based on the present market is more likely to increase rather than decrease the premium. There would need therefore to be political interference to adopt a deferment rate at a level which reduces the premium”. (Damian Greenish, solicitor)

How should deferment rates be prescribed?

“based on a long-term interest rate equivalent to the term of the lease”. (Philip Rainey QC, barrister)

“linked to another accepted rate of interest available in the financial market”. (Paul Tayler Ltd and Howard de Walden)

“reliable gilt / bond with appropriate adjustment”. (David Robson, a surveyor)

“Long term analysis should be employed by an independent financial historian (the Bank of England has data going back over 300 years). Reference should be made to the property cycle, according to The Economist house prices are 30% overvalued against incomes and 45% against rents according to long term analysis. This should mean deferment rates should be far higher than 4.75% and 5%, as there is a high chance of property values falling and indeed over correcting”. (Parthenia, surveyors)

Effect of the deferment rate on relativity

Deferment rate and relativity are linked and so a change in the deferment rate in an enfranchisement calculation would result in a change in the relativity of the existing lease. The reason is as follows: in any claim a lower deferment rate would result in a higher value for the freehold reversion and so a higher enfranchisement premium. In turn, that would reduce the price that would be paid for the existing lease, because a prospective purchaser would assess the existing lease value by deducting the likely lease extension premium from the extended lease value (see paragraph 3.20 onwards above). That is why the Sportelli decision, which reduced deferment rates across the country, also increased premiums especially outside central London in areas where deferment rates had previously been much higher.

Prescription of relativity (or the no-Act deduction)

Consultees in favour of prescribing relativity (or the no-Act deduction)

“We consider reference to in-the-market relativity rate graphs provided by a range of professional practitioners/estate agents for geographic areas ... with a prescribed and supportable discounts for Act rights, would help address the current uncertainties behind references to graphs”. (The Dulwich Estate, The Charity of Richard Cloudesley, and Dame Alice Owen’s Foundation, charitable sector)

“In order to simplify and expedite the valuation process, and cut down on disputes, prescription of some of the components of the valuation could be considered. Relativity could be prescribed although this would contradict the Upper Tribunal's most recent market led approach as adopted in Sloane Stanley v Mundy. . Relativity has tended not to be constant in the past, but that is probably because of the uncertainty of the premium payable for a lease extension, which impacts the short lease value. So introducing a prescribed graph of relativity would bring some consistency to the market and the valuation of short leasehold interests in general, which would probably be welcomed by valuers and market participants alike.” (Cerian Jones, a surveyor)

“CILEx welcomes proposals for this to be set to a fixed relativity model. This shall help to simplify the valuation methodology, eliminate cause for disputes and help to improve consumer awareness around the costs involved within the enfranchisement process”. (CILEx, a legal professional representative body)

“I refer back to the Land Tribunal’s decision in Arrowdale when they proposed that the RICS ought to get a working party to agree one graph of relativity. The principle that one graph of relativity is acceptable has therefore been established. Let us be quite honest, none of the graphs are anything other than downright opinion, or somebody's interpretation of what they call "facts". After 25 years of the 1993 Act the arguments over marriage value are worse than they have ever been in my experience (see the Upper Tribunal decision in Ironhawk). Many attempts have been made to find a solution, all have failed, the only way you will resolve that problem is either to eliminate marriage value or prescribe a graph. Quite frankly, I do not see why you should not draw a straight line between term date (nil years unexpired) to 80 years unexpired and everything above 80 years unexpired gets no marriage value. It's about as fair as you would ever get: landlords will be relieved that it is not being abolished altogether although they would never admit that!” (Bruce Maunder-Taylor, a surveyor)

Consultees opposed to prescribing relativity (or the no-Act deduction)

“Relativity should not be prescribed as the valuation of the existing leasehold interest relative to the freehold value should be assessed by the valuer familiar with the actual property under consideration.” (Leasehold Forum, a body representing enfranchisement professionals)

“... some of the tolerances of the current position in case law (emphasis on local and recent transactions) should continue to be a feature, a concept which may be difficult to realise, for instance if the approach was to be by way of any single graph.” (Association of Leasehold Enfranchisement Practitioners, a body representing legal professionals and surveyors)

“Relativity should not be prescribed as it may result in an existing lease value that is not reflective of the particular property or location.” (JLL, surveyors)

“In my ten years’ experience, I have never had a dispute over relativity which has led to a Tribunal for determination. The majority of valuers are able to agree this element without recourse to the Tribunal and can reflect the market and geographical area without needing the rate to be prescribed”. (Marie Joyce-Reidy, a surveyor)

For the reasons set out in paragraph 6.68 above, that argument misses the point of prescribing the deferment rate.

How should relativity (and the no-Act deduction) be prescribed?

landlords and by valuers who often act for landlords. It would allow relativity to be prescribed in a “fair and comprehensive” manner (Eyre Estate). It was described as the “go-to graph” for Prime Central London or Greater London, followed by the Savills 2015 graphs.145 It was suggested by two consultees that adopting the Gerald Eve graph would mean that “leaseholders would be protected in so far as premiums would not be increased by a new graph with lower relativities and landlords would have security in so far as they would know that premiums would not be reduced from current basis”.146 Other consultees noted that, although the Tribunal in Mundy had concluded that the Gerald Eve graph was the “least unreliable” and had accepted the landlord’s case, the Tribunal nevertheless said that the Gerald Eve graph may overstate relativity, in which case prescribing rates using that graph would in fact fix premiums at below-market levels.

relativity or a no-Act deduction should be set.

“In my view relativity should be prescribed - but this should be a once-only exercise after which the curve should be fixed for all time. There can never be any compelling evidence as to what relativity is or to show that whatever has been prescribed should be altered.” (Philip Rainey QC, barrister)

A couple of consultees suggested that reviews of relativity should be in line with reviews for capitalisation and deferment rates. Five-yearly reviews was the most popular option, suggested by several consultees.

“I would also tweak the valuation criteria to make it easier to prescribe and to increase fairness. For example I would add a “no scarcity” assumption i.e. an assumption that short leases were not “blighted” because most leases are now long. I would make the “no Act” assumption a true “no Act world” assumption - and add an assumption that there was no risk of an Act being introduced.” (Philip Rainey QC, barrister)

Compatibility with A1P1 of prescribing rates

Valuation often involves the use of rates to determine capitalised or deferred capital sums, and for relativity. Identifying the appropriate rates can be difficult and contentious. The rate used can make a significant difference to the premium that will be paid. One of the options for reform introduced by the Law Commission is the idea of prescribing rates.

As the Law Commission has noted in my instructions, it is difficult to assess the compatibility with A1P1 of any prescribed rate without knowing what that rate might be and how it relates to the rate which would otherwise be applied by a valuer considering the individual attributes of a particular property. However, it seeks my advice on (a) whether prescribing rates would be compatible with A1P1, when the rate was intended to be a market rate, but prescription would necessarily mean that in some cases less than or more than a market rate may be obtained; and (b) where the rate is intentionally prescribed to be less than a market rate in order to produce a lower premium.

In relation to scenario (a), I consider that, at least in principle, prescribing a rate that is intended to be a market rate is likely to be compatible with A1P1. The concept of prescribing a rate is not of itself incompatible with A1P1. As the Strasbourg Court observed in Lithgow v UK, in the context of legislation which is intended to have a wide-reaching social and economic impact, it is justifiable to adopt a common formula which applies across the board, even if it is tempered with a degree of inbuilt inflexibility.

However, it would be important to ensure that the prescribed rate is not so inflexible that it does not in fact reflect the market rate in relation to particular categories of property or particular areas or particular lengths of lease. For example, in the case of deferment rates, it may be necessary to prescribe different deferment rates according to the location of the property or the length of the lease. I consider that if rates are to be prescribed, there would need to be a fair and transparent procedure for setting and adjusting the rates, to ensure the rates adequately reflect changing developments over time. It should also be possible for landlords or leaseholders to challenge the method by which the rates are prescribed.

I also note that ‘market value’ in the context of enfranchisement claims is an imprecise, flexible and in some cases artificial concept. Valuation is not an exact science, and in practice, professional valuers disagree about the appropriate rates for capitalisation, deferment and relativity. As there is no definitively ‘correct’ capitalisation rate, deferment rate or relativity, whilst enfranchisement premiums are meant to reflect the correct ‘market value’ for the landlord’s asset, the current valuation methodology can give rise to a range of possible outcomes in respect of the same property. Therefore, provided that the Government prescribes rates which result in premiums that are within the range of possible outcomes under the current law (or are even towards the lower end of that range of possible outcomes), it would be difficult to argue that such rates have not been prescribed at market levels. If such a scheme is developed, I consider that the risk of a successful A1P1 challenge to this aspect of the scheme is Medium Low to Low.

It is more difficult to advise in relation to scenario (b), in the absence of knowing the primary objective/s of the scheme, the identity of the leaseholders who would benefit from the scheme, or the level of the resulting premiums. A rate intentionally prescribed to be marginally less than a market rate, or not significantly below a market rate (or the range of values which can be described as market levels), would not ipso facto be incompatible with A1P1. But clearly, the further away from a market rate (or the range of possible outcomes reflecting market levels) that the rate is prescribed, the higher the risk of a finding that the scheme as a whole does not strike a fair balance, and imposes a disproportionate burden on landlords.

Conclusion: options for Government relating to prescription of rates

Prescription of rates at market levels

certain valuation regime. Leaseholders would have certainty about what their enfranchisement premium would be (or at least the range into which the premium would fall).

Prescription of rates at below-market levels

Benefits of prescription of rates (at any level)

Certainty and predictability

Simplicity

Consistency

Removing unfair incentive structures

Reduced scope for inequality of power, and litigation tactics, to influence the outcome

Reducing costs, delays and litigation

Benefits of prescription of rates (below market levels)

All of the benefits listed above, plus leaseholders would pay lower enfranchisement premiums

Who would benefit?

Prescription at market rates would have benefits for all leaseholders, regardless of the length of their lease, and some benefits for landlords.

Prescription at below-market rates would benefit all leaseholders, regardless of the length of their lease.

How should rates be set?

Personal injury claims usually result in lump sum awards of damages to claimants. These lump sums are, however, often intended to reflect future losses. Put simply, the court must determine what lump sum today should be awarded in respect of those future losses. In order to determine the appropriate lump sum, the courts use a “discount rate”: the rate of return to be expected from the investment of the lump sum awarded in respect of the future losses.

In some ways, this is similar to the valuation of “the term” in an enfranchisement premium, seeking to assess what capital sum today would reflect the landlord’s loss of future income.

The personal injury discount rate is reviewed by the Lord Chancellor every five years and, where appropriate, changed by statutory instrument. The first review (under a new statutory methodology)147 was concluded on 15 July 2019, and followed a Call for Evidence, which directly informed the Government Actuary’s advice to the Lord Chancellor. The Lord Chancellor is required to make a number of assumptions and to take a number of issues into account in determining the appropriate rate (or rates, if different rates are thought to be appropriate for separate classes of case).148

For subsequent reviews, the legislation sets out how an expert panel is to be constituted. The Government Actuary must be the chair of the panel, and the other four members must consist of an actuary, an investment manager, an economist and someone experienced in "consumer matters as relating to investments". The Lord Chancellor must decide whether the rate or rates should be maintained or changed, having received advice from the expert panel and having consulted the Treasury, and must give reasons for his or her decision. In terms of the application of the personal injury discount rate, the court can take into account a different rate of return in specific cases where a party to proceedings shows that it is more appropriate in that situation.149

Different rates in different circumstances

Reviewing prescribed rates

Exceptions to prescribed rates

Option 7.

Can FHVP values be prescribed?

SUB-OPTION (2): TREATMENT OF GROUND RENT

The significance of ground rents for landlords and leaseholders

Possibility of ground rents continuing following a lease extension

The Consultation Paper

the property, and capitalising only that (capped) ground rent.

(“RPI”), and capitalising only that ground rent.

We also discussed the possibility of calculating the average ground rent for the remainder of the term, and capitalising that sum, but we noted that that approach would increase the premium.

Consultees’ views

General comments in favour of a restriction on the treatment of ground rent

Arguments against a restriction on the treatment of ground rent

Consultees’ views on particular suggestions

“In the case of escalating ground rents a cap may be introduced so that any amount of ground rent above 0.1% of the capital value is ignored.” (Nesbitt and Co, surveyors)

“Ignoring the ground rent or any part of it would result in an inaccurate valuation of the landlord's interest, would be unfair, and would no doubt be liable to legal challenge.” (Cerian Jones, surveyor)

“it should be born in mind that leasehold properties in Prime Central London are commonly held by parties who had acquired such leases in the full knowledge any onerous terms of their leases, such as onerous or geared ground rent, or they would have received professional advice prior to exchange of contracts and would have adjusted their bids downwards accordingly. Such leaseholders operating in a sophisticated market would benefit from a windfall gain if on any subsequent enfranchisement the premium was calculated ignoring any onerous rents.” (Gerald Eve, surveyors)

Assuming a review on the valuation date

Compatibility with A1P1 of a cap on ground rent in the enfranchisement valuation

In the scenario in which the leaseholder paid the same premium on the grant of the lease as he or she would have paid if there was no onerous ground rent liability, then in my view, the payment of onerous ground rent to the landlord is an undeserved windfall. I understand that ground rent generally bears no relation to the level of maintenance or the quality of service provided to leaseholders - that is the function of the service charge. Therefore, where leasehold properties are sold for the same price as their freehold equivalents, the ground rent simply represents a source of income for landlords, with little to justify it beyond the fact that it was agreed as a term of the lease. Where the ground rent exceeds 0.1% of the property’s value, it becomes disproportionate to the value of that property. For that same ground rent then to be factored into the calculation of the premium means that the landlord receives a further windfall when the leaseholder exercises his or her enfranchisement rights. In those circumstances, I consider that capping the ground rent at 0.1% of the property’s value represents a fair balance between the landlord’s contractual entitlement to receive some income and the rights of leaseholders, and is likely to be compatible with A1P1. The risk of a successful challenge to such a cap is likely to be Medium Low.

On the other hand, where the price paid for the leasehold property was reduced to reflect the onerous nature of the ground rent provisions, it may be harder to justify capping ground rent at 0.1% of the property’s value. The landlord would have a basis for arguing, in this scenario, that he or she has foregone capital in return for a guaranteed source of income over the life of the lease, and that the rent in excess of 0.1% of the property’s value is not in these circumstances a windfall. Nevertheless, as just one element of a scheme, it may still be possible for the Courts to find that capping ground rent at 0.1% of the property’s value represents a fair balance between the interests of landlords and those of leaseholders and wider society. Whether the Courts will do so will depend on whether the other elements of the scheme and the scheme as a whole can be said to impose a disproportionate burden on landlords. However, taking this element by itself, I consider that it is more likely than not that imposing such a cap in these circumstances would not be compliant with A1P1, or in other words, that the risk of a successful challenge to such a cap in these circumstances is Medium High.

Conclusion: options for Government

Benefits of capping ground rent in the valuation calculation

Reducing premiums for leaseholders with onerous ground rents.

Who would benefit?

Leaseholders who currently have onerous ground rents or whose ground rents may or will in the future (following review) become onerous, regardless of the length of their lease.

Figure 30: effect on premiums of capping the treatment of ground rent at 0.1% of the freehold value of the property

House 3

Details of existing lease

Unexpired term

241 years

Ground rent

£300 pa rising in line with RPI

FHVP value

£250,000

Enfranchisement premium

Valuation under:

Current law

Option for reform

Part (1): term

£9,554

£6,250

Part (2): reversion

£3

£3

Part (3): marriage value

£-

£-

Total premium

£9,557

£6,253

House 4

Details of existing lease

Unexpired term

241 years

Ground rent

£300 pa rising to £9,600 pa

FHVP value

£250,000

Enfranchisement premium

Valuation under:

Current law

Option for reform

Part (1): term

£79,422

£6,250

Part (2): reversion

£3

£3

Part (3): marriage value

£-

£-

Total premium

£79,425

£6,253

which appears for all intents and purposes to be a very typical long residential lease - save that it happens to have been granted for a nil or very low premium, because that is the agreement the parties have reached. In many of these cases, it would not be surprising to find a high or onerous ground rent liability within the lease. For example, a well-informed leaseholder may have negotiated a significant reduction in premium purely because of the inclusion of a high ground rent in the lease. We have also heard of occasional instances in which a leaseholder has offered to pay a higher-than-average ground rent in order to secure a reduction in the premium payable to purchase the lease. One consultee told us that they have known high-net-worth individuals purchasing properties in the Prime Central London market to make such requests where they are only interested in acquiring the property for a relatively short lease term (albeit still over 21 years) and will have little interest in enfranchising.

of landlords have granted leases of residential properties in excess of 21 years but without requiring payment of a premium for the grant. Instead, the lease includes what would typically be described as a “market rent” rather than a “ground rent”. In other words, the leaseholders are obliged to pay a monthly rent much like the rack rent payable under an assured shorthold tenancy. The National Trust, for example, has explained that it has a number of properties let in this manner, such as houses which are run by the leaseholders as bed and breakfasts or pubs. Consultees have pointed out that some of the changes to qualifying criteria for enfranchisement rights which we provisionally proposed in the Consultation Paper might lead to these properties becoming subject to enfranchisement rights when they are not currently. We do not think that these properties becoming enfranchisable would be an especially significant concern on the current enfranchisement valuation methodology, because the premium which would be payable where a full market rent has to be accounted for is likely to make enfranchisement practically impossible for the leaseholder in most cases. For those for whom it would be possible, the landlord would receive significant compensation. But we are mindful that the position would be very different if Government were to introduce a cap on ground rents within enfranchisement valuations.162

Option 8.

SUB-OPTION (3): DEVELOPMENT VALUE

The Consultation Paper

Consultees’ views

Consultees in favour of leaseholders being able to elect to take a restriction on development

“... this seems a sensible proposal that could help leaseholders and make enfranchisement more affordable.” (National Leasehold Campaign, a leaseholder representative body)

“Providing a right for leaseholders to elect to accept a restriction on development would significantly reduce the cost of enfranchisement in cases where development value may arise. Often it is the leaseholders’ preference not to have the block extended or for any further development to be carried out, and so should not have to pay a price that reflects the value of a development that they have no intention of realising”. (Leasehold Forum, a body representing enfranchisement professionals)

“. this would help to reduce the cost of enfranchisement [and] significantly reduce litigation.” (The Wellcome Trust, charitable sector)

Several consultees said that it was not unusual for leaseholders to agree such a restriction with the landlord under the current law (despite the potential issues referred to above).

