The Government has taken significant steps to reform leasehold ownership of residential property with the introduction of the Leasehold Reform (Ground Rent) Act, which came into force on 30 June 2022 and effectively abolished ground rents for brand new leases of houses and flats.
Prior to the introduction of the Act, Lord Greenhalgh (then Minister of State at the Department for Levelling Up, Housing and Communities) wrote to ALEP, reiterating the Government’s commitment to introduce further reform in the field of enfranchisement. His letter provided an update on the scope for further reforms and the possible timing of these in the second session of this Parliament, with changes to the valuation system set to be the focus of the next phase of reform.
However, the announcement of Boris Johnson’s resignation as Prime Minister was preceded by a raft of ministerial resignations, and Lord Greenhalgh is now no longer a government minister. Those with an interest in the sector - including leaseholders, freeholders and professionals involved in leasehold enfranchisement - are now left to ponder what the next Prime Minister’s attitude to leasehold reform will be and whether the same appetite for change will be evident.
The Government is currently in a state of flux; Marcus Jones has been appointed as the Junior Housing Minister, with Greg Clarke now serving as the new Secretary of State for Levelling Up, Housing and Communities and, at the time of writing, no successor has yet been named to Lord Greenhalgh as the Building Safety and Fire minister, a post which includes responsibility for ‘tackling leasehold and freehold abuses.’
It is more than likely that there will be a re-shuffle under the new Prime Minister once they are in post, and so these ministerial appointments may well be subject to further change. For the moment we will have to assume that Government will remain committed to the statements made by Lord Greenhalgh, but that is by no means certain.
Assuming that the Government continues along the path set out by Lord Greenhalgh in his letter to ALEP in June 2022, we can expect to see reforms to the process of valuation. In his letter, Lord Greenhalgh indicated major reforms were to be tabled, most notably the long-promised abolition of marriage value, the launch of an online calculator to help ensure "standardisation and fairness” during the valuation process, and the introduction of 990-year terms for statutory lease extensions.
The abolition of marriage value would represent a big shift in the way that the premium is calculated for those leaseholders with a lease of under 80 years. For flat owners with a short lease (under 80 years), the compensation payable in respect of marriage value can be as much as a third to half of the premium. Clearly, this proposal will be one key strand of the Government’s aim to make the enfranchisement process cheaper for home owners affected in this way.
The ministerial letter also noted (in line with the Law Commission’s Reports and recommendations on this) that reforms to the law on valuation would also have to ensure that ‘sufficient compensation is paid to landlords to reflect their legitimate property interests.’
This in itself raises a number of questions. Firstly, there is no indication of what will constitute ‘sufficient’ compensation in these circumstances, and any new law will clearly have to be set in such as way so as to sit in balance with the Human Rights obligations imposed by Protocol 1, Article 1 of the European Convention on Human Rights. Should freeholders consider that the compensation offered is not sufficient, there could be a legislative challenge on these grounds brought by freeholders. This would lead to a significant delay in the implementation of any reform and, therefore, those with short leases should by no means assume that these changes are in any way ‘imminent’ or a ‘certainty.’
Secondly, once the Government has dealt with marriage value, it remains to be seen whether other elements of the premium calculation, such as the capitalisation rate, or perhaps the deferment rate, will be the next area of debate.
It must be remembered that valuation reforms were initially envisaged earlier in the year, when the UK was not yet facing the twin spectres of soaring inflation and the prospect of higher interest rates. Arguments attacking both the capitalisation rate and the deferment rate would be run on the basis that yield rates from comparable instruments such as bonds have been very low in recent history, and this certainly has been the case over the last 10 to 15 years; a period stretching back to (and before) the decision on deferment rates in Sportelli in 2008.
These arguments may become increasingly appropriate unless the current economic conditions are just a very short term ‘blip’ in the market.
Also on the horizon may be the introduction of a leasehold calculator, with the general aim of ensuring “standardisation and fairness” during valuation. Leasehold valuation is extremely complex, so an online calculator that can reconcile the many elements of the calculation, including with intermediate leasehold interests, stepped rents and minor interests, would be a major feat of engineering. It is yet to be seen whether their aim here would be to apply the ‘calculator’ to all transactions or a specified class of them. Given the complexity, I would suggest that any working model is likely to apply to a specific set of facts (e.g. longer leases and/or values capped at a certain level).
Government will have to grapple with a lot of variables to make the complex valuation equation work properly, and many surveyors doubt that an effective calculator can actually be delivered.
So, where are we? Well, the certainty is that change is coming. We already have the Leasehold Reform (Ground Rent) Act 2022 which restricts rