Law Commission valuation proposals for leasehold enfranchisement: A fair deal?

The Law Commission was tasked by the Government with examining the options to reduce the premiums payable by leaseholders in England and Wales seeking statutory lease extensions or making claims to collectively acquire the freehold of their buildings and launched a consultation in September 2018 which closed in January 2019. The valuation aspects of the consultation appeared to be the most contentious leading to much debate between landlords and tenants.

The Law Commission has today published its report and its proposals do not, at first sight, appear to be as radical as anticipated.

The report headlines are:

1. The Law Commission obtained Counsel’s Opinion on the Human Rights aspects which confirmed that the requirement for leaseholders to pay a premium to extend their lease or purchase the freehold does not violate the European Convention on Human Rights (“ECHR”). However, Counsel concluded that the right to compulsorily acquire the freehold or extend the lease of a house or flat interferes with a landlord’s property rights under the ECHR and will only be lawful if a landlord is sufficiently compensated to justify interference with those property rights. 

2. Three schemes of valuation are proposed (which are proposed by the Law Commission on the basis that they consider the schemes to sufficiently compensate the landlord):

• Scheme 1 - assumes that the leaseholder is never in the market and there is no marriage or hope value payable;
• Scheme 2 - assumes that the leaseholder may be in the market in the future so hope but not marriage value is payable; and
• Scheme 3 (the current system) - assumes the leaseholder is in the market and marriage value is payable.

3. There is then a menu of sub-proposals which the Law Commission invites the Government to consider and which could be added to any of the three schemes:

• A proposal to fix the rates for elements of the calculation such as the capitalisation rate, deferment rate and relativity rate;
• Capping the ground rents to be taken into account when valuing the term;
• Providing a mechanism for leaseholders to agree not to develop the building in the future so that they do not have to pay development value with a proviso that the former landlord would receive development value if there were to be development in the future;
• Considering applying different rules to owner-occupiers to pay reduced premiums but not commercial investors.

Ultimately, it will be for the Government and Parliament to decide which of the schemes and menu of sub-proposals will be adopted and to determine other details such as how the various rates would be fixed and at what levels. Only at that stage will it be possible to assess the full impact of the reforms, but what is confirmed by the report is that the final valuation method must sufficiently compensate the landlord for interference with its property rights.

The Law Commission is also reviewing the processes of enfranchisement, right to manage and commonhold and reports on those areas are expected in Spring 2020.

This article was written by Laura Bushaway. For more information please contact Laura via laura.bushaway@crsblaw.com or on +44 (0)20 7438 2261.