“In practice this often happens and it should be possible for claimants to elect to accept the restriction”. (Jennifer Ellis, a surveyor)

“CILEx provisionally accepts this proposal, provided that it is possible to release the restriction at a later date where both parties consent.” (CILEx, a legal professional representative body)

“We agree with this proposal, which will simplify the valuation process in cases where there can be arguments about development potential, it would reduce enfranchisement premiums in such cases, and also reduce the scope for litigation. However, in any such scheme there must be a proper mechanism for (i) reserving the development value to the landlord and (ii) ensuring that the landlord is properly compensated if and when the reservation is released.” (British Property Federation)

Consultees opposed to leaseholders being able to elect to take a restriction on development

“On that basis the landlord would be secure in the knowledge that they have secured full value for the transfer, and the leaseholder would be secure in the knowledge that they have acquired an un-encumbered freehold”. (The Portman Estate, landlord)

We consider, however, that such an election itself would not discourage development. Rather, it simply ensures that development value is only paid if and when development is actually undertaken, rather than development value having to be paid at an earlier stage on a speculative basis.

“We do not believe it would be possible to incorporate a restriction which would last the length of the lease. The personal covenant between leaseholders and landlord outlined in [the Consultation Paper] would not hold for the lifetime of the lease as the parties will potentially change several times over the life of the lease”. (Wallace Partnership Group Ltd, a commercial investor)

We consider that it would be possible to create a type of statutory restriction which would hold for the lifetime of a lease. But in any event, it is not necessarily the case that the restriction on development should last for the lifetime of the lease; it might be sufficient for it to last for (say) 10 or 20 years only. A development that takes place after a long period of time may be considered too speculative, at the time of the enfranchisement claim, for a premium to be required to be paid (for example, planning and other policies change over time and it is impossible to anticipate with any certainty what they might be far into the future). Further, we discuss alternative mechanisms for achieving the aim of allowing leaseholders to choose a restriction rather than to pay development value below.

“Whereas this proposal would limit the premium payable to the benefit of the leaseholder by excluding from the premium any value attributable to development potential, it would not simplify the process in the long term. This is because as / when the former leaseholder wishes to undertake a development of the property in the future, which would be in breach of the restriction, it would be necessary for the former leaseholder to either negotiate with the former freeholder for the release of the covenant or to apply to the Upper Tribunal under the provisions of the Law of Property Act 1925 to have the restriction lifted or amended.” (Gerald Eve LLP, surveyors)

This argument does not, however, address the fact that for those leaseholders who do not wish to develop, the enfranchisement process would be simplified and the price would be reduced.

“... the covenant/restriction would have to exist in gross, and the benefit would have to be transmissible by the landlord. Therefore, it is logical to assume that a secondary market trading these restrictions would arise, which is not an attractive prospect.” (Philip Rainey QC, barrister)

If it was considered desirable to prevent a secondary market arising it may be possible to prevent this by restricting the manner in which the benefit of these restrictions could be transferred (for example, by preventing their sale for value).

Alternative mechanisms to provide an election restricting development

“We believe that it should not be possible for leaseholders to accept a restriction on development to prevent development value to be paid as part of an enfranchisement valuation. Alternatively, we propose that a form of overage restriction entered on the freehold title at the point of enfranchisement, capped at say, 20 years, would address this concern and avoid any dispute over valuation at the point of enfranchisement. Otherwise, the freeholder is denied the opportunity to take a legitimate profit and the suggestion that he should find other investment opportunities to make a similar profit deprives him of a legitimate interest in the property.” (Long Harbour and HomeGround, commercial investors)

“This could be achieved by using an overage clause in the sale. This would be similar to the numerous sales that occur already when land is sold without planning permission but with a degree of hope value. A restriction is included in the Transfer whereby the purchaser is obliged to pay the seller a percentage, often 50%, of any uplift in value if planning permission is obtained for development. This is usually time limited to 20 to 50 years. The same provision could be included in the sale of a leasehold property, i.e. the purchasing leaseholder(s) would pay a price excluding development value, but the purchase would be subject to a restriction on any development unless the purchaser(s) pay the former freeholder 50% of any increase in value due to development within 20 years of the date of sale.” (Caxtons Commercial Ltd, surveyors)

Compatibility with A1P1 of enabling leaseholders to elect to take a restriction on development

freehold acquisition, I can see no basis for any objection under A1P1. I assess the risk of a successful legal challenge to such an option as Low.

Conclusion: options for Government

Benefits of enabling leaseholders to elect to take a restriction on development

Premiums would be reduced at the date of the freehold acquisition claim. If leaseholders subsequently decided that they wanted to develop, they would pay a portion of any profit received on a subsequent development to the landlord, rather than (as at present) having to pay development value in respect of a speculative future possibility of development.

Who would benefit?

Leaseholders of flats acquiring the freehold to their block, as they would not be required to pay the landlord an additional sum to reflect the potential to develop their properties. Leaseholders would no longer be required to negotiate with the landlord to create such a restriction; rather, they would be entitled to demand such a restriction be included.

Leaseholders and landlords, as disputes, negotiation and litigation about development value would be reduced.

Option 9.

SUB-OPTION (4): DIFFERENTIAL PRICING FOR DIFFERENT TYPES OF LEASEHOLDER

The Consultation Paper

How can a distinction be drawn in practice?

The Portman Estate, a landlord, expressed support for distinguishing between categories of leaseholder, but also said that doing so would create complexity and other difficulties. It argued that “the simplest approach would be to restore the residency test in the form that applied before its abolition by the 2002 Act, such as occupying the property as their own or principal home for the last three years or three years in the last ten.”

Some variations on the residence test from before 2002 were also suggested by consultees.

One anonymous consultee suggested that “if you have lived in the property for a length of time (say one or two consecutive years) 'at any point in your ownership' then you can get the enfranchisement entitlement of a first-time buyer”.

We discuss the problems to which that residence test gave rise (when it acted as a filter as to whether or not enfranchisement rights were available at all) in the Consultation Paper.168 The residence test was replaced with an ownership requirement in the 2002 Act, with occupation no longer a necessary component.

“Differentiation should be made to those exercising enfranchisement rights for the first time and in respect of his or her main home.” (Andrea McKie, a leaseholder)

“By reference to whether the leaseholder is exercising enfranchisement rights in respect of his or her only or main home.” (Nesbitt and Co, surveyors)

“In respect of the options... it is possible to distinguish between such leaseholders by reference to whether the leaseholder is exercising enfranchisement rights in respect of his/her only main home.” (Leasehold Forum, a body representing enfranchisement professionals)

Consultees’ views on differential pricing

Arguments in favour of differential pricing

“I do believe commercial investors should pay more. I feel that a home should be for living in and those who wish to merely use it for their profit should pay a premium for this.” (Stephen Heslop, a leaseholder)

A distinction is “very sensible so that owner occupiers who are exercising enfranchisement for the first (and hopefully only time) are not punished in the same way that investors would be. This is someone’s home and they should not be expected to pay freehold investors a fortune to buy the freehold on their home.” (An anonymous leaseholder responding to our consultation)

“The original purpose of the legislation was to allow home owners to buy the freehold or extend the lease of their home. Removing the residence requirement has opened up enfranchisement and lease extension to investors. Ideally, we should return to the original purpose of the legislation and limit these rights to owner-occupiers only.” (Caxtons Commercial Ltd, surveyors)

Argument against differential pricing

“Whilst desirable, I do not consider that this would be easily workable, and would be likely to give rise to considerable disagreement, and even litigation. Such a distinction might also distort the market, as the Commission have described.” (Howard de Walden Estates Limited, a landlord)

“The discussion is whether owner-occupiers should enjoy lower premiums than commercial investors, whether first-time claims should result in lower premiums and whether there should be lower premiums for a leaseholder’s main home. This is superficially attractive but may be difficult to apply in practice... On balance, although the intent behind this proposal is laudable, we feel that it is open to abuse and its policing would be difficult and contentious.” (Church Commissioners for England)

“This will add a layer of complexity that is poorly understood and unlikely to be taken into account in property valuations, leading to more issues and even more reasons for consumers to avoid leasehold properties in totality.” (National Leasehold Campaign, a leaseholder representative body)

“The landlord is being compensated for their loss, not for the leaseholder’s gain.” (An anonymous consultee)

“I bought a flat to live in, lived in it for 8 years, then moved in to my now wife's flat and let my flat out. I really like my old flat and would like to live there again. I would like to buy the freehold, extend the property and move in to it with the family. But perhaps I will instead buy the freehold, extend it and sell it, or let it out again, and perhaps move in to it later, or sell it later, or move into it and then sell it. I am not presently an owner occupier, but nor am I a 'property investor'. I don't think owner occupancy should be a factor in leasehold enfranchisement. It is certainly not relevant to the way I think about my flat, and if it is made a factor in the enfranchisement rules, I think it has the capacity for significant distortion.” (an anonymous leaseholder responding to our consultation)

“My wife bought a leasehold house 10 years ago before we were together. It contains a doubling ground rent clause which has meant that she cannot now sell the property so had to rent it out when we bought a home together. I know that many people have experienced the same issue on the estate ... and have had to move for work/family reasons, with no way to sell the properties and not being able to afford two mortgages people have had no option but to rent the houses out.” (An anonymous leaseholder responding to our consultation)

“An investor leaseholder who is selling to a future owner occupier (who would pay a lower enfranchisement premium) could make a windfall gain if they had themselves acquired the property from an investor.” (Gerald Eve LLP, surveyors)

Compatibility with A1P1 of differential pricing for different types of leaseholder

Ultimately, whether the Government should limit the class of leaseholder eligible to benefit from leasehold enfranchisement rights or should provide differential pricing for different types of leaseholder will depend on the social policy objective being pursued and the level of premiums payable under the new scheme. If the primary aim of the reforms is to benefit ordinary homeowners and to redress perceived injustice suffered by them, then it is likely to be disproportionate and not rationally connected to the objective to bring within the class of leaseholder benefitting from enfranchisement reforms those who are not owner-occupiers. If commercial investors could rationally be brought within the scope of the scheme, the Government is likely to be required to introduce differential pricing if it wishes to set the premiums payable at a very low level, because such a low level of compensation is unlikely to be justified for those who are not owner-occupiers.

However, a two-tier valuation scheme is likely to have all of the defects identified by the Law Commission in paragraph 15.35 of its Consultation Paper. In particular, it is foreseeable that landlords will argue that a scheme under which premiums differ depending purely on the identity of the leaseholder is unfair and discriminatory.

If the Government’s primary aim is to streamline and simplify the leasehold enfranchisement system, then it is rational for the scheme to include all classes of leaseholder within its scope and to provide one method of calculating premiums. However, as this policy objective would not be as significant or important as eliminating injustice in the housing sector, the premiums should be set at a level that is closer to market value in order to strike a fair balance between the interests of landlords and those of leaseholders and general society.

Conclusion: options for Government

Benefits of differential pricing for different types of leaseholder

Owner-occupiers would benefit from a lower enfranchisement premium.

The policy of reducing premiums for owner-occupiers may be easier to justify under A1P1.

Who would benefit?

Leaseholders who are owner-occupiers, regardless of the length of their lease.

Option 10.

REFORM TO ELEMENTS THAT WOULD, BY THEMSELVES, INCREASE PREMIUMS

SUB-OPTION (5): 80-YEAR CUT-OFF IN RESPECT OF MARRIAGE VALUE

The Consultation Paper

Consultees’ views

Consultees in favour of removing the 80-year cut-off

“marriage value can arise, not just in consequence of the coalescence of the freehold and leasehold interests. For example, merger of a lease with the freehold may give rise to a development opportunity or a beneficial change of use which the leaseholder is unable to carry out under his lease. The consequential added value (which can be substantial and is realised immediately by the leaseholder) can only be captured as marriage value.” (Damian Greenish, solicitor)

“It is generally recognised that there is at least a 50% increase (and over 100% in some cases) in the premium payable for a lease with 80 years unexpired with no marriage value payable compared to the premium payable for the same property valued with 79 years unexpired, for which marriage value is included. As such the 80-year rule has been beneficial to leaseholders at the expense of landlords. Reversing the 80-year rule, as the Commission suggests, would restore the balance to the landlord.” (The Portman Estate, a landlord)

“By removing the 80-year threshold it would take pressure off leaseholders and make matters easier and cheaper for them.” (Long Harbour and HomeGround, commercial investors)

We would point out, however, that currently there are no costs associated with calculating marriage value for leaseholders with more than 80 years unexpired, for the simple reason that no marriage value is payable.

“... it would remove from the market the (usually manufactured by third parties with financial interests) panic associated with leases dropping to the 80-year mark.” (Geraint Evans, a surveyor)

“The cut-off more or less obliges tenants to make a claim before the term reduces below 80 years. This is not beneficial to the many tenants who would prefer not to be compelled to undertake this exercise at that point in time. The cut-off also now causes mortgage companies to look less favourably on leasehold interests that have less than 80 years unexpired, irrespective of the fact that 80 years is still an extremely long period.” (Paul Tayler Ltd, surveyors)

Consultees opposed to removing the 80-year cut-off

“The market has become accustomed to the 80-year cut-off, although there is no real valuation justification for it.” (British Property Federation)

“To remove the cut off would increase the cost of lease extensions to prudent leaseholders who look to extend their leases before the 80-year cut-off. This would seem unfair as they bought with the knowledge of the existing position”. (Church & Co Chartered Accountants)

“Removing the 80-year cut-off could have a significant effect on the premiums for leaseholders with more than 80 years remaining, despite the prescribed relativity level, when those leaseholders have 'done the right thing' by ensuring their lease expiry stays comfortably above the 80-year mark. They should not be disadvantaged.” (An anonymous leaseholder responding to our consultation)

Consultees suggesting amending the 80-year cut-off

Conclusion: options for Government

Benefits of removing the 80-year cut-off

For landlords, an arbitrary cut-off for the payment of marriage value would be removed.

Distortion of the market would be avoided, and the artificial cliff edge faced by leaseholders approaching the 80-year point would be removed.

Who would benefit?

Landlords of leases with more than 80 years left to run, because removing the cut-off would increase premiums.

Leaseholders with more than 80 years left to run would not benefit unless this option is combined with other measures that would have the overall effect of reducing premiums. There would be no effect on leaseholders with 80 years or less left to run.

Option 11.

SUB-OPTION (6): DISCOUNT FOR LEASEHOLDERS’ IMPROVEMENTS

The Consultation Paper

Consultees’ views

Consultees in favour of retaining the discount

“The freeholder should not gain from leaseholder improvements.” (Catherine Williams, a leaseholder)

“... it is unfair that a leaseholder has to pay a premium for their property, then has to pay ground rent and then has to pay a further premium to extend or enfranchise and that premium should not be increased because of their improvements to the property.” (The Conveyancing Association, a body representing legal professionals)

The fairness of this discount was said by a number of consultees to outweigh the desire to simplify the enfranchisement regime in this particular context.

“Speaking as a layman, it seems more difficult to prescribe a discount for leaseholders’ improvements. than e.g. capitalisation rates. In general, I think the simplicity of prescription is worthwhile where it is possible to estimate with reasonable accuracy, but leaseholders’ improvements are unpredictable and need to be handled on a case-by-case basis.” (an anonymous leaseholder responding to our consultation)

“The original disregard has been watered down by Tribunals and there is some doubt in regard to improvements for which either no consent was granted, or the lessee cannot prove that consent was granted. Sometimes, consent is granted on the basis that the works of improvement are consideration for the landlord giving [consent]! If properties are not improved by the tenant over the decades, then many modest value properties would have no more than site value at the end of the term. It is inequitable that the landlord is entitled to a reversionary value on the assumption that there will be no deterioration or obsolescence in the value of the property between the valuation date and the term date. That principle was recognised in the 1967 Act where the landlord was held to own the site and the lessee was held to own the building. Rather than merely retain the improvement disregard rule, if you have equity in mind, and you want to make enfranchisement less expensive, the improvement disregard rule ought to be strengthened not removed.” (Bruce Maunder-Taylor, a surveyor)

“As the discount is of benefit to leaseholders, the object of this reform exercise, we propose that it should be retained.” (Leasehold Advisory Service, (“LEASE”))

“Removing the [discount] would result in higher premiums for lessees which goes against the aims of these reforms.” (Nesbitt & Co, surveyors)

“Inevitably the quantum of discount is a matter of negotiation and this may complicate negotiations, but it has been an established principle of leasehold reform law and practice that the freehold and leasehold values under discussion should reflect values net of improvements, which is both equitable and serves to reduce the price payable.” (British Property Federation)

“Few disputes over leaseholders’ improvements arise and therefore abolishing the discount simply to avoid the rare dispute is unfair on a majority of leaseholders. Many leaseholders are at pains to identify and list all the improvements carried out at their own cost so that they are not penalised by having to pay the landlord a higher premium due to an enhanced value brought about at their own expense.” (Leasehold Forum, a body representing enfranchisement professionals)

Consultees opposed to retaining the discount

on the valuation of their property as is (on the assumption it has been maintained in accordance with the lease).” (Consensus Business Group, a commercial investor)

Some consultees referred specifically to areas of dispute which arise frequently - some of which we explore above and set out in the Consultation Paper. For instance, one consultee argued that many alterations are carried out to individual tastes and are likely to be changed again by future leaseholders.

“In a logical sense they should, otherwise they will be paying a premium to extend their lease based on a value of the flat that has increased as a result of the works they have done. However, in the real world [it is] very difficult to prove what are "improvements" as opposed to just maintenance or actually negative works e.g:

In the real world there is practically no improvement to a flat that is not in reality a temporary change that will be restated 5 more times in its life. As such this should be ignored. Furthermore, in line with your remit, if you keep this concept you open up another angle for valuation disputes, which will increase costs to all involved.”

