On the 9 January 2020 the Law Commission published the ‘Report on Options to Reduce the Price Payable’. The report focuses on leasehold enfranchisement; the process by which a Leaseholder exercises their statutory right to extend their lease or purchase the freehold title to their property.
What is the Issue?
Although a leasehold property may increase in value in line with property prices its value also tends to reduce over time as the length of the lease reduces. For some, an extension is necessary to make sure that they remain the owners of the property rather than handing it over to the Freeholder at the end of the lease. For others, they may simply wish to have more control over their home.
The premium (price) payable to the Freeholder ought to reflect the higher value of the Leaseholder’s greater interest in the property and the reduction or loss of the Freeholder’s entitlement of their capital investment and the income from the ground rent and other fees.
Calculating the premium
Valuation is a complex issue and is not readily understandable. The current valuation process follows three general stages:
Stage 1. Each Valuer advises their own client what they should expect to pay or receive. These often produce different figures as each Valuer tries to achieve the best outcome for their own client.
Stage 2. The Valuers negotiate to attempt to agree a premium to be paid. Outcomes will vary depending on the advice, negotiation skills, quality of evidence and expert evidence of each party’s Valuer.
Stage 3. If agreement cannot be reached, a Valuer will provide expert evidence at a Tribunal Hearing, acting independently. A figure will then be determined.
The costs to the Leaseholder will include their own valuation and legal fees, the premium and also the Freeholder’s valuation and non-litigation legal fees. Collectively, these fees can be as high as the premium itself.
Potential for reform
The Law Commission has found that there are technical problems with the present system: it is complex, there can be potentially arbitrary outcomes, inconsistency, unpredictability, uncertainty, undesirable tactical methods used by some Freeholders and an inequality between Freeholder and individual Leaseholders.
What do the Law Commission recommend?
The recommendations attempt to ensure that the cost to existing and future Leaseholders to enfranchise is reduced whilst ensuring that sufficient compensation is paid to the Freeholder to reflect their legitimate property interests.
To do this the Law Commission have devised three Schemes, each of which have various sub-options depending on the particular circumstances.
One of the most notable changes could be that certain ‘rates’ which form part of the present valuation process are prescribed as standard (by a body such as the Royal Institute of Chartered Surveyors) and, if so, the possibility of an online calculator could be realised. The Law Commission state that the online calculator would be simple to use, increase certainty and predictability, remove layers of complexity and reduce scope for dispute. In this case, enfranchisement claims could be dealt with in exactly the same way. Crucially, there would be significant cost savings to the Leaseholder, particularly in professional costs and litigation costs.
This Report raises a number of legal and political questions upon which Parliament must decide. The Law Commission are yet to publish three further reports but there appears to be an appetite for change. Change, however, is unlikely to occur in the immediate future and Leaseholders should consider this when making their own, personal decision to enfranchise.
For a no obligation face to face meeting to discuss extending your lease or buying the freehold to your property please call 01928 735 333.
Article written by Trainee Solicitor, Nicola Jones.