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Lease Extension And Freehold Enfranchisement Claims – The Valuation Perspective

leasehold reform

Lease Extension And Freehold Enfranchisement Claims – The Valuation Perspective

The new Leasehold and Freehold Reform Act 2024 was given Royal Assent on 24th May 2024. At face value, it looks good for leaseholders who own short and medium-length leases and bad for freeholders, however, to what extent, we do not yet know.

So, what is in and what is out?

The controversial proposal to cap ground rents payable in existing leases at £250pa, or reduce them to zero, has been scrapped, however all other valuation proposals have made it through, as follows:

  1. Lease extensions to be to 990 years rather than just 90 years
  2. Two-year ownership rule to qualify to extend a lease removed
  3. Increasing the commercial property element from 25% to 50% of floor area to allow a building to qualify for enfranchisement. This will open up a huge number of mixed-use buildings for enfranchisement
  4. In collective claims, freeholders can be forced to retain any non-participant flats or commercial areas. This means it will now be possible for leaseholders to mount a claim, when they were previously excluded, provided of course they make up at least 50% of the number of flats, as before
  5. Freeholders to pay their own costs except in low-value claims
  6. Ground rent may be capped at 0.1% of the freehold value of the property for the purpose of rent capitalisation in a lease extension or enfranchisement claim unless the freeholder can show the price paid for the lease initially was lower than it would otherwise been, because of the ground rent (to be clarified).
  7. Marriage value no longer has to be paid, with the leaseholder benefiting from 100% of the marriage value
  8. The Minister to prescribe deferment and capitalisation rates, however we do not know how this will be done, except the Minister in the House of Lords said they would be set at market rates, to be reviewed by regulation every 5-10 years2

It is these last three points that are the most significant. While the removal of marriage value will reduce the price to extend or enfranchise any leases under 80 years, any lowering of the deferment or capitalisation rate may then increase the price – and for leases with over 80 years it could end up being more expensive.

The most important factor now is what deferment rate will be determined, with a possible move away from the 2007 adopted Sportelli rates of 5%/4.75% for flats and houses respectively. The question is what is the market rate? This is a contentious issue, not to be covered here in this short note – but let’s just say several experts consider the market rate is probably less than 5%/4.75%, with one expert in the Bill Committee on 26th January 2024 (Professor Tim Leunig, Economist and Government advisor), saying the market rate should be 3.5%.

For leases with less than 80 years unexpired (where marriage value was previously payable), if the deferment rate is set at 3.5% it should cancel out the saving in the premium created by the abolition of marriage value, and so the status quo remains. However, a deferment rate higher than 3.5%, say 4%, will result in cheaper premiums.

For leases above 80 years (where marriage value was never applicable) premiums will be more expensive if deferment rates drop below current levels.

So when might this all come into force? 

Leasehold Reform News reports that some provisions will be in force within two months, so 24th July 2024, but…. ‘As to the other ‘meatier’ parts of the Act, these are subject to commencement under statutory instruments (‘SI’) – See section 123(3). These SIs need to be made by the Secretary of State and we also know that in order to be effective the valuation changes will need various matters such as the relevant rates to be prescribed. These will need to be in place before the valuation changes can be enacted’

If you have any additional questions or would like more information, please contact James White at Fanshawe White.

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