(Church & Co Chartered Accountants)

“On balance no; if a capped regime is put in place for landlords' costs in order to encourage simplicity, we believe that the simplicity should be a two-way street, which would militate against adjustments in respect of leaseholder improvements.” (Maddox Capital Partners Limited, a commercial investor)

“I agree that landlords should not benefit twice, but many landlords do not know about improvements until the inspection takes place after the claim is made! So I would get rid of the discount.” (Jennifer Ellis, a surveyor)

“It is virtually always such a small figure that there is no point in retaining it. It is usually impossible to value the [vacant possession] value within that level of accuracy.” (Anthony Shamash, a commercial investor)

Consultees who expressed qualified support for retaining the discount

“Yes, but only in respect of improvements under the existing lease. Section 3(3) of the 1967 Act and the ability to chain leases together to claim a disregard for ancient improvements should be abolished. I would also tighten up the wording, so that only real improvements, such as adding space or altering the layout, can be claimed.” (Philip Rainey QC, barrister)

Two consultees suggested an alternative: that the improvements should have been made within the existing lease or within the last 21 years (whichever is shorter).

“This tends to be an issue more relevant to houses than to flats for the simple reason that it is often the ability to extend floor space or to develop (which is not generally available to flats) which gives rise to the most significant claims for discounts. In the case of the 1967 Act, section 3(3), particularly in the case of London Estates, causes notable problems where leaseholders can join together successive leases over many years to look for historic improvements, on occasions going back several centuries. At the very least therefore, improvements to be taken into account should be limited to those carried out during the term of the existing lease or within 21 years of the date of the claim (whichever is the shorter). That amendment would also remove the need to retain section 3(3),” (Damian Greenish, solicitor)

As can be seen from the responses quoted above, a further view expressed was that the discount should only apply where there have been improvements that involved the addition of space or an alteration to the layout of the property.

“There should be no discount for leaseholder's improvements. However, in estimating the hypothetical value of the Virtual Freehold Price it should be assumed that the property is in good repair. It should not be open to the leaseholder to allow the property to go to rack and ruin in order to drive down the enfranchisement price.” (Tapestart Limited, a commercial investor)

“Our view is that it would be simpler and easier if there were instead an assumption that the property is unimproved.” (Church Commissioners for England)

Conclusion: options for Government

Benefits of removing the discount for leaseholders’ improvements

Simplifies the valuation regime, reducing the potential for disputes.

Who would benefit?

Landlords, because the effect of the discount is always to reduce premiums.

Landlords and leaseholders (regardless of the length of their lease) would no longer incur costs when there are disputes about leaseholders’ improvements.

It may be argued that such changes would be fairer to landlords, who may otherwise be put to significant cost arguing about improvements (at a leaseholder’s election), for instance, from many decades previously. However, these changes are likely to limit the applicability of the discount, especially as they would be applied across the board, to leaseholders of both flats and houses. Therefore, in some cases, any such alterations are likely to increase premiums.

Option 12.

SUB-OPTION (7): DISCOUNT FOR THE RISK OF HOLDING OVER

Current position

Consultees’ views

Consultees in favour of retaining the discount

“We agree that the removal of the right to hold over will make little difference to most valuations. However, it will significantly impact valuations where there are few years remaining on the lease and should therefore be retained in order to be equitable to all parties to the lease.” (Wallace Partnership Group Limited, a commercial investor)

“This does not need to be disregarded by statue as it rarely applies in any event. However, in certain situations there may be good reason to apply the discount and applying the disregard would unfairly disadvantage the lessee.” (Nesbitt and Co, surveyors)

“The right to hold over should be taken into account, so as to reflect the true-life situation.” (Fanshawe White, surveyors)

“From my experience, where a tenant did hold over after the expiry of a long lease, the resulting procedure for the landlord and the discounted rent due to condition was a considerable disadvantage. Therefore, where there is a real prospect of holding over, I believe there should be a discount.” (Prosper Marr-Johnson, a surveyor)

“It would... demonstrate the preferential treatment given to those who are owner-occupiers over those who are commercial investors.”

Consultees in favour of retaining the discount in a limited way

“We do not consider there is a serious risk of holding over in any but the very shortest of leases and we do not think the market reflects this either. We therefore consider that such a risk should be disregarded except in cases of very short lease (sub five years), and where there is a realistic possibly of an Assured Tenancy at reversion. The time and expense in arguing the point rarely equals the amount of the discount.” (The Eyre Estate, a landlord, and the British Property Federation)

Other consultees argued that the relevant period should be longer.

“At the moment, for the main, discounts are only claimed and granted where the lease qualifies and is sub-10 years. Our view is that this should continue and be prescribed at a rate of, say, 5%.” (Church Commissioners for England)

“This is generally only taken into account when there is a short unexpired term remaining on the lease, perhaps around 20 years or less. One is only assessing the risk of the tenant holding over upon expiry rather than the actuality. Usually a property subject to an assured tenancy is valued at circa 95% of vacant possession value, so the discount for an assured tenant in situ is 5%. Therefore, making a deduction of 2.5% to reflect the risk of that prospect would seem to be an appropriate adjustment, in the case of a lease with 20 years or less remaining on the lease at date of claim.” (Cerian Jones, a surveyor)

“The discount should be prescribed, and should be low.” (Philip Rainey QC, barrister)

“It would. simplify the valuation if set parameters for unexpired lease term were established to include the amount of discount and number of years remaining.” (The Wellcome Trust, charitable sector)

Consultees opposed to retaining the discount

“The right to hold over should only be considered in the instances of the very shortest leases and even then does the adjustment made have a very small effect on the premium. It is an added complication which hinders the government's aim of making enfranchisement easier and more simple.” (Midland Valuations Limited, surveyors)

“I agree that this right should be disregarded as I do not consider that the right gives rise to a notable detrimental impact on the value of the freeholder's interest.” (Howard de Walden Estates Limited, a landlord)

Church & Co Chartered Accountants suggested that the right to hold over is in fact beneficial to the freeholder, rather than detrimental, as it is generally thought to be.

“... this is a double counted discount - the prospects of a tenant holding over are not only unlikely but contradicted by the very act of extending the lease.” (The Dulwich Estate, Dame Alice Owen’s Foundation, and The Charity of Richard Cloudesley, charitable sector)

“The right to hold over should [be] ignored - it is not a benefit most lessees have any idea exists simply put up as a way of reducing prices. Most owner occupiers would not consider converting to being a renting tenant paying a market rent [on] letting the lease expire.” (Jennifer Ellis, a surveyor)

“Disregarding the possible right to hold over at the end of tenancy, would simplify the process. The legislation requires carrying out a test on five points, all of which must be fulfilled in order to apply a discount, which in most cases causes further disputes.” (Anna Symonowicz, a surveyor)

Conclusion: options for Government

Benefits of removing the discount for the risk of holding over

Simplifies the valuation regime, and reduces disputes about an element of the valuation scheme which generally has only a minor effect on the premium.

Who would benefit?

Landlords, because the effect of the discount is always to reduce premiums.

Landlords and leaseholders (regardless of the length of their lease) would no longer incur costs when there are disputes about the discount for holding over.

Option 13.

CONCLUSION

INTRODUCTION

THE BENEFITS OF AN ONLINE CALCULATOR

REDUCING THE VARIABLES BY PRESCRIBING RATES

Figure 31: inputs for the calculation of the enfranchisement premium for an individual enfranchisement claim

The inputs would be:

which would be clear from the lease;

then the relevant category would need to be known, and that should be ascertainable by looking at the lease itself or from the leaseholder’s or landlord’s knowledge of the property; and

THE REMAINING VARIABLE: FHVP VALUE

How is the FHVP value relevant to the calculation of enfranchisement premiums?

FHVP value essentially irrelevant for long leases

House 3, for example, has 240 years unexpired. It has a reversionary value of just £3 (see Figure 5; para 2.39 above) and no marriage value is payable because the lease has over 80 years unexpired. Even a significant change to the FHVP value would make no difference to those aspects of the enfranchisement premium.

For example, say the FHVP value of a house is somewhere between £250,000 and £280,000.

In each of these cases, no marriage value is payable because the lease has over 80 years unexpired.

So even a significant change to the FHVP value would make little difference to those aspects of the enfranchisement premium.

FHVP value relevant for short leases

House 1 has a reversionary value of £2,303, based on a FHVP value of £250,000 (see Figure 5; para 2.39 above). But:

House 2 has a reversionary value of £7,349, based on a FHVP value of £250,000 (see Figure 5; para 2.39 above). But:

Conclusion

THE STATUS OF AN ONLINE CALCULATOR

CONSULTATION RESPONSES

Consultees in favour of an online calculator

“This is desirable. It will encourage leaseholders to investigate enfranchisement if they can quickly and easily get a quote. The big question in every leaseholder's head is ‘How much is it going to cost?’” (National Leasehold Campaign, a leaseholder representative body)

“We consider that for enfranchisement valuations an online calculator is desirable and it should be available for as many types of claim as possible.” (LEASE)

“We strongly support the introduction of an online calculator and consider it to be a desirable feature of any new framework. The introduction of an effective online calculator will mean that the majority of leaseholders would have access to a substantially clearer, simpler and more costefficient regime, and therefore offers a better deal for leaseholders as consumers.” (Rothesay Life, a commercial investor)

“Absolutely. This would be conducive to a valuation system that is simple, reasonable, fair and clear - which would thereby be satisfactory to leaseholders and landlords alike, and remove the potential for dispute.” (Dan Smith, consultee)

“Yes, this would make life so much easier. At least we would know where we stand and how much it would cost. It would give us a baseline to work from.” (Russell Hughes, a leaseholder)

“Definitely desirable as leaseholders will be able to identify the cost at the outset and find out whether they can actually afford it.” (Carol Barber, a leaseholder)

“74.42% of [our] survey respondents agreed or strongly agreed that standardising rates could allow for the use of an online valuation calculator and indicated that this would be desirable for a range of reasons” (CILEx, a legal professional representative body)

Consultees opposed to an online calculator

A simple calculation based on 10 times ground rent would not require an online calculator.” (Hayes Point Collective Freehold Limited, consultee)

“I prefer the ordinary calculator that everyone has at home or on their phone [which] would do the job if extension was 9 x the original ground rent.” (Jeanette Allen, a leaseholder)

Given that we are not putting forward a simple multiplier as an option for reform, that particular basis for objection to the provision of an online calculator falls away.

“In our experience there are dangers to the use of online calculations as they can lead to false expectation and results similar to automated valuations provided by property search engines. They have a place in helping to frame a range of outcomes but ultimately the nuances of valuation are best left to advising professionals.” (The Dulwich Estate, The Charity of Richard Cloudesley, and Dame Alice Owen’s Foundation, charitable sector)

“Some online calculators already exist and they are not fit for purpose.” (Midland Valuations Limited, surveyors)

If an online calculator is developed along the lines that we suggest above, then those concerns fall away. It would be possible to develop a good quality calculator, and as we discuss below, that could be done by Government rather than leaving it to the market.

“An online calculator cannot make allowances for tenant’s improvements, it cannot make allowances for deferment or capitalisation rates, unless these are prescribed, and it cannot determine relativity or '93 Act Right allowances.” (Scrivener Tibbatts Ltd, surveyors)

But for the reasons set out above, we think that an online calculator would be of most use if rates are prescribed, and we have addressed arguments about the prescription of rates in Chapter 6.

the wrong inputs were entered.

“On line calculators rely on the person inputting the variables for their accuracy.” (Nesbitt and Co, surveyors)

“... if the wrong or incorrect inputs are made into an online calculator (such as an incorrect capital value) the calculation will be wrong.” (Julian Wilkins & Co, surveyors)

“A mistake by a leaseholder could cost him dear. Do you imagine the freeholder saying he is paying too much?” (Anthony Brunt, a surveyor)

But prescribing rates would limit the number of variables that need to be inputted, and all other matters (save for FHVP value) should be easily ascertainable, for example from the lease itself: see Figure 31 above. Even the FHVP value is relatively easy to ascertain - at least within a range: see paragraph 6.19 above. Moreover, as explained in paragraph 7.24 above, it would be the underlying legislation - rather than the calculator itself - which was determinative. Accordingly, if the wrong figures are entered into the calculator, then the figure generated will not be correct (because it will not reflect what the underlying legislation requires) and will not stand as the enfranchisement premium in that case.

We acknowledge Anthony Brunt’s concern; there would be no mechanism to double-check for the leaseholder that he or she was not offering to pay too much by suggesting an unnecessarily high FHVP value. That is an inevitable consequence of reducing, or removing, the need for leaseholders to obtain professional advice from a valuer in order to make an enfranchisement claim. But leaseholders will continue to be able to take advice if they want it, or they could obtain a FHVP valuation from a local estate agent. We do not think that the risk of leaseholders, in rare cases, offering to pay too much (by using an unnecessarily high FHVP value) outweighs the benefits of an online calculator and the possibility of leaseholders thereby avoiding the need to pay for professional advice from a valuer in most enfranchisement claims.

and may be programmed to produce unrealistically low premiums so as to win business. Similarly, John Byers (a surveyor) said that:

“... it will be inequitable for one particular calculator to be given what would be some form of artificial statutory endorsement.”

Furthermore, it was suggested that online calculators can give leaseholders unrealistic views as to the premium payable, which leads to a greater risk of a dispute with the landlord.

“Online calculators should be treated with extreme caution as they can give the general public an unrealistically low or high indication of what the potential premium payable in their case might be.” (Carter Jonas LLP, surveyors)

Those might be reasons for Government to provide its own calculator, rather than leaving it to the market. But in any event, any reputable provider of an online calculator ought to be able to programme it with the relevant prescribed rates to produce results that exactly mirror the requirements of the underlying legislation.

“Having seen many online calculators in most instances there can be provisions within a lease that are not taken into consideration [such as] ground rent reviews.” (Andrew Richard Perrin, a surveyor)

But if capitalisation rates are prescribed - including, perhaps, different rates for different categories of rent review provision - then an online calculator would be appropriate. The calculator devised by Rothesay Life demonstrated that it is possible to include complex rent review structures in an online calculator.

“Even the simplest calculation currently possible, ie over 80 years with a nominal fixed ground rent, can go wrong if the incorrect capital value is inserted and tenants improvements are not taken into account.” (Carter Jonas LLP, surveyors)

But if those elements of the scheme are retained, we have suggested that leaseholders should be able to elect whether they wish to rely on them: see Suboptions 6 and 7 in Chapter 6. Those discounts would affect the FHVP value that was inserted into an online calculator. We have already concluded that that figure would remain variable, and would need to be agreed between the parties or determined by the Tribunal. If a leaseholder wishes to argue that the figure should be further reduced to reflect the discount, he or she would be free to do so. And the online calculator would be able to help him or her to work out whether the cost, delay and uncertainty of arguing for a discount was worthwhile: he or she could see what effect a discount would have on the ultimate enfranchisement premium.

“An online calculator cannot calculate a freehold claim when there are losses to a freeholder beyond term and reversion, eg development value, caretaker's flat, carparking, vaults etc.” (Fanshawe White, surveyors)

But these additional elements of value feature less in an individual enfranchisement claim, as opposed to a collective enfranchisement claim. And in claims where development value exists (which would principally be collective enfranchisement claims, but perhaps also some individual freehold acquisition claims), we have suggested an option for reform that would prevent the leaseholders from being required to pay development value: see Sub-option 3 in Chapter 6. In those cases where a landlord can claim additional sums, an online calculator would not be capable of telling a leaseholder what additional sum will have to be paid. But it could include a note to the user explaining that an additional sum may, in certain circumstances, be sought by the landlord.

“An online calculator cannot determine an intermediate leaseholder's ground rent capitalisation rate as it would not know the head leaseholder's position (negative or positive). Consequently, an online calculator could not possibly determine an intermediate leaseholder's split.” (Fanshawe White, surveyors)

We think that in a great many cases an online calculator ought to be able to take into account the existence of an intermediate lease in calculating the premium. We acknowledge that there may be limitations. However, as we explain at paragraph 1.60 above, we will consider issues relating specifically to the valuation of intermediate leases in our second report. Any proposals to reform the valuation of such leases will necessarily impact on the ability of an online calculator to take them into account. Consequently, in our second report we will also consider both the extent of, and the ability to overcome, any limitations of an online calculator where there is one or more intermediate interests.

“Our suggested solution is therefore to prescribe deferment rates at the current Sportelli rates ... We suggest that such a prescription apply to leases at all unexpired terms, including leases below 20 years. As such this would dispense with the complex approach for determining the deferment rate applicable for leases below 5 years unexpired as outlined in the Upper Tribunal decision of the Trustees of the Sloane Stanley Estate v Carey-Morgan, 196 commonly known as the Vale Court Approach. It would also remove the difficulties of determining the deferment rate applicable for reversions where the unexpired term is between 5 years and 10 years, for which there is no guidance from Upper Tribunal decisions, and for unexpired terms between 10 and 20 years, where the Upper Tribunal guidance, such as it is, is complex (Earl Cadogan v Cadogan Square Properties Limited)”. 197

lease contains onerous terms (which would currently reduce the existing lease value, thereby decreasing relativity, and increasing the premium), the prescribed relativity could still be adopted. That would have the effect of disregarding the onerous terms. Many leaseholders would argue that onerous terms should, in any event, be disregarded when calculating an enfranchisement premium on the basis that landlords should not profit, at the leaseholder’s expense, from the existence of such terms.

Conclusion

HOW SHOULD AN ONLINE CALCULATOR BE ESTABLISHED?

With clever online marketing companies some consideration needs to be given as to whether there is a clearly identified official calculator as firms wanting to win business will use an online calculator for lead generation. It may be necessary to prescribe the valuation basis that all suppliers must use so that all online calculators give the same answer, or as a minimum it's clear to consumers why two calculators give different answers.” (National Leasehold Campaign, a leaseholder representative body)

“When subscriptions are provided by the sector that the body is supposed to police this has been problematic as they have got too cosy with the people they are meant to oversee. The Government Communities and Housing Department should be responsible for setting up and maintaining the online valuation calculator - as the DWP agreed with regards to pensions.” (Andrea McKie, a leaseholder)

CONCLUSION

Benefits of an online calculator

Simplicity and accessibility

Certainty and predictability

Reduced professional costs

Reduced scope for inequality of power, and litigation tactics, to influence the outcome

Reduced disputes, costs and delays

Who would benefit?

Leaseholders (regardless of the length of their lease) and landlords.

Option 14.

INTRODUCTION

SUMMARY OF THE SCHEMES AND SUB-OPTIONS

ADOPTING ONE SCHEME WITH A COMBINATION OF SUB-OPTIONS

calculator to be introduced.

Sub-options: any can be selected

Schemes: one to be selected

Scheme 1:

Market value, assuming the leaseholder is never in the market

Scheme 2:

Market value, assuming the leaseholder is not now in the market, but may be in the future

Scheme 3:

Market value, assuming the leaseholder is in the market

Sub-options that would reduce premiums

Sub-option 1: prescribing rates

Only capitalisation and deferment rates need to be prescribed

Capitalisation and deferment rates, and relativity and hope value discount, would need to be prescribed

Capitalisation and deferment rates, and relativity, would need to be prescribed

Sub-option 2: capping the treatment of ground rent

Sub-option 3: allowing leaseholders to elect to restrict development

Sub-option 4: differential pricing for different leaseholders

Possible, if required to justify lower premiums

Possible, if required to justify lower premiums

Possible, if required to justify lower premiums

Sub-options to be considered alongside other measures that would reduce premiums overall

Sub-option 5: removing the 80-year cut-off for marriage value

X

Unnecessary, since the scheme does not include marriage value

Sub-option 6: removing the discount for leaseholders’ improvements

Sub-option 7: removing the discount for the risk of holding over

INTRODUCTION

THE CURRENT LAW

Current qualification criteria: when does the original valuation basis apply?

Current valuation methodology: what is the original valuation basis?

that, while the land belonged to the landlord, morally the house belonged to the leaseholder. As the authors of Hague suggest, this idea was no doubt intended to reflect the position at the grant of a normal 99-year building lease under which the landlord reserved a “ground rent” and the builder erected a building, making his profit by selling the lease with the building erected.202 Some consultees have also suggested that the 1967 Act was originally intended to apply to houses which were not expected to be standing at the expiry of the lease, which might also explain why it is primarily the value of the land on which the house is situated (and not the house itself) which is taken into account when determining the premium under section 9(1). With these concepts in mind, section 9(1) requires the calculation of the “site value” of the property.

a “capitalisation rate” is applied to the ground rent payable over that term; and

hypothetical lease extension, a “deferment rate” is applied to the freehold value of the property.

Calculating the modern ground rent

Applying section 9(1) in practice

“In my opinion there is quite a big difference between the perception of the 1967 Act amongst surveyors and solicitors in London and surveyors and solicitors in the rest of England and Wales. In the preceding 5 financial years to the date of this response, I have undertaken 446 freehold purchases (acting for landlord and tenant) under the 1967 Act. Of these, only 3 have not been under s.9(1). Of the 3 cases, 1 was a detached house in a wealthy university city and 2 others were shops with accommodation over that would not be recognised by the ‘man in the street’ as being a house at all. The latter 2 were interesting as the counter-part valuer in each case, who was an experienced practitioner, was unaware that there was any other valuation basis for houses other than s.9(1). I believe that I would have had a similar response in any area in England and Wales, except Prime Central London.” (Geraint Evans, a surveyor)

Figure 32: two examples

House A - based on a terraced house in London

Freehold value: £2,500,000

Unexpired lease term: 50 years

Ground rent: £250 per annum

Site value percentage adopted: 50%

Deferment rate on first reversion: 5%

Deferment rate on second reversion: 4.75%

Capitalisation rate: 6%

Premium under 9(1): £125,150

Premium under 9(1C): £449,800

House B - based on a terraced house near Swansea, Wales

Freehold value: £150,000

Unexpired lease term: 50 years

Ground rent: £15 per annum

Site value percentage adopted: 35%

Deferment rate on first reversion: 5%

Deferment rate on second reversion: 4.75%

Capitalisation rate: 6%

Premium under 9(1): £5,700

Premium under 9(1C): £27,000

PROBLEMS WITH THE CURRENT LAW

Ascertaining which houses qualify for valuation under section 9(1): problems with the current qualification criteria

Calculating the premium under section 9(1): problems with the current valuation methodology

THE CONSULTATION PAPER

Consultees’ views

Should section 9(1) be abolished?

“No [section 9(1)] should not be maintained - simplification has to mean that you bring all leasehold properties into a single regime.” (Church & Co. Chartered Accountants)

“Properties in Greater London should be excluded from any future section 9(1) valuations.” (Damian Greenish, solicitor)

“So far as concerns London and home counties properties I cannot see the justification for retaining the differential between 1967 and 1993 Act valuations. I do understand that in Wales and up north it is a very different set of circumstances.” (Bruce Maunder-Taylor, a surveyor)

“Section 9(1) should be retained in Wales and other low value areas.” (David Evans, consultee)

Should the section 9(1) valuation methodology be retained in its current form?

“The current methodology is not complex, and it is routine for the experienced valuer dealing with statutory claims.” (Scrivener Tibbatts Ltd, surveyors)

“Section 9(1) valuations are recognised to be one of the more, if not the most, complex of all the statutory Leasehold Reform Act valuations provisions and, given that it applies for the lowest value houses, its continued retention places a continued cost and burden on both leaseholder claimants and landlords responding to enfranchisement claims made under this section. The costs and burden are two-fold; firstly in terms of legal costs incurred by claimants and landlords in identifying that the property in question satisfies the relevant financial criteria (rateable value) for section 9(1) to apply and secondly in terms of valuation costs in assessing correctly the relevant complex components of the section 9(1) valuation as applicable to the property in question.” (Gerald Eve LLP, surveyors)

“We consider the Section 9(1) valuation methodology should be retained for as long as possible and certainly whilst there are leasehold houses that qualify under this valuation basis by falling within the original definitions in the 1967 Act.” (LEASE)

Should the current section 9(1) valuation methodology be replaced with an equivalent but simplified provision?

“We believe that a simplified methodology is a necessity, particularly if the outcome is to provide a simpler and fairer enfranchisement regime for leaseholders. As a group of private home owners who want to purchase the freehold title to provide security of ownership, the current regime is impenetrable, as an illustration, even responding to much of the detail in this consultation is too complex for anybody without a legal background.” (Mark Tomkins, members of a leaseholders’ residents association).

“Valuation methodology should possibly be retained for a short period no longer than 3 months to ensure a smooth transition. Valuation methodology should be replaced by a much simplified methodology easily understood by leaseholders.” (An anonymous consultee)

“Just make the calculation as simple as possible and preferably one which can be accessed online via the internet to determine the value of the freehold purchase.” (Ian Humphreys)

“We consider option (2) is the most sensible replacement of the existing, over complicated methodology" (British Property Federation)

“Section 9(1) valuations ought to be replaced with a simplified methodology. The existing scheme is cumbersome to operate ... .” (Cerian Jones, a surveyor)

Scheme 1 in Chapter 5 above. Again, however, such an approach would not replicate the favourable valuation methodology in section 9(1) and would, in effect, be a form of abolition, significantly increasing premiums for leaseholders.

“In order to replace Section 9(1) with a simplified valuation process, we have undertaken modelling that indicates that it is difficult to replicate a Section 9(1) premium exactly using a simplified method.” (Gerald Eve LLP, surveyors)

“We do not believe that the 9(1) methodology should be replaced with a fixed proportion of term and reversion as this would lead to a potentally significant loss in freeholders’ assets and would likely be in contravention of the landlord’s rights under A1P1 ... .” (Consensus Business Group, landlord)

“We have no strong view between (1) [retaining section 9(1) valuation methodology] and (2) [replacing section 9(1) valuation methodoloy]. However, it should be noted that human rights of landlords will be undermined if a move from (1) to (2) results in a materially lower premium.” (Maddox Capital Partners Limited, landlord)

Should the current qualification criteria under section 9(1) be replaced with an equivalent simplified provision?

“Council tax banding, whilst currently used, is archaic: it is based on historical 1991 values and circumstances. Problems will no doubt arise as to the appropriate band possibly involving the VOA in an already depleted and overworked Department. In any case as with the 1973 Valuation Lists, Council Tax may well cease and be replaced.” (Each Side Leasehold, surveyors)

“I definitely feel that valuation based upon council taxes would be unfair since virtually identical properties of similar value next to each other in our block have recently been found to be in different Council Tax bands!” (Jonathan West)

“Valuers will no doubt give guidance as to which of the suggestions are most likely to reflect the current qualification criteria. To some extent, they will all be flawed in that some properties presently without section 9(1) will be brought within and some presently within section 9(1) will be taken without”. (Damian Greenish, solicitor)

“The test for a 9(1) valuation can also be very time consuming to research, and fraught with difficulties if the property is very old and has been improved over the years. A simpler methodology ought to be considered, although there would appear to be no silver bullet”. (Cerian Jones, surveyor)

DISCUSSION AND OPTIONS FOR REFORM

enfranchisement regime;

identify low value properties and provide them with a more favourable valuation basis.

OPTIONS NOT PUT FORWARD FOR GOVERNMENT

Abolishing section 9(1): partial abolition based on location

Replacing section 9(1) with equivalent provision: no truly equivalent provision

Replacement Qualification Criteria

R = P x I

1 - (1 + /) -T

where —

“P” is the premium payable as a condition of the grant of the lease (and includes a payment of money's worth) or, where no premium is so payable, zero,

“I” is 0.06, and

“T” is the term, expressed in years, granted by the lease (disregarding any right to terminate the lease before the end of the term or to extend the lease).

Replacement Valuation Methodology

Figure 34: Comparing premiums under s.9(1) with premiums calculated under term plus percentage of reversion valuation methodology

Overview: The modelling calculates the difference between the premium currently produced under section 9(1) and the premium produced under the term plus percentage of reversion valuation methodology suggested by consultees. The difference in premium is assessed assuming that an enfranchisement claim is brought at various different points in a lease term (ranging from an unexpired term of 1 year to an unexpired term of 140 years). Three examples are used: houses worth £150,000, £325,000 and £2,500,000 respectively.

FHVP value of house: £150,000

Site Value Percentage: 35% (example assumes house outside London only)

With unexpired lease terms of over 50 years, leaseholders would pay the same or virtually the same premium as under s.9(1). With unexpired lease terms of 50 years or less leaseholders would pay a lower premium than under s.9(1) (6% lower with an unexpired lease term of 50 years, increasing to 16% lower with an unexpired lease term of 1 year).

FHVP value of house: £325,000

Site Value Percentage: 35% (assuming house outside London); 50% (assuming house in London)

In London - with unexpired lease terms of 50 years or more, leaseholders would pay slightly more than they do currently (up to 10% more). With unexpired lease terms of less than 50 years leaseholders would pay a lower premium than under s.9(1) (up to 8% lower).

Outside London - with unexpired lease terms of more than 80 years, leaseholders would pay the same or slightly more than they do currently (up to 4% more). With unexpired lease terms of 80 years or less leaseholders would usually pay a lower premium than under s.9(1) (up to 14% lower).

FHVP value of house: £2,500,000

Site Value Percentage: 50% (example assumes house in London only)

With unexpired lease terms of 50 years or more, leaseholders would pay more than under section 9(1) (up to 19% more). With unexpired lease terms of under 50 years leaseholders would pay less than under s.9(1) (up to 8% less).

Replacing section 9(1) with equivalent provision: difficulties caused by lack of truly equivalent provision

Replacing section 9(1) with equivalent provision: compatibility with A1P1

The section 9(1) basis of valuation is somewhat of an historical anomaly. If it were to be introduced now, it may well be considered to violate A1P1. However, it has previously been held to be lawful, and its lawfulness was not subsequently challenged on the abolition of the residence requirement, and the expansion of the categories of leaseholder who may benefit from it to include corporate bodies and/or investors. Leaseholders and landlords have conducted their affairs for over 30 years on the basis that the section 9(1) basis of valuation is lawful. Given that retaining section 9(1) cannot be unlawful, it is therefore unlikely that replacing section 9(1) with an equivalent but simplified provision would be unlawful.

However, that assessment depends on any simplified replacement provision being equivalent to section 9(1) both in terms of who would qualify to benefit from the replacement basis of valuation and in terms of the amount of the premium payable. In my view, the guiding principle should be that landlords should be no worse off under a replacement provision than they already are under section 9(1). That is because section 9(1) represents the outer limits of compatibility with A1P1. The further that a replacement provision moves away from the current qualifying criteria and the premiums currently payable under section 9(1), the greater the likelihood that the replacement provision would be assessed by the Courts on its own merits (rather than simply being viewed as equivalent to section 9(1)) and held to be incompatible with A1P1.

In fact, it does not appear to be possible to identify a simple test which would mirror the current qualification criteria. This gives rise to two risks. First, there is the litigation risk that there will be landlords of properties which do not currently qualify for a valuation under section 9(1) but which would be brought within the scope of any replacement provision, who will therefore be incentivised to challenge the compatibility of the replacement provision with A1P1. Second, there is the risk that the replacement qualification criteria will be found to be irrational or arbitrary on their own terms and/or which fail to achieve their designed purpose of replicating the section 9(1) qualification criteria.

For example, I understand that there is no apparent correlation between Council Tax banding and the properties to which section 9(1) currently applies. Further, there appears to be little correlation between Council Tax bands and current property values. Consequently, it does not appear that Council Tax bands could be used reliably to identify houses which could today be described as “low value”. Given that the original rationale for section 9(1) was to grant enfranchisement rights to leaseholders of low value houses only, there is a risk that a purported replacement for section 9(1) based on Council Tax bands will capture houses which would not have been caught by section 9(1) and which could not be regarded as low value and will therefore beheld to be irrational or arbitrary and in breach of A1P1. I assess such a risk as Medium High.

A sunset provision in itself is not problematic from an A1P1 perspective. It is designed to provide some protection for existing leaseholders for a time-limited period, without at the same time preventing ultimate reform of current valuation provisions. However, it does not address the problem identified above, namely, that landlords will be brought within the scope of a replacement provision who do not currently qualify for a valuation under section 9(1). Further, it will not save replacement qualification criteria which are otherwise irrational or arbitrary from being held incompatible with A1P1.

I do not consider it would assist to limit the replacement section 9(1) provision to existing leases of existing properties. In fact, it would introduce a further disparity, which may be hard to justify, in that leaseholders of existing leases would pay less to purchase their freeholds than leaseholders of new leases of exactly the same value.

In my view, in the context of valuation methodology (as opposed to qualification criteria), compatibility with A1P1 is likely to depend on the number of landlords who receive considerably reduced premiums in the event the valuation methodology was replaced. If very few landlords would be affected by the reduced premiums, then the Court is more likely to take the view that landlords as a group are not being made to bear an excessive burden; if, however, large numbers of landlords would be affected, the Court is more likely to conclude that the replacement valuation methodology does not strike a fair balance between the rights of landlords and the general interests of society (including leaseholders).

OPTIONS PUT FORWARD FOR GOVERNMENT

Retaining section 9(1): prescribing rates for the valuation methodology

...in my view, the same principles apply to considering the compatibility of prescribing rates in the context of retaining section 9(1) in its current form as apply to prescribing rates under the general approach, save that the rates prescribed under section 9(1) should not result in the payment of premiums that are lower than currently produced under section 9(1) in line with the guiding principle that landlords should be no worse off than they already are under section 9(1).

Retaining section 9(1): the impact of Government’s proposed ban on leasehold houses

Replacing section 9(1) with entirely new scheme: what might a new scheme look like?

Replacing section 9(1) with entirely new scheme: which properties would the new scheme apply to?

Replacing section 9(1) with entirely new scheme: what should happen to section 9(1)?

leases which qualified for a valuation under section 9(1) at the point at which the new scheme was introduced.

Replacing section 9(1) with entirely new scheme: compatibility with A1P1

In my view, different considerations would apply in terms of compatibility with A1P1 if the Government’s purpose in introducing such a new scheme was the creation of a more accurate method of identifying lower value properties and providing leaseholders of such properties with a more favourable basis of valuation, rather than the Government’s purpose being to simplify the complexities of section 9(1). If the Government made the assessment (supported by evidence) that leaseholders of low value properties require additional assistance to enable them to enfranchise (for example, because they are less likely to be able to afford to enfranchise even in respect of a low value property), and the Government’s aim in introducing the scheme was to assist such leaseholders to enfranchise, then the Courts are likely to find that the scheme pursues a legitimate aim in the public interest (as the ECtHR did in James v UK). Provided the scheme accurately applies to all and only low value properties, it would be impossible to attack the scheme as arbitrary, irrational or as failing to achieve its designed purpose. The only question would be whether it strikes a fair balance in terms of compensation payable to landlords. If the premiums payable to landlords under the new scheme are no lower than those currently payable under section 9(1), then I consider that any such new scheme is marginally more likely than not to be compatible with A1P1. In other words, I would assess the risk of a successful A1P1 challenge to such a scheme as slightly less than 50% i.e. towards the upper end of Medium Low.

The A1P1 risk assessment is unlikely to be significantly affected by the manner in which the new scheme is introduced. What is likely to matter more is whether Parliament takes sufficient time to consider the aims and ambit of the scheme and particularly to consider the impact of the scheme on landlords (as well as leaseholders). I consider it would be open to the Government to abolish section 9(1) and introduce the new scheme with immediate effect, without affecting the A1P1 risk assessment. I also consider it is unlikely to affect the risk assessment to retain section 9(1) for a temporary period, at the same time as introducing the new scheme. Although this would introduce a disparity between leaseholders of existing and new leases which are of equal value, this would be temporary, and could probably be justified on the basis that it would allow leaseholders who currently qualify for a section 9(1) valuation but would not qualify under the new scheme (or who qualify under both section 9(1) and the new scheme but would have to pay an increased premium under the new scheme) the opportunity to take the benefit of section 9(1) while it remained in force.

However, I have more concern about any proposal to retain section 9(1) indefinitely alongside a new scheme. This would appear to have less justification than a sunset provision, as it would create a long-term disparity between leaseholders of existing and new leases which are of equal value for no obvious reason. It is also likely to increase the risk of a successful challenge to the section 9(1) basis of valuation, because it is harder to justify retaining a potentially flawed scheme indefinitely alongside a new scheme which was intended to remedy those flaws. I estimate that the risk of a successful A1P1 challenge in these circumstances would be Medium High.

Option 15.

Chapter 10: Summary of options to reduce premiums

Option 1

[Paragraph 5.109]

Option 2

[Paragraph 5.119]

Option 3

[Paragraph 5.123]

Option 4

[Paragraph 5.124]

Option 5

[Paragraph 5.133 and 5.134]

Option 6

[Paragraphs 5.139 to 5.140]

Option 7

[Paragraph 6.115]

Option 8

[Paragraphs 6.153 to 6.154]

Option 9

[Paragraph 6.179]

Option 10

[Paragraph 6.204]

Option 11

[Paragraph 6.222]

Option 12

[Paragraphs 6.248 to 6.249]

Option 13

[Paragraph 6.268]

Option 14

[Paragraphs 7.36 to 7.37]

Option 15

for low value properties and either (a) abolish section 9(1) immediately or (b) retain section 9(1) temporarily for a sunset period.

[Paragraph 9.153]

Bob Ford

Boodle Hatfield

Boris Vucicevic

Brenda McMahon

Bretton Green Ltd

Brian Turnbull

Bridget Murphy

British Insurance Brokers'

Association (BIBA)

British Property Federation Brockenhurst Parish Council Bruce Maunder-Taylor

BRW Sparrow

Bryan Cave Leighton Paisner LLP

Bryan Wildman

Buckingham Court Residents Association

Building Societies Association

Cadogan

Candy Green

Cannock Mill Cohousing Colchester Limited

Carol Barber

Carol Giles

Carol Greenwood

Carol Johnson

Carol Seymour

Carol Walsh

Caroline Marks

Carrie Rollinson

Carter Jonas LLP

Cassie Ilett

Catherine Gale

Catherine Kane

Catherine Loader

Catherine Williams

Caxtons Commercial Ltd

Celina Jowett

Cellina Momodu

Cerian Jones

Charities Property Association

Charles Oliver

Charles Tellerman

Charlie Coombs

Charlotte [no other name given]

Charlotte Newton

Charlotte Thomas

Cherry Denison Chin Li

Chris Alexander

Chris and Lynn Scully Chris Austin

Chris Burns

Chris Lawrenson

Chris Longley Chris Martin

Chris Mitchell

Chris Pearce

Chris Smith

Chris Uden

Christina Goddard

Christina Mary Edmunds Christina Varnakidou

Christine Rigby Christopher Balogh Christopher Cubbin Christopher Denny Christopher Elliott Christopher J.D. Roberts Christopher Jessel

Christopher Mark Hepple Christopher Myers Church & Co. Chartered Accountants

Church Commissioners for England

CILEx

Ciro Ahmad

City of London Corporation

Clare Butchart

Clare Ellis

Clare Huntingford

Clare Schofield

Cliff Hawkins

Clifford Chance LLP

Cluttons

CMS Cameron McKenna Nabarro Olswang LLP (CMS)

Colin Greenbank

Colin Joseph Gavan

Conrad Lea

Consensus Business Group

Cora Beeharry

Corrina Davies

Cottons

Council for Licensed Conveyancers

Country Land and Business Association

Craig Alexander

Craig Hamer

Craig Moodie

Craig Stamper

Cyntra Properties Limited

D Taylor

Dale Robertson

Dame Alice Owen's Foundation

Damian Greenish

Damien Coyle

Dan Smith

Daniel Allum

Daniel Hooley

Daniel Jones

Daniel Latto

Dave and Sue Parker

Dave Chapman

Dave Smith


David Allen

Des Kinsella

Francesco [no other name

David Britch

Dhar [no other name given]

given]

David Clapp

Doreen Keane

Francesco Guariglia

David Cobb

Douglas Whyte

Francine Jones

David Deaville

Dr Anthony Shaw

Franciszka Mackiewicz-Lawrence

David Dixon

Dr Bernard Johnston

Gabriel Netser

David Evans

Dulwich Estate

Gabriel Schembri

David Hatch

E Pugh

Gareth Helsby

David Heard

Each Side Leasehold

Gary Humphries

David Hinchliffe

Ebrahim Esat

Gary Nolan

David Johnson

Ed Meyer

Gary Okell

David Johnston

Eileen O'Brien

Gavin Allen

David Lester

Eileen Walsh

Gemma James

David Lewis

Elizabeth Bull OBE

Geoff Fear

David Masterman

Elizabeth Pearce

Geoffrey Brewis-Levie

David Mawer

Ellen Booth

Geoffrey Holmes

David McArthur

Elliot Sweeney

George Donath

David Michael Pugh

Emily Harris

Geraint Evans

David Murphy

Emily Harrison

Gerald Eve LLP

David Newton

Emma Hynes

Gerald Grigsby

David Pearce

Emma Latham

Gerald Hyam

David Robson

Emma McDonald

Giles Rowlinson

David Sainsbury

Emma Sutton

Gilles Costerousse

David Sheppard

Emma Thomas

Gillian Miller

David Silvermam

Emma Thorncroft

Glen Armstrong

David Stewart

Erik Magnusson

Glyn Jenkins

David Thorogood

Estates Business Group

Gordon Clifton

David Whitworth

Estelle Hargraves

Gordon Peters

Dawn Barnes

Eunice Keane

Graeme Foster

Debbie Peaford

Fanshawe White

Graham Dixon

Debbie Winfield

Deborah Holmes

Federation of Private Residents' Associations (FPRA)

Graham Hollingworth

Graham McGouran

Debra Harvey

Fee Simple Investments

Graham Webb

Declan O'Byrne

Limited

Greg Davies

Deepak Gupta

Fieldfisher LLP Solicitors

Greg Passeri

Della Bramley

Fiona Biglin

Grosvenor

Denise Clark

Derek AR Gomez

Derek Sparrow

First-tier Tribunal (Property

Chamber)

Five Rivers Cohousing

Guy Charrison

Hamlins LLP

Hamsptead Garden Suburb

Derek Walker

Trust

Hannah Kopel

Hannah Yates

Hatal Raninga

Hayes Point Collective

Freehold Limited

Heather Keates

Hele Meehan

Helen Atack

Helen Butcher

Helen Leighton

Helen Merrifield

Helen Short

Hilary McDonagh

Hitesh Sangtani

Howard de Walden Estates

Limited

Hugh Donaldson

Huw Thomas

Iain Glennon

Ian Ashmore

Ian Daniels

Ian Grant

Ian Holland

Ian Humphreys

Ian Jefferson

Ian Kirby

Ian Leigh

Ian Morgan

Ian Murphy

Ian Nicholson

Ian Teacher

Ian Thomson

Ian Young

Institute and Faculty of

Actuaries (IFoA)

Irwin Mitchell LLP

J Walsh

J Williams

Jacob Fraser

Jacqueline Coals

Jacqueline Perkins

Jad Adams

Jahangir Hussain

James Driscoll

James Matthews

James Mills

James Moyse

James Pickering

James Souter

James Strong

James T Palmer

Jamie Farrell

Jamie John Atkins

Janaka Prasad Vithanage

Janan Shan

Jaqueline Gay Meeks

Jasmin Akhtar

Jason Smith

Jay Beeharry

Jayne Field

Jean Lemon

Jeanette [no other name given]

Jeanette Allen

Jeanette Rodgers

Jean-Sebastien Tourtel

Jeffrey Ellis

Jennifer Ellis

Jennifer McMaster

Jenny Harley

Jeremy Gibbs

Jeremy Goldberg

Jeremy Shall

Jerry and Tamzin Mannion

JLL

Jo Darbyshire

Jo Morgan

Joan Bingham

Joanne Walker

Jocelyn [no other name given]

John Bound

John Byers

John Davidson

John Fosyer

John Fryer

John Hall

John Hammerbeck

John Lyon's Charity

John Paul Hardesty

John Rogers

John Shorrock

John Smyth

John Stephenson

John W Bunting

Jonathan Adams

Jonathan and Yvonne Boyd

Jonathan Clark

Jonathan Grisenthwaite

Jonathan King

Jonathan Poulter

Jonathan Pringle

Jonathan Rolls

Jonathan West

Joseph McGuigan

Josephine Rostron

Joy Dickinson

Judith Read

Julian E C Briant

Julian Parsons

Julian Wilkins & Co Chartered Surveyors

Jupiter Investments Ltd

Kalpesh Patel

Kapil Purohit

Karen Burrell

Karen Conneely

Karen Deakin

Karen Knowles

Karen Mills

Karen Wilson


Karim Walji

Karl Briggs

Karl Layland

Kate Jones

Kath Jones

Kathleen Fellows

Kathryn Cavanagh

Kathryn McGouran

Katie Johnson

Katie Kendrick

Keith Hince

Keith Richardson

Kelly Casey

Ken Moore

Kerry Knowles

Kerry Maisey

Kevin Joyce

Kevin Sephton

Kevin Tranter

Kirsty Marsden

KPMG

Kris Bradshaw

Kristian Littlewood

Kristine and Geoff Taylor

Bryher

Kyle Hollingworth

Laura Ferrie

Laura Woodward

Laurence Griffiths

Laurence Prax

LEASE

Leasehold Forum

Leasehold Knowledge

Partnership

Leasehold Solutions

Lee Baker

Lee Broadbent

Lee Dickinson

Lee Livett

Leonard Samson


Leonardo Monzon

Lucy Watt

Leshane Perry

Luke Boyden

Lesley Johnson

Lune Valley Community

Lesley Rentell

Land Trust Ltd

Leslie Smee

Lynn Myers

Lewis Cowey

Lynne Briggs

Liam Goodwin

Lynne Butler

Lilac Mutual Home

Lynne Martin

Ownership Society

Lynne O'Brien

Linda Berriman

Lynsey Foster

Linda Diane Parsons

M Naseef Owasil

Linda Friend

M Y Ecker

Linda Macdonald

Maddox Capital Partners Limited

Linda Skelton

Linda Sloane

Madeleine Brierley

Lindsey Smith

Linz Darlington

Lisa [no other name given]

London Borough of Camden

London Borough of Islington

London Borough of Tower

Malgorzata Zymla Man Fai Lo Marbeth Gordon

Margaret Benton Margaret Moore Maria Jouce

Hamlets

Maria Manalo Nwachuku

London Diocesan Fund

Marian Berkeley

Long Harbour and

Marie Joyce-Reidy

HomeGround

Marie McLaughlin

Lord Berkeley

Marilyn Campbell

Lord Carnwath of Notting Hill

Mark Attenborough

Lord Truscott

Mark Baynton-Glen

Lorena Vacca

Mark Chick

Lorraine Black

Mark Emeny

Lorraine Jimenez

Mark Hanson

Louisa Tunney

Mark Hawkins

Louise Glover

Mark Hood

Louise Hudspith

Mark Sullivan

Louise Jones

Mark Tomkins

Louise O’Riordan

Mark Wall

Louise Whitnall

Marsha Oza

Lucia O'Brien

Marshel Weerakone

Lucy Carmichael

Martha Commandeur

Lucy Lenton

Martin and Fiona Nicolle


Martin Beesley

Martin Chamberlain

Martin Cottam

Martin Dawson

Martin Geoghegan

Martin William D T Ward

Martine Colby

Martyn Eynon Jones Not applicable

Mary Stiff

Matthew Alton

Matthew Hewstone

Matthew McKay

Matthew Olley

Maureen Gillooly

Maureen Whitlock

Mavis Chakwenya

Mavis Paterson

Max Beckett

Mayoor Agarwal

Mayor of London McCarthy & Stone

Megan Bowyer Mehboob Neky

Melanie West

Melissa Goodwin

Melissa Johnson

Michael Hollands

Michael Huang

Michael Kelly

Michael Kucharski

Michael Marshall

Michael Moran

Michalis Kapsos

Michelle Merrilees

Midland Valuations Limited

Mike [no other name given] Mike Searle

Millbrooke Court Residents Association

Miss J Boyce and Mr Mark Mitchell

Mitchell [no other name given]

Morgoed Estates Limited

myleasehold ltd

Nagappan Selvan

Nancy Hopkins

Nasir Zaman

Natalia Bremner

Natalie Suggitt

Natasha Forster

Natasha Sampson

National CLT Network and the UK Cohousing Network

National Housing Federation

National Leasehold

Campaign

National Trust

Neil Gear

Nesbitt and Co

Neville Brian Gallacher

Nicholas Roberts

Nick Raymond

Nick Steel

Nick Trainer

Nicola Beswick

Nicola Bowden

Nicola Callaghan

Nicola Jenkinson

Nicola Jones

Nicola Reid

Nicola Smith

Nicola Tann

Nicola Tomlinson

Nicola Warburton

Nigel Carnie

Nigel Edwards

Nigel Keen

Nina Rautio

Nina Salsotto Cassina

North View Fold Resident Group

Notting Hill Genesis

Oakfield Court Residents'

Association

Octavia Housing

Oliver Stancombe

Onward Homes

Orme Associates Property

Advisers

Ormond P Simpson

Owen O'Neill

Pamela Cunliffe

Pamela Rose

Parthenia

Patricia Kennedy

Paul and Sally Coulthard

Paul Church

Paul Glover

Paul Goodlad

Paul Gothard

Paul Hamilton

Paul Hird

Paul Osborne

Paul Potts

Paul Roberts

Paul Rowntree

Paul Tayler Limited

Paul Thomas

Paul Thurston

Paul Willmott

Paul Worley

Paula Hill

Paula Shaw

Pauline Mawer

PBM Property Management

Pearn Ltd

Penelope Brook

Pennington Manches LLP

Penny Atkinson

Penny Gell


Persimmon plc

Residents’ Association of

Russell Thomson

Pete Liggins

Canary Riverside

S M Rendell

Peter and Christine Davis

Rhett Ewer

Richard Baron

Salah Banna

Peter Barker

Richard Bass

Sally Jane Jenkins

Peter Beckett

Richard Chester

Sally Mills

Peter Cunningham

Richard Glass

Sandeep Dulai

Peter Finneran

Richard Hards

Sandra Smith

Peter Jones and Gabrielle

Sanja Williams

Maxwell-Jones

Richard Hartigan

Sara Cornthwaite

Peter Muir

Richard McCarthy

Sarah Brachtvogel

Peter Weeks

Richard Porter

Sarah Chan

Peter Wright

Richard Stacey

Sarah Cooper

Philip Ashley

Richard Warwick

Sarah Elise Robertson

Philip Bullivant

Richard William Morris

Sarah Foster

Philip Cross

Rishi Mital

Sarah Hilton

Philip Culley

Rita Simmonds

Sarah Johnston

Philip Kelly

Robert Bater

Sarah Majid

Philip Rainey QC

Robert Brooks

Sarah Webb

Phyllis Helen Buchanan

Robert Guerrini

Sarfraz Rajwadkar

Piers Haben

Robert James

Sarum St Michael

Polly Durey

Robert Nix

Management Company Ltd

Pollyanna Williams

Robert Owen

Saul Gerrard

Professor Grey Giddins

Robert Parr

Sayyam Sahni

Property Bar Association

Robert Warren

Scrivener Tibbatts Ltd

Prosper Marr-Johnson

Robert Wood

Sharon Johnson

Rachael Ball

Robin Benjamin

Shaun Porter

Rachael Newman

Roger Dunn

Sheila Jalving

Rachel Florey

Roger Parkin

Sheila Neville

Rachel Lewin

Rolfe Klement

Sheila White

Rachel Rose Dring

Ron Harris

Shelagh Fitzpatrick

Radamanthos Tsotsos

Rory & Elizabeth

Shelley King

Rakesh Tiwari

Cunningham

Shepard Way Residents

Rama Vorray

Rory Cunningham

Association

Ramilla Shah

Rosemary Hadfield

Shira Baram

Randy Silver

Rosie Bahr

Shirley Mcdonagh

Ravelle Josephs

Rothesay Life

Shoosmiths LLP

Ray Chapple

Royal Institution of

Simon Davies

Chartered Surveyors (RICS)

Simon Davies

Renate Thompson

Resident Landlords

Rupert Barnes

Simon Elliott

Association

Rupert Houltby

Russell Hughes

Simon Wones

Sinnathamby Senthitselvan Sir John Cass's Foundation Sladana Tanaskovic Sophie Wolf

South East Leasehold

Southlands College Estate Wimbledon Limited

St Thomas's Leaseholders

Stefania Maulucci

Stella Roberts

Stephanie Holm

Stephanie Livesey

Stephanie Russell Stephanie Stockton

Stephen Barney

Stephen Desmond

Stephen Heslop

Stephen Hogg

Stephen Nottridge

Stephen Wharton

Steve Fiddler

Steve Lydiate

Steven Harding

Steven Robert Jones

Steven Short

Stewart Gray

Stone King LLP

Stuart Cox

Sue Murray

Sumita Harris

Suraiya Akter

Susan Airey

Susan Clarke

Susan Heywood

Susan Kirby

Susan Lydiate

Susan Pearmain

Susan Routledge

Sutton Leaseholders Association


T Smethurst

Tracey Horton

TANT (Tenants Association

Transport for London

of the National Trust) -Killerton Group

Trevor Leigh

Tapestart Limited

Trowers and Hamlins LLP

Tenants Association

UK Finance

National Trust

Valerie Gibson

Tenants Association of the

National Trust

Valerie Johnson

Vanessa Austin Badoor

Terence Perkind

Veer Shah

Terence Robert Ballard

Verina Glaessner

Thackray Williams LLP (Solicitors)

Verity McMahon

The Alan Mattey Group

Vicky Johnson

The Berkeley Group Holdings plc

Victor and Freda Margaret Crew

The Charity of Richard

Victor Levy

Cloudesley

Victoria Bradbury

The Conveyancing Association

Victoria Davies

Victoria Holden

The Crown Estate

Wales Co-operative Centre

The Land Trust

The Landmark Trust

Wallace LLP

Wallace Partnership Group

The Law Society

Ltd

The Portman Estate

Wayne Rowlatt

The Property Litigation

Wedlake Bell LLP

Association (PLA)

Wendy Parga

The Royal Commission for the Exhibition of 1851

Wendy Seddon

The Society of Licensed

Wesley Kinsella

Conveyancers

William Bullin

The Wellcome Trust

William Coney

Therese Leignel

William Doran

Thomas Beech

William Stansfield

Thomas JD Travers

Wing Man Kan

Tim Reeves

Wojciech Zymla

Tom Ellis

Wojciech Zymla

Tom Muir

Womble Bond Dickinson

Tommy Reeves

(UK) LLP

Tony Boys

Wrigleys LLP

Tony Burke

Wrigleys LLP

Tony Smetham

Xuxax Limited

Tracey Cummings

Yvonne Tolliday

Zhaokai Ma


THE LAW COMMISSION: RESIDENTIAL LEASEHOLD LAW REFORM

TERMS OF REFERENCE

The project was announced in the Law Commission's Thirteenth Programme of Law Reform and in Government's response to its consultation Tackling unfair practices in the leasehold market.

The project will be a wide-ranging review of residential leasehold law, focussing in the first instance on reform to:

The Commission and Government are discussing other areas of residential leasehold reform that could be included in the project.

The Government has identified the following policy objectives for the Law Commission's recommended reforms:

Generally

Enfranchisement

Commonhold

Right to manage

Enfranchisement covers the statutory right of leaseholders to:

The project will consider the following issues:

Commonhold is a form of ownership of land which is designed to enable the freehold ownership of flats. There are various legal issues within the current commonhold legislation which affect market confidence and workability. The Commission will review those issues to enable commonhold to succeed.

The following legal issues will be considered:

The project will commence with the publication of a call for evidence. Other legal problems that emerge from that call for evidence will be included in the project by agreement with Government.

The Commission’s review will complement Government’s own work to remove incentives to use leasehold, and Government’s work to address non-legal issues to re-invigorate commonhold such as education, publicity and supporting developers, lenders and conveyancers. As part of its call for evidence, the Commission will invite consultees’ views on (i) whether, and if so how, commonhold should be incentivised or compelled, and (ii) the non-legal issues that must be addressed to re-invigorate commonhold, and report on the outcome of that consultation, without making recommendations.

The right to manage was introduced by the Commonhold and Leasehold Reform Act 2002. It is a right granted to leaseholders to take over the landlord’s management functions through a company set up by the leaseholders for this purpose.

The Law Commission is asked to conduct a broad review of the existing right to manage legislation with a view to improving it. In particular, the Law Commission will:

INTRODUCTION

THE TERM

Calculation of the “term” for Houses 1, 2, 3 and 4

House 1: The current value of the right to receive £50 per annum rising to £250 per annum over the next 101 years of the lease based on a capitalisation rate of 6% is £1,844.

House 2: The current value of the right to receive £50 per annum rising to £200 per annum over the next 76 years of the lease based on a capitalisation rate of 6% is £1,806.

House 3: The current value of the right to receive £300 per annum, increasing in line with RPI every 10 years of the term, for the remaining 241 years of the lease based on a capitalisation rate of 4% is £9,554.

House 4: The current value of the right to receive £300 per, doubling every 10 years for the first 50 years of the term, for the remaining 241 years of the lease based on a capitalisation rate of 4% is £79,422.

House 1:

The current ground rent is £50 per annum, and it is one year until the first rent review.

The years’ purchase for one year, at a capitalisation rate of 6%, is 0.9434. Therefore, the value of a ground rent of £50 per annum for one year is £50 x 0.9434 = £47.

There will subsequently be four rent reviews, before the expiry of the lease in 101 years.

The years’ purchase for 25 years at a capitalisation rate of 6% is 12.7834. That figure will need to be multiplied by the present value of £1 after 1, 26, 51 and 76 years at a deferment rate of 6% (which, by convention, in this context, mirrors the capitalisation rate applied) respectively, to reflect the fact that the value is being paid now, rather than in the future.

The relevant present values are as follows.

Therefore, the relevant multiplier to be applied to the rent in respect of each review period is as follows.

The value of each period of rent, and the total, is therefore as follows.

Total value of the term in respect of House 1 is £47 + £1,206 + £421 + £131 + £38 = £1,844

House 2:

The current ground rent is £50 per annum, and it is one year until the first rent review.

The years’ purchase for one year, at a capitalisation rate of 6%, is 0.9434. Therefore, the value of a ground rent of £50 per annum for one year is £50 x 0.9434 = £47.

There will subsequently be three rent reviews, before the expiry of the lease in 76 years.

The years’ purchase for 25 years at a capitalisation rate of 6% is 12.7834. That figure will need to be multiplied by the present value of £1 at a deferment rate of 6% after 1, 26 and 51 years respectively, to reflect the fact that the value is being paid now, rather than in the future.

The relevant present values are as follows.

Therefore, the relevant multiplier to be applied to the rent in respect of each review period is as follows.

The value of each period of rent, and the total, is therefore as follows.

Total value of the term in respect of House 2 is £47 + £1,206 + £421 + £131 = £1,806

House 3:

The current ground rent is £300 per annum, and it is one year until the first rent review.

The years’ purchase for one year, at a capitalisation rate of 4%, is 0.9615. Therefore, the value of a ground rent of £300 per annum for one year is £300 x 0.9615 = £288.

There will subsequently be a rent review every 10 years (until the end of the lease in 241 years), increasing the ground rent in line with RPI. The capitalisation rate that has been chosen to reflect this is 4%.

The years’ purchase for 240 years at a capitalisation rate of 4% is 24.9980. The present value of £1 after one year at a deferment rate of 4% is 0.9615, so the multiplier to be applied to the ground rent from 2020 is 24.9980 x 0.9615 = 24.0365.

The figure that has been chosen to reflect a £300 ground rent increasing in line with RPI every 10 years for 240 years is £385.

The value of each period of rent, and the total, is therefore as follows.

Total value of the term in respect of House 3 is £288 + £9,266 = £9,554.

House 4:

The current ground rent is £300 per annum, and it is one year until the first rent review.

The years’ purchase for one year, at a capitalisation rate of 4%, is 0.9615. Therefore, the value of a ground rent of £300 per annum for one year is £300 x 0.9615 = £288.

There will subsequently be five rent reviews, before the expiry of the lease in 241 years.

The first four rent reviews (in 2020, 2030, 2040 and 2050) are taken first.

The years’ purchase for 10 years at a capitalisation rate of 4% is 8.1109. That figure will need to be multiplied by the present value of £1 at a deferment rate of 4% after 1, 11, 21, and 31 years respectively, to reflect the fact that the value is being paid now, rather than in the future.

The relevant present values are as follows.

Therefore, the relevant multiplier to be applied to the rent in respect of each review period is as follows.

There will then be a final rent review in 2050.

In respect of this final rent review, the years purchase for 200 years at a capitalisation rate of 4% is 24.9902. That figure will need to be multiplied by the present value of £1 at a deferment rate of 4% after 41 years, which is 0.2003. Therefore, the multiplier which needs to be applied to reflect the fact that the value is being paid now, rather than in the future, is 24.9902 x 0.2003 = 5.0050.

The value of each period of rent, and the total, is therefore as follows.

Total value of the term in respect of House 4 is £288 + £4,679 + £6,322 + £8,542 + £11,542 + £48,048 = £79,422

THE REVERSION

House 1:

The FHVP value of House 1 is £250,000.

The unexpired term of the lease is 101 years.

The present value of £1 in 101 years at a deferment rate of 4.75% is 0.0092. The deferment rate of 4.75% is taken from the decision in Sportelli.

The value of receiving the £250,000 house in 101 years is, therefore £250,000 x 0.0092 = £2,303.

House 2:

The FHVP value of House 2 is £250,000.

The unexpired term of the lease is 76 years.

The present value of £1 in 76 years at a deferment rate of 4.75% is 0.0294.

The value of receiving the £250,000 house in 76 years is, therefore £250,000 x 0.0294 = £7,349.

House 3:

The FHVP value of House 3 is £250,000.

The unexpired term of the lease is 241 years.

The present value of £1 in 241 years at a deferment rate of 4.75% is 0.000014.

The value of receiving the £250,000 house in 241 years is, therefore £250,000 x 0.000014 = £3.

House 4:

The FHVP value of House 4 is £250,000.

The unexpired term of the lease is 241 years.

The present value of £1 in 241 years at a deferment rate of 4.75% is 0.000014.

The value of receiving the £250,000 house in 241 years is, therefore £250,000 x 0.000014 = £3.

MARRIAGE VALUE

House 2:

As we explain in Chapter 2 above, the way to calculate marriage value is to work out the difference in the combined value of the leaseholder’s and landlord’s interests before the enfranchisement claim, compared with their combined value after the enfranchisement claim.

The “before” value:

The “after” value:

The “marriage value”:

The difference between the combined value before the claim (£235,405) and after the claim (£250,000) is £14,595 - this is the marriage value.

The leaseholder must pay the landlord, under the 1967 Act, 50% of that value, which comes to £7,298.

TOTAL PREMIUMS

House 1:

The total premium is the term (£1,844) + the reversion (£2,303).

= £4,147

House 2:

The total premium is the term (£1,806) + the reversion (£7,349) + the payable share (50%) of marriage value (£7,298).

= £16,453

House 3:

The total premium is the term (£9,554) + the reversion (£3).

= £9,557

House 4:

The total premium is the term (£79,422) + the reversion (£3).

= £79,425

Appendix 4 contains modelling relating to the impact on premiums of replacing the current valuation methodology in section 9(1) with a simplified, updated methodology. The modelling is referred to and summarised in paragraph 9.104 and Figure 34 above. Appendix 4 is in the following order:

Common Facts

Ground Rent

Freehold Vacant Possession Value


ASSUMING 50% "SITE VALUE" PROPORTION


Section 9(1) Valuation Variables


LEASEHOLD REFORM ACT 1967 (as amended)

Calculation of Premium Payable for Freehold of a low value house under Section 9(1) as compared to Suggested Alternatives


ASSUMING 35% "SfTE VALUE" PROPORTION


Section 9(1) Valuation Variables


GE APPENDIX 1 (RE Q107)


&

GERALDEVE


272


Freehold Capitalisation rate tor Grnd Rent              6.06%

Site Value (Standing House Approach)                  50%

Decap rate for Modern Ground Rent                5.00%

Cap rate for Modem Ground Rent                  5.00%

Def rate for Modem Ground Rent                   5.00%

F reeh old Defermen t rate                             4.7 5%

Deduction for right to hold over                         10%


Freehold Capitalisation rate tor Grnd Rent            6.00%

Site Value (Standing House Approach)              35%

Decap rate for Modern Ground Rent               5.00%

Cap rate for Modern Ground Rent                 5.00%

Def rate for Modern Ground Rent                  5.00%

Freehold Deferment rate                            4.75%

Deduction for right to hold over                        10%


Control Section 9(1) Valuation

1) Capitalised value of Ground Rent at 6%, plus

Suggested Alternative No 1 at 50% of value of Reversion

1) Capitalised value ot Ground Rent at 6%, plus

2) Reversion to 50 Year lease extension at S15 rent with site value 50%, Decap tor MGR 5.0%, Cap & Det rate for MGR 5.0%.

2) Valued Freehold reversion reduced by50%(= 50%Site Value equivalent) &de1erred at the Sportelli Rate (4.75%), plus

3) Value of Freehold reversion at end ol 50year extension, with 10% discount for lessee holding over, deferred at the Sportelli Rate (4.75%)

3) Mo Share d Marriage Value to Freeholder

UneXpiied Ie rm

Section 9(1) Valuation (rounded)

Premium

Alter native No 1

Premium Difference

Sect 9(1)

Less Alternative Nol

Percentage Difference against 9(1)

£

£

£

£

1

168,750

155,150

13,600

8.06%

10

109,400

102,400

7,000

6.40%

20

67,650

64,650

3,000

4.43%

30

41,950

40,350

1,100

2.62%

40

26,1 00

25,950

150

0.57%

50

16,300

16,500

■200

-1.23%

60

10,300

10,600

■300

■2.91%

70

6,550

6,900

■350

■5.34%

79

4,450

4,750

■300

■6.74%

80

4,300

4,550

■250

■5.81%

90

2,850

3,100

■250

-8.77%

100

1,950

2,150

■200

-10.26%

110

1,450

1,550

-100

-6.90%

120

1,150

1,200

■50

-4.35%

130

900

950

-50

-5.56%

140

800

850

■50

-6.25%


S

7

8

9

10

Control

Section 9(1) Valuation

  • 1) Capitalised value of Ground Rent at 6%, plus

  • 2) Reversion to 50 Year lease extension at S15 rent with site value 35%, Decap tor MGR 5.0%, Cap & Def rate for MGR 5.0%.

  • 3) Value o1 Freehold reversion at end d 50year extension, with 10%discount for lessee holding over, deferred at the Sportelli Rate (4.75%)

Suggested Alternative No2 at 35% of value of Reversion

  • 1) Capitalised value d Ground Rent at 6%, plus

  • 2) Value of Freehold reversion reduced by 65% (= 35% Site Value equivalent) & deferred at the Sportelll Rate (4.75%), plus

  • 3) No Share of Marriage Value to Freeholder

Section 9(1) Valuation (rounded)

£

Premium

Alternative No 2

£

Premium Difference Sect 9(1}

Alternative No 2

£

Percentage Difference against 9(1)

£

UneXpired Term

126,350

108,650

17,700

14.01%

1

82,100

71,750

10,350

12.61%

10

50,900

45,350

5,550

10.90%

20

31,650

23,750

2,900

9.16%

30

19,800

18,300

1,500

7.58%

40

12,450

11,700

750

6.02%

50

7,900

7,600

300

3.80%

60

5,100

5,000

100

1.96%

70

3,500

3,500

0

0.00%

79

3,400

3,350

50

1.47%

80

2,300

2,350

■50

■2.17%

90

1,650

1,700

■50

-3.03%

100

1,250

1,300

■50

-4.00%

110

1,000

1,000

0

0.00%

120

850

850

0

0.00%

130

750

750

0

0.00%

140


Comparison of premium (A) under section 9(1) and (B) on the basis of term plus percentage of reversion

House worth £150,000, ground rent of £35 per annum, site value: 35% of freehold value

Term (years)

Valuation under section 9(1), with site value of 35%

Valuation based on term plus 35% of reversion

Difference (£)

Difference (%)

Outcome

1

£58,350

£50,150

£8,200

16%

Landlord receives less

10

£38,000

£33,250

£4,750

13%

Landlord receives less

20

£23,700

£21,150

£2,550

11%

Landlord receives less

30

£14,850

£13,550

£1,300

9%

Landlord receives less

40

£9,400

£8,750

£650

7%

Landlord receives less

50

£6,050

£5,700

£350

6%

Landlord receives less

60

£3,950

£3,800

£150

4%

Landlord receives less

70

£2,650

£2,600

£50

2%

Landlord receives less

79

£1,950

£1,900

£50

3%

Landlord receives less

80

£1,850

£1,850

£-

0%

Identical

90

£1,400

£1,400

£-

0%

Identical

100

£1,050

£1,100

-£50

-5%

Landlord receives more

110

£900

£900

£-

0%

Identical

120

£750

£800

-£50

-7%

Landlord receives more

130

£700

£700

£-

0%

Identical

140

£650

£650

£-

0%

Identical

Comparison of premium (A) under section 9(1) and (B) on the basis of term plus percentage of reversion

House worth £2,500,000, ground rent of £1 per annum, site value: 50% of freehold value

Term (years)

Valuation under section 9(1), with site value of 50%

Valuation based on term plus 50% of reversion

Difference (£)

Difference (%)

Outcome

1

£1,297,700

£1,193,300

£104,400

8%

Landlord receives less

10

£839,450

£785,900

£53,550

6%

Landlord receives less

20

£517,400

£494,150

£23,250

4%

Landlord receives less

30

£318,950

£310,700

£8,250

3%

Landlord receives less

40

£196,650

£195,350

£1,300

1%

Landlord receives less

50

£121,250

£122,800

-£1,550

-1%

Landlord receives more

60

£74,750

£77,250

-£2,500

-3%

Landlord receives more

70

£46,100

£48,550

-£2,450

-5%

Landlord receives more

79

£29,850

£32,000

-£2,150

-7%

Landlord receives more

80

£28,450

£30,550

-£2,100

-7%

Landlord receives more

90

£17,550

£19,200

-£1,650

-9%

Landlord receives more

100

£10,850

£12,100

-£1,250

-12%

Landlord receives more

110

£6,700

£7,600

-£900

-13%

Landlord receives more

120

£4,150

£4,800

-£650

-16%

Landlord receives more

130

£2,550

£3,000

-£450

-18%

Landlord receives more

140

£1,600

£1,900

-£300

-19%

Landlord receives more

CCS1019368652

978-1-5286-1706-2

1

We generally use the term “leaseholder” instead of “tenant” when describing those who enjoy enfranchisement rights. We do so because “leaseholder” is typically used to denote those holding long leases of properties (who therefore qualify for such rights), whereas “tenant” is generally used to refer to those with short leases (such as a one-year “assured shorthold tenancy”). However, the enfranchisement legislation uses the word “tenant”, and, in some instances, we adopt that language when referring to the legislation - for example, when referring to a “qualifying tenant”.

2

There is an exception: leaseholders of houses can extend their lease without paying a premium but instead paying a higher annual rent. See para 2.5 below.

3

In the 2010 British Social Attitudes survey, 86% of respondents had a preference for buying a home and 14% preferred to rent: Department for Communities and Local Government, Public attitudes to housing in England: Report based on the results from the British Social Attitudes survey (July 2011), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/6362/193 6769.pdf.

4

Historically, the sale of houses on a leasehold basis became widespread practice in particular areas of the country.

5

Department for Communities and Local Government (now Ministry of Housing, Communities and Local Government), Tackling unfair practices in the leasehold market: Summary of consultation responses and Government response (December 2017) available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/670204/Tackling_Unfair_Prac tices_-_gov_response.pdf, and Ministry of Housing, Communities and Local Government, Implementing reforms to the leasehold system in England: Summary of consultation responses and Government response (June 2019), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/812827/1 90626_Consultation_Government_Response.pdf.

6

L Xu, “Commonhold Developments in Practice” in W Barr (ed), Modern Studies in Property Law: Volume 8 (2015) p 332. The main provisions of the Commonhold and Leasehold Reform Act 2002 came into force on 27 September 2004.

7

For more information on our project on commonhold, see https://www.lawcom.gov.uk/project/commonhold/.

8

Leasehold home ownership: buying your freehold or extending your lease (2018) Law Commission Consultation Paper No 238 (“the Enfranchisement CP”), available at https://www.lawcom.gov.uk/project/leasehold-enfranchisement/.

9

Unless they are a leaseholder of a house and seeking a lease extension as opposed to buying the freehold.

10

See, further, para 1.62 below.

11

  The First-tier Tribunal (Property Chamber) in England and the Residential Property Tribunal in Wales.

12

  1998 Act, s 19(1).

13

  1998 Act, ss 4 and 8.

14

Available at https://www.lawcom.gov.uk/project/leasehold-enfranchisement/.

15

See Harrow London Borough Council v Qazi [2003] UKHL 43, [2004] 1 AC 983 at [50] to [53] by Lord Hope.

16

See Malekshad v Howard de Walden Estates Ltd [2001], EWCA Civ 761, [2002] QB 364 at [49] to [53] by Sedley LJ (overturned by the House of Lords on a different issue).

17

Marckx v Belgium (1979) 2 EHRR 350 (App No 6833/74) at [63]; Sporrong and Lonnroth v Sweden (1982) 5 EHRR 35 (App No 7152/75) at [57].

18

Available at https://www.gov.uk/government/publications/guidance-note-on-legal-risk.

19

An intermediate lease is a lease that is superior to another lease (in other words, a lease under which the leaseholder is also the landlord under another lease). Put another way, it is a lease that has an interest above and below it. For example, where a freehold house is subject to a 999-year lease to X, which in turn is subject to a 125-year lease to Y, which itself is subject to a 99-year lease to Z, then the 999-year lease and the 125-year lease are both “intermediate leases”. The 125-year lease is also a “sub-lease” (as is the 99-year lease). An intermediate lease is also known as a “head lease” or a “superior lease”.

20

The categories that we have adopted are: leaseholders and representative bodies; commercial investors; social housing sector; charitable sector; legal professionals; surveyors; other professionals; and other consultees. Those are very broad categories. For example, commercial investors might include large pension funds, but also individuals who have a second home which they sell on a long lease to provide retirement funds.

21

See n 5 above.

22

Regulation of Property Agents: working group report (July 2019), available at

https://www.gov.uk/government/publications/regulation-of-property-agents-working-group-report.

23

Residential Leasehold Reform Task and Finish Group, Independent review of residential leasehold: report (July 2019), available at https://gov.wales/independent-review-residential-leasehold-report.

24

The Housing and Planning Act 2016, s 136 and sch 10, confers a power to make regulations governing minor intermediate leasehold interests for the purposes of the enfranchisement legislation (namely the 1967

Act and the 1993 Act). The power is exercisable by the Secretary of State in relation to land in England and by the Welsh Ministers in relation to land in Wales. Regulations for England were made by the Department for Communities and Local Government in 2017 (Valuation of Minor Intermediate Leasehold Interests (England) Regulations 2017, (SI 2017 No 871).

25

Government of Wales Act 2006, sch 7, Pt I, para 11.

26

  Wales Act 2017, s 3 and sch 1 and 2 (and the new sch 7A and 7B).

27

  Protocol of 10 July 2015 between the Welsh Ministers and the Law Commission, available at

https://www.lawcom.gov.uk/document/protocol-rhwng-gweinidogion-cymru-a-comisiwn-y-gyfraith-protocol-between-the-welsh-ministers-and-the-law-commission/.

28

  Available at https://www.lawcom.gov.uk/project/leasehold-enfranchisement/.

29

The difference is that in a lease extension claim, there is an additional stage of calculating the value of the reversion after the extension. The premium is then the difference between the value of the reversion (i) before and (ii) after the lease extension. In a freehold purchase claim, the landlord does not retain any interest and so it is only necessary to calculate the value of the reversion before the claim.

30

Existing lease value is based on guidance in Contractreal Ltd v Smith [2017] UKUT 178 (LC), at [70], and Earl Cadogan v Erkman [2011] UKUT 90 (LC).

31

See para 6.119 onwards.

32

As of September 2019, the average UK house price was £234,370: see HM Land Registry UK House Price Index, available at https://landregistry.data.gov.uk/app/ukhpi.

33

Strictly speaking, the lease is not extended; rather, the old lease is surrendered and a new lease of a longer term is granted in its place. Nevertheless, the phrase “lease extension” is commonly used and we adopt it in the Report.

34

See n 29 above.

35

Enfranchisement Consultation Paper (“Enfranchisement CP”), para 4.4 onwards.

36

Enfranchisement CP, ch 6.

37

Enfranchisement CP, paras 4.38 to 4.41.

38

When a deferment rate is used in this way, by convention the capitalisation and deferment rates will be the same.

39

Contractreal Ltd v Smith [2017] UKUT 178 (LC), at [70], referring to Earl Cadogan v Erkman [2011] UKUT 90 (LC).

40

The relativity of 90.5% is taken from the Gerald Eve 1996 graph of unenfranchiseable relativities, available at www.geraldeve.com/services/leasehold-enfranchisement. See further para 2.45 onwards below.

41

These houses would have been bought at a relativity of 99% or 100%, which ignored the onerous ground rent. Since then, potential purchasers have become aware of the huge enfranchisement premiums payable to acquire the freeholds. Consequently, the leases of the houses are now only worth £250,000 less the enfranchisement premium of, say, £79,417 as per our example. This is £170,583, which is 68.23% of the £250,000 freehold value. However, for the purposes of our examples, our method has been to ignore the onerous ground rent.

42

  Para 2.15.

43

Earl Cadogan v Sportelli [2007] 1 EGLR 153. The determination of the deferment rate was appealed to the Court of Appeal (Earl Cadogan v Sportelli [2007] EWCA Civ 1042, [2008] 1 WLR 2142). However, that part of the appeal was dismissed so the Tribunal’s decision still stands. There was a further appeal to the House of Lords, but the determination of the deferment rate did not form part of that appeal.

44

The exceptions are in the cases of very short or very long existing leases where the separate values will be worth more than the value of the interests married together (and so in this situation marriage value will be a negative rather than a positive value).

45

  1967 Act, s 9(1E); 1993 Act, schs 6 and 13, para 4(2A).

46

  1967 Act, s 9(1D); 1993 Act, schs 6 and 13, para 4(1).

47

See McHale v Earl Cadogan [2010] EWCA Civ 1471, [2011] HLR 14 at [29] onwards.

48

  1967 Act, s 9(1A)(a); 1993 Act, sch 6, para 3(1)(b).

49

For example, the Gerald Eve graph is based on settlements reached on enfranchisement claims between 1974 and 1996. We discuss the Gerald Eve graph further in Figure 7 below.

50

The Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 223 (LC).

51

The price of a property is the sum of the value of its different attributes, such as size and location. Regression is the breakdown of that price to find the value of an individual attribute of interest, in this case the value attributable to lease length. That individual attribute is known as the “hedonic” attribute.

52

Mundy v The Trustees of the Sloane Stanley Estate [2018] EWCA Civ 35, [2018] HLR 13.

53

Gerald Eve table of relativities (1996), available at www.geraldeve.com/services/leasehold-enfranchisement.

54

In Millard Investments Ltd v Cadogan (LON/LVT/1756/04), the Tribunal considered the correct approach to valuation of a ground rent that exceeded 0.1% of a property’s freehold value (which they considered to be “onerous”). The valuation that formed part of the decision included an additional step that capitalised the onerous portion of the ground rent and deducted the resulting capital sum from the value of the existing lease. This increased the marriage value and so also increased the premium payable by the leaseholder. Since then it has become common valuation practice to follow this approach whenever the ground rent exceeds 0.1% of the property’s freehold value, a level which is now generally considered to be onerous.

55

Earl Cadogan v Pitts; Earl Cadogan v Sportelli [2010] 1 AC 226, Lord Neuberger.

56

Enfranchisement CP, paras 14.71 to 14.78.

57

See Nailrile Ltd v Cadogan [2009] EGLR 151, our discussion of the case in paras 16.99 to 16.101 of the Consultation Paper, and our provisional proposal to address this problem in para 16.142 of the Consultation Paper by suggesting that the rent in a headlease should be “commuted” on a lease extension claim.

58

That is, a yield based on the annual rental value of the property after deducting management expenses.

59

Trustees of the Sloane Stanley Estate v Carey-Morgan [2011] UKUT 415 (LC).

60

See para 2.43 above.

61

St Emmanuel House (Freehold) Ltd v Berkeley Seventy-Six Ltd CHI/21UC/OCE/2017/0025, 0026 and 0027.

62

The Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, r 19(1).

63

NAEA Propertymark, Leasehold: A Life Sentence? available at

https://www.propertymark.co.uk/media/1047279/propertymark-leasehold-report.pdf.

64

See https://petition.parliament.uk/petitions/238071.

65

There were 177 members of the APPG when Parliament was dissolved before the 2019 general election.

66

Conveyancing Association, Modernising the Home Moving Process (November 2016), available at

https://www.conveyancingassociation.org.uk/campaigns/modernising-the-home-moving-process-white-paper/.

67

Event Fees in Retirement Properties (2017) Law Com No 373, at para 2.5 onwards, and Residential Leases: Fees on Transfer of Title, Change of Occupancy and Other Events (2015) Law Commission Consultation Paper No 226, at paras 4.16 to 4.26, both available at https://www.lawcom.gov.uk/project/event-fees-in-retirement-properties/.

68

The latest Government statistics state that there are approximately 4.3 million leasehold properties in England, which is 18% of the English housing stock. Of these properties, 2.3 million were owner-occupied sector and 1.7 million were privately rented. See Ministry of Housing, Communities & Local Government, Statistical Release, Estimating the number of leasehold dwellings in England 2017-2018 (26 September 2019), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/834057/E stimating_the_number_of_leasehold_dwellings_in_England__2017-18.pdf.

69

See for example the case of Money v Cadogan Holdings [2013] UKUT 0211 (LC) discussed in para 14.75 of the Consultation Paper.

70

Para 2.45 and Fig 7.

71

In this context, by short lease we mean a lease which is of such a length that the buyer would look to extend it or acquire the freehold of the property during his or her period of ownership.

72

Kosta v Carnwath (re: 47 Phillimore Gardens) [2014] UKUT 319 (LC).

Figure 14: uncertainty about enfranchisement premiums for Houses 1, 2, 3 and 4

In Figure 10 above, we set out the valuations that the parties’ valuers might have prepared for the purposes of negotiation. The leaseholder and landlord will not know what figure, between those two extremes, the premium is going to be, until the claim is concluded (by agreement or

3.31 The outcome of an enfranchisement claim does not just depend on differences of opinion about valuation. It can also depend on, and therefore the uncertainty of outcome can be influenced by, for example:

(1) the advice, negotiation skills, and expert evidence of one party’s valuer;

(2) the quality of the particular valuer’s evidence (as assessed by the Tribunal);

(3) the parties’ negotiating position - for example, a leaseholder who is eager to sell their property, but who needs to enfranchise before doing so, may be more inclined to pay a higher premium in order to finalise the transaction;

(4) the parties’ risk appetite - for example, whether the parties want to run the risk, and incur the cost, of a Tribunal hearing; and

(5) whether the landlord has other leaseholders in a similar position and so is concerned that the premium agreed for one property will be seen as setting a precedent for others.

3.32 The parties can estimate the likely outcome and their valuers can provide advice on the likely outcome, but valuers cannot predict the future and so ultimately there is no certainty at all until the end of the claim. The parties must therefore live with uncertainty - including significant financial uncertainty - for a long time. The leaseholders might also be daunted by the prospect of an enfranchisement claim which could result in a very high premium.

(1) To take the figures for House 1 (in Figure 10 above), the leaseholder’s valuer prepares an initial valuation for negotiation purposes of £1,940, and might have provided initial advice to the leaseholder estimating that the ultimate premium is likely to be around £4,150. But the leaseholder then receives the landlord’s valuer’s proposed premium of £11,000.

(2) For Houses 2, 3 and 4, the different potential valuations are even more stark.

(3) To provide a recent example, in a relatively recent Welsh Leasehold Valuation Tribunal decision, the leaseholder’s valuer argued for a premium of £300,

73

Davis v The Somerset Trust (LVT/0036/11/15 and LVT/0046/01/16), available at

https://residentialpropertytribunal.gov.wales/sites/residentialproperty/files/2019-02/lvt-decision-6-somerset-road-swansea.pdf.

74

We will discuss the current requirement for leaseholders to pay towards their landlords’ costs in our second report.

“I encountered many difficulties which I would summarise as landlords taking advantage [of the] system to attempt to rip me off which I avoided by representing myself:

1) Initial counter offer of £5,000 more since they know [it will cost most] leaseholders at least that to oppose.

2) Charging for VAT when they are not VAT eligible, since most leaseholders don't demand the evidence.

3) Initially overcharging for their legal costs by £2K since they know it will cost you that to contest.

4) Since I pay for their legal costs there is no incentive to mitigate their costs. ...”

(A leaseholder responding to our survey)

“Landlords often ask for excessive premiums and use the [Tribunal] to their advantage as leaseholders pick up the majority of the costs.” (Karl Layland, leaseholder).

“A lease extension or enfranchisement is a distressed purchase with a lay leaseholder with a low bargain position at one end and a sophisticated professional freeholder blocking the way to

75

This view partially stems from the Tribunal’s decision in Millard Investments Ltd v Cadogan (LON/LVT/1756/04), but has been widely accepted. The Nationwide Building Society’s lending policy is not to lend on properties with a ground rent above 0.1% of the value of the property (see Consultation Paper, para 15.65). For a summary of some of the arguments about what amounts to an onerous ground rent, see Leasehold Reform, Report of the Housing, Communities and Local Government Committee (March 2019) HC 1468, paras 88 to 91, available at https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/1468/1468.pdf. The Tribunal’s decision in Roberts v Fernandez (LRA/14/2014) suggested that a ground rent above 0.21% of the property value was onerous. Ground rents which double frequently (e.g. every 10 years) are generally regarded as being onerous, and have been subject to Government intervention: see https://www.gov.uk/government/publications/leaseholder-pledge/public-pledge-for-leaseholders.

76

In relation to one of the flats in Mundy, for instance, over which a lease was granted in 1974, a deduction of £10,424 was made to the value of the lease to reflect the fact that it contained an onerous ground rent: Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 223 (LC) at [155]. And in Millard Investments Ltd v Cadogan (LON/LVT/1756/04), a lease granted in 1983 provided for the rent to be reviewed at a future date to 1% of the freehold value of the property.

77

See paras 2.22 onwards and 2.48 onwards.

78

Enfranchisement CP, para 14.91.

79

Majority-leaseholder-owned companies are in a slightly different category from other kinds of landlord because, in some circumstances, their interests may more closely align with the interests of the leaseholders. But that will often not be the case, for example, where an enfranchising leaseholder is not a member of the company (because he or she did not participate in the collective enfranchisement that led to the company acquiring the freehold).

80

We discuss the option of differential pricing for different types of leaseholder in para 6.180 onwards below.

“As an example, one of the (non-participating) apartments on our estate has a capital value of £600,000 and a current ground rent of £200 per annum, increasing to £600 per annum in December at the first review. Using the rates which applied to our enfranchisement (and which

81

Leaseholders of flats have a “right of first refusal” under the Landlord and Tenant Act 1987 if the landlord sells the freehold. However, the right is very easily avoided by landlords, and there is no equivalent right for leaseholders of houses.

82

Commonhold, which enables freehold ownership of flats, is currently rarely available. It is the subject of a separate Law Commission project. We published our consultation paper, Reinvigorating commonhold: the alternative to leasehold ownership (2018) Law Commission Consultation Paper No 241, on 10 December 2018 and will publish our report later this year.

83

By the Leasehold Reform, Housing and Urban Development Act 1993, and the Commonhold and Leasehold Reform Act 2002.

84

Termination of Tenancies for Tenant Default (2006) Law Com No 303.

85

We explain in para 2.61 that a different methodology could be adopted in order to calculate the market value. If the conventional valuation methodology were mandated in all cases, then it would mean that an enfranchisement premium could not be set (for example) by reference to a recent local comparable transaction, since that would be an alternative means of assessing the market value. However, going through the conventional valuation methodology should logically produce broadly the same result.

Dean Buckner, in a response supported by the Leasehold Knowledge Partnership and the cochairs of the All-Party Parliamentary Group on Leasehold and Commonhold Reform, said that:

“The concept of marriage value, namely the supposed additional value an interest in land gains when the lessor’s and the lessee’s separate interests are married into single ownership, is economically incoherent. The implied market value of the two interests (leasehold and freehold) is equal to the implied market value of the interest with vacant possession.

A single deferment rate therefore determines the value of both freehold and leasehold interests. The deferment rate is defined as the discount rate that when applied the freehold price of vacant possession results in the price of deferred possession or freehold price, and which by implication defines the price of the corresponding leasehold value. Using a single rate for both freehold and leasehold, i.e. by assuming that marriage value is already embedded in the price of both, simplifies the cost of leasehold extension and enfranchisement.

86

References to “PCL” are to “Prime Central London”: see Glossary.

Comments on deferment rates

“If a deferment rate has to be prescribed it should be done so to reduce the payments due by leaseholders as this is clearly in the public interest. We suggest 6% in PCL and 6.5% for the rest of the country”. (Leasehold Knowledge Partnership, a leaseholder representative body)

“We believe 10% is the correct figure”. (Millbrooke Court Residents Association, a leaseholder representative body)

“Where the leases are long, say, over 20 years, the rates could be prescribed at, say, 4.75% for houses and 5% for flats. One proposal is that flats and houses should be treated the same

87

St Emmanuel House (Freehold) Ltd v Berkeley Seventy-Six Ltd CHI/21UC/OCE/2017/0025. See also para

6.63 below.

88

The Trustees of the Sloane Stanley Estate v Mundy [2016] UKUT 223 (LC), at [154].

89

See para 6.10 below.

90

Unless the 80-year cut-off for marriage value is removed (see Sub-option 5 in Chapter 6), in which case Schemes 1, 2 and 3 would become relevant for all leaseholders, regardless of the unexpired term of their lease.

91

Enfranchisement CP, paras 15.41 to 15.57.

92

See, for example, the proposal put forward in a Private Member’s Bill by Justin Madders MP: Hansard (HC), 7 November 2017, vol 630, col 1384.

93

See further Enfranchisement CP, para 15.53 onwards.

94

Rentcharges (Redemption Price) (England) Regulations 2016 (SI 2016 No 870).

95

  82 Portland Place (Freehold) Ltd v Howard de Walden Estates Ltd [2014] UKUT 0133 (LC).

96

We give two examples in the Enfranchisement CP, para 15.51.

97

Long Leases (Scotland) Act 2012, s 47.

98

The “over 30 not over 30.5 year” National Loans Fund interest rate, published by the UK Debt Management Office.

99

Enfranchisement CP, para 15.53.

100

Para 5.125 onwards.

101

Enfranchisement CP, para 15.55 onwards.

102

See para 7.15 below where we explain that disputes about the FHVP value of a property will often have little bearing on the enfranchisement premium.

103

Para 5.135.

104

We referred to the fact that an investor may pay hope value (Consultation Paper, footnote 1375), but did not present as an option an approach whereby the leaseholder pays hope value but not marriage value.

105

International Valuation Standards 2017 (IVS 2017), para 30, published by the International Valuation Standards Council (IVSC), an independent, not-for-profit organisation that acts as the global standard setter for valuation practice and the valuation profession. The IVSC encourages the adoption of the International Valuation Standards across the globe so as to underpin consistency, transparency and confidence in valuations worldwide.

106

Which is how we suggest that the assumption could be framed: see Sub-option 6 in Chapter 6.

107

See Counsel’s Opinion in para 5.108 below, where she comments: “The risk of a Court finding that [Scheme

1] violates A1P1 would also be reduced if the option includes development or additional value (albeit that any such value would also be assessed on the assumption that the leaseholder was not and would never be in the market).” More generally, adopting a coherent basis for the calculation of enfranchisement premiums is more likely comply with A1P1 in so far as A1P1 requires reforms to achieve their purposes in a rational and coherent way.

108

Assuming that hope value is assessed at 10% of marriage value.

109

These calculations do not take into account any other reforms which, combined with Schemes 1, 2 or 3, would reduce the premium.

110

It is derived from the decision in Pointe Gourde Quarrying and Transport Co v Sub-Intendent of Crown Lands [1947] AC 565.

5.102 There are competing arguments as to whether the leaseholder, as special purchaser, should be ignored. Landlords would say that enfranchisement is common and the necessity to enfranchise ought to be well-known to leaseholders, so it is acceptable for their presence in the market (and therefore the payment of marriage value) to be taken into account. On the other hand, leaseholders would say that the very fact that enfranchisement is necessary and common provides even more support for a regime under which only the landlord’s loss, rather than the landlord’s profit, is to be paid. Leaseholders are, in effect, being penalised for enfranchising; they are forced to enfranchise because their lease is running down, but at the same time they have to pay more than any other person would have to pay for the freehold. Leaseholders would also say that Scheme 1 still produces a market value because there is no guarantee that a leaseholder will ever enfranchise - the lease might just run its course.

5.103 The assumption in Scheme 1:

(1) would reduce premiums where the current lease has 80 years or less left to run and the leaseholder seeks:

(a) to extend it;

(b) (if a house, falling outside the original valuation basis) to purchase the freehold individually; or

(c) (if a flat) to participate in a collective enfranchisement.

(2) would reduce premiums on a collective enfranchisement, where the leases of any of the non-participating leaseholders have 80 years or less left to run and the participating leaseholders need to pay hope value in respect of them.

(3) would (on its own) have no effect on premiums where the current lease has more than 80 years left to run, since marriage value is not payable in any event by reason of the 80-year cut-off (see further paragraph 6.210 onwards below), but Scheme 1 could be used to reduce premiums for these leaseholders if combined with other reforms from Chapter 6.

111

Para 6.115.

112

Paras 7.36 to 7.37.

113

Paras 5.11 and 5.28.

114

Para 5.13 onwards.

115

Para 5.34 onwards.

116

And also to require the conventional valuation methodology to be used in all cases (see Option 4 above; para 5.124).

117

It would be necessary to establish what that multiplier should be, and the multiplier could be decided in the same way that a prescribed capitalisation could be decided. The use of a multiplier is more likely to be compatible with A1P1 if it is based on a capitalisation rate which is itself linked to the market value of the asset. By contrast, selecting a multiplier without any basis for doing so is less likely to be compatible with A1P1.

118

Enfranchisement CP, para 15.29.

119

We explained in para 5.130 above that a percentage of freehold value could not be used as a mechanism to implement Schemes 1, 2 or 3. But in this different context of devising a stand-alone regime for straightforward or low value claims (in the absence of other reforms), it is possible that a limited category of leases could be identified for which a formula based on a percentage of freehold value could be appropriate.

120

We explain at para 3.52 why 0.1% is generally considered as an appropriate level to identify onerous ground rents. See also n 57 above.

121

Relativity is not, strictly speaking, a “rate”, but we use that term as shorthand to cover capitalisation rates, deferment rates and relativity (or the no-Act deduction).

122

See paras 4.8 to 4.10 and Option 4 (para 5.124).

123

At the rates used in Figure 9 above (para 2.54).

124

At the level set out in Figure 9 above (para 2.54).

125

See para 6.19 above.

126

See para 3.29 onwards above.

127

See para 3.35 onwards above.

128

See paras 3.13 and 3.31 above.

129

See para 3.48 onwards above.

130

See para 3.50 onwards above.

131

See para 3.37 onwards above.

132

That is, within the dotted line in Fig 26 above.

133

Fig 26 shows that these additional factors can result in a premium that is higher or lower than Range A. As we have explained in Chapters 1 and 3, it is generally the leaseholder who is in the weaker bargaining position, and so these additional factors will generally result in premiums that are higher than Range A. But that is not always the case; for example, if the landlord of a block of flats is a group of leaseholders, then a large buy-to-let investor who owns the long leases of multiple flats in the block might be in a stronger bargaining position than the landlord. In those circumstances, the additional factors might result in a premium that is lower than Range A.

134

Enfranchisement CP, para 15.71.

135

By which we mean responses that addressed and answered this question.

136

St Emmanuel House (Freehold) Ltd v Berkeley Seventy-Six Ltd CHI/21UC/OCE/2017/0025.

137

Some of these views were expressed in the context of opposition to prescription; for example, some consultees opposed prescription because they said that different rent review provisions in leases justified different capitalisation rates.

138

If rents are to be capped at 0.1% of the freehold value (see further paragraph 6.119 onwards below), then the need for - and possible range of - different rates reduces.

139

Enfranchisement CP, para 15.75.

140

Earl Cadogan v Sportelli [2010] 1 AC 226.

“The scales are so heavily tipped in favour of the freeholder, who has the deep pockets to employ top barristers, economists, and others to set case law for low deferment rates to ensure high enfranchisement premiums. Leaseholders really have no defence against this.” (National Leasehold Campaign, a leaseholder representative body)

Sportelli set the deferment rate but based on existing leasehold assumptions which make it unacceptable to leaseholders. It is based on constructed nonsense. Reversion is a 14th century legal construct which has earned freeholders many billions of pounds over the years. it needs to be abolished completely. Reversion is based on a land owner’s perpetual rights to own the land and do with it as they please. We freely accept that land owner’s rights have been altered in nearly all other aspects like the type of buildings that can be erected, environmental rights, fracking rights, the rights of access in public buildings and height and depth a land owner continues to exert their ownership rights. Reversion needs to be ended. If a deferment rate has to be prescribed it should be done so to reduce the payments due by

141

Enfranchisement CP, para 15.79.

142

The Leasehold Knowledge Partnership and National Leasehold Campaign thought that marriage value should not be payable be leaseholders at all, in which case it would not be necessary to prescribe relativity.

143

RICS Research Report, Leasehold Reform: Graphs of Relativity (Oct 2009).

144

Graph of unenfranchiseable relativities: see para 2.44 onwards and Figs 6 and 7 above.

145

Graphs of enfranchiseable relativities and unenfranchiseable relativities; see

https://www.savills.co.uk/research_articles/229130/203902-0.

146

Gerald Eve and Grosvenor.

147

Created by s 10 of the Civil Liability Act 2018.

148

Damages Act 1996, sch A1, para 4. Issues which the Lord Chancellor must take into account include, for example, the actual returns that are available to investors, which is one reason why a Call for Evidence was held before the first review.

149

Damages Act 1996, s A1(2).

150

We explain in para 9.97 below that data about average property prices is not currently collected at this level of detail.

151

Some investors might say that they prefer ground rents that increase in line with the Retail Prices Index because they are less politically controversial. Ground rents that double reach extremely high levels, which are not affordable for ordinary leaseholders, and are particularly politically controversial. Doubling ground rents might therefore be seen by investors as more susceptible to potential Government intervention, and hence more risky than a moderate ground rent.

152

See https://www.nationwide-intermediary.co.uk/lending-criteria/new-build.

153

Enfranchisement CP, para 4.46.

154

Enfranchisement CP, paras 15.61 to 15.66.

155

Enfranchisement CP, Fig 22.

156

Enfranchisement CP, para 15.67.

157

See, for example, Leasehold Reform, Report of the Housing, Communities and Local Government Committee (March 2019) HC 1468, paras 88 to 91, available at

https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/1468/1468.pdf.

158

See para 1.78.

159

See para 3.94 onwards.

160

See https://www.gov.uk/government/publications/leaseholder-pledge/public-pledge-for-leaseholders.

161

In this context, we use “premium” to refer to the price paid by the leaseholder to purchase the lease. See the Glossary.

162

We have of course framed the cap as a cap on ground rents, designed to minimise the impact of those which are onerous. A “market rent” payable under a no-premium lease would not normally be considered onerous, and indeed would tend to be referred to simply as “rent” rather than as a ground rent. But “ground rent” is not a term of art and does not appear in the enfranchisement valuation provisions at present - in fact it is rent in general which must be factored into the calculation of the premium. We do not consider that it would be advisable to try to devise a means of distinguishing between “ground rents” and “market rents”. Thus, subject to what we suggest in para 6.151 below, the rent payable under this kind of lease would be subject to any cap in the same way as a normal ground rent.

163

That is, what would be market value for the same lease but without the high ground rent provisions.

164

For example, the landlord may grant a lease at a reduced premium, but the lease is then subsequently assigned from Leaseholder A to Leaseholder B, with Leaseholder B paying a full premium to Leaseholder A.

165

Enfranchisement CP, para 15.87 onwards.

166

Enfranchisement CP, para 15.91.

167

Damian Greenish, solicitor.

In my view, enabling leaseholders to elect to take a restriction on development, so as to avoid paying development value, is likely to be compatible with A1P1. This option does not deprive landlords of an entitlement; it simply removes the conditions in which an entitlement would arise. If the enfranchising leaseholders subsequently decide that they want to develop, this option would ensure that landlords receive a portion of the profit. Provided the landlords’ share of any subsequent profit is no less than the amount the landlords would have received by way of development value at the date of the

168

Enfranchisement CP, para 8.185 onwards, and para 2.24.

169

Enfranchisement CP, para 15.79(5).

170

Many leaseholders said they were in favour of removing the cut-off, but it was clear from the rest of their responses that they thought the effect would be to reduce premiums for leases with 80 years or less unexpired, rather than to increase them for leases with more than 80 years unexpired.

171

If the value of the term (ie the capitalised ground rent) is low.

172

Removing the 80-year cut-off would have no effect on leaseholders whose leases have 80 years or less left to run.

173

If House 2 had 81 years left to run, and marriage value was payable, the premium would be £1,816 for the term, £5,827 for the reversion, and £4,929 marriage value, giving a total premium of £12,572.

174

Enfranchisement CP, para 14.44.

175

We set out a full list of common categories of dispute in the Enfranchisement CP, para 14.98(4).

176

Enfranchisement CP, para 15.86.

“This discount should be removed. In the enfranchisement cases I deal with each year this issue only rarely forms part of the calculation; it is subjective and therefore difficult to quantify and actually only serves to complicate the process. If the government's aim is to simplify enfranchisement and make it quicker and easier, this is something that should not be retained.” (Midland Valuations Limited, surveyors)

“We consider that the discount for leaseholders' improvements should not be retained because it will simplify the process and provide more certainty for leaseholders if the valuation is based

177

Imposing such a limit would, as is explained by Philip Rainey QC and Damian Greenish in their responses, directly impact s 3(3) of the 1967 Act (the “chaining” provision referred to above). This is explored further below.

178

In s 3(3) of the 1967 Act.

179

Part I of the Landlord and Tenant Act 1954 and sch 10 to the Local Government and Housing Act 1989 respectively, depending on when the long lease was granted and when it expires or expired.

180

For a more complete discussion of these and other issues, see Enfranchisement CP, paras 14.40 to 14.43, and 14.98(3).

181

Enfranchisement CP, para 15.83.

182

Enfranchisement CP, para 15.104 and Fig 31.

183

Assuming that the conventional valuation methodology is required to be used: see paragraph 5.124 and Option 4 above.

184

See Ch 2.

185

It may be necessary to provide various categories of different types of rent review provision, if different capitalisation rates are prescribed for different types of provision. There is a wide range of different types of rent review provision. We discuss some at para 2.17 onwards above, but any categories would need to allow for nuanced examples - for example, some reviews are to a percentage of the FHVP value at a future date, and some give two alternative options, such as the greater of RPI or 0.1% of the value of the property. If a cap on the treatment of ground rent is introduced (see Sub-option 2 in Ch 6), then the number of relevant categories would be reduced.

186

See n 189 above.

187

That is, a lease extension or an individual freehold acquisition claim where there is no additional value or other loss.

188

Para 2.43.

189

If the lease has 80 years or less remaining, or if the 80-year cut-off is removed: see Sub-option 6 in Chapter

6.

190

See para 6.19.

191

Including, among others, the Income Tax Act 2017, the Income Tax (Trading and Other Income) Act 2005, and the Income Tax (Earnings and Pensions) Act 2003.

192

An online tax calculator is provided by HMRC, but there are also other tax calculators supplied by private organisations. We discuss below whether an online calculator for enfranchisement premiums should be provided by Government or left to private providers in the market.

193

There were also options to facilitate other proposals made by Rothesay Life for reforming valuation (see para 4.15).

194

Enfranchisement CP, para 4.46.

195

See para 2.61(2).

196

[2011] UKUT 415 (LC), [2012] RVR 92.

197

[2010] UKUT 427 (LC), [2011] 1 EGLR 155.

198

Para 6.115.

199

Para 5.124.

200

Where the purchase price for the lease was not reduced to reflect the ground rent obligation.

201

Pursuant to s 300 Housing and Regeneration Act 2008.

202

Hague on Leasehold Enfranchisement (6th ed), para 1-08.

203

As well as a third assumption, that the sale is subject to any rentcharge to which the freehold is subject.

204

We explain how a modern ground rent is calculated in para 9.15 below.

205

The modern ground rent is calculated under s 15(2) 1967 Act, which requires at s 15(2)(a) that ‘the rent shall be a ground rent in the sense that it shall represent the letting value of the site (without including anything for the value of the buildings on the site)...’

206

1967 Act, s 15(2).

207

See para 2.12 onwards and 2.28 onwards above.

“Section 9(1) is an anomaly and should be abolished in my view. During a transitional period of say 10 years it should be possible to make a “legacy” 9(1) claim if all the old qualifying criteria (including that the property qualifies as a house under the old law) are met.” (Philip Rainey QC, barrister)

“The section 9(1) valuation basis is and has always been an anomaly. We consider that it should be repealed, and that a sunset provision (applicable for say 5/10 years) would be appropriate.” (Boodle Hatfield LLP, solicitors)

“These above all other aspects of leasehold legislation, are entirely artificial. So, for example, to qualify for section 9(1), you need to check the rateable value and many councils no longer keep those records. They then depend on valuing a site, which is more or less unknown in Central London, and then adopting a yield on a site, which is another unknown factor, and then applying something called the Haresign addition. Each stage relies on an artificial assumption unrelated to the real world. These section 9(1) claims should be abolished.” (Church Commissioners for England)

“...section 9(1) is inequitable to the landlord. Clearly it does not provide sufficient compensation to the landlord. The only excuse for its retention is that its abolition would lead to increased premiums for some house leaseholders. That is not a sufficient or equitable reason. It is nonsensical to continue with a valuation method that is acknowledged to be based on an incorrect fiction and an unrealistic assumption. Clearly the landlord is not receiving sufficient compensation - one third of the true value is clearly in contravention of A1P1. Therefore section 9(1) needs to be abandoned and one method for all houses and flats incorporated.” (Anthony Shamash, a commercial investor)

“In practice [the valuation methodology in section 9(1)] is not regarded by the many practitioners in the field as being in any way complicated or requiring simplification.” (Geraint Evans, a surveyor)

“The section 9(1) valuation methodology should be retained for so long as there remain leasehold houses that qualify under this basis of valuation... In general and particularly from the valuer’s point of view the current methodology is not particularly complex and quite routine for the experienced valuer dealing with leasehold reform valuations.” (Leasehold Forum, a body representing enfranchisement professionals)

“I do not see the section 9(1) methodology as being particularly complex and has been applied for over 50 years.” (Nesbitt and Co, surveyors)

208

That is the case not only under the existing mainstream valuation basis, but under each of the schemes we have put forward for reform. Premiums would increase under each of Schemes 1, 2 and 3 (in Chapter 6) since those schemes all involve premiums including a sum to reflect the value of “the term and reversion”, whereas section 9(1) produces lower premiums than that (see para 9.8).

209

1967 Act, s 1(7).

210

Department for Communities and Local Government (now Ministry of Housing, Communities and Local

Government), Consultation on updating leasehold value limits (2011) available at

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/8485/192

2040.pdf

211

James v United Kingdom (1986) 8 EHRR 123.

212

See eg Ministry of Housing, Communities and Local Government, Implementing reforms to the leasehold system in England: Summary of consultation responses and Government response (2019) available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/812827/1 90626_Consultation_Government_Response.pdf.

213

In other words (aside from various categories of exemptions, such as National Trust land, shared ownership properties and retirement properties) when it comes into force the ban on the granting of new long leases of houses will apply to:

(a) any land held only as freehold (ie with no leasehold also on the title), regardless of when the freehold title was acquired; and

(b) any leasehold land acquired from 22 December 2017 onwards (but not leasehold land acquired prior to that date).

See para 2.60, Ministry of Housing, Communities and Local Government, Implementing reforms to the leasehold system in England: Summary of consultation responses and Government response (2019).

214

Para 10.9.

215

Para 10.18 and 10.19.

216

Para 10.9.

217

Para 10.4.

218

Existing lease value is based on guidance in Contractreal Ltd v Smith [2017] UKUT 178 (LC), at [70], and Earl Cadogan v Erkman [2011] UKUT 90 (LC).

219

Existing lease value is based on the Gerald Eve 1996 graph of unenfrachiseable relativities, available at www.geraldeve.com/services/leasehold-enfranchisement.

220

Existing lease value is based on guidance in Contractreal Ltd v Smith [2017] UKUT 178 (LC), at [70], and Earl Cadogan v Erkman [2011] UKUT 90 (LC). If the lease was under 80 years, and marriage value payable, it would be subject to an onerous ground rent adjustment. See further n 44 above.

221

Existing lease value is based on guidance in Contractreal Ltd v Smith [2017] UKUT 178 (LC), at [70], and Earl Cadogan v Erkman [2011] UKUT 90 (LC). If the lease was under 80 years, and marriage value payable, it would be subject to an onerous ground rent adjustment. See further n 44 above.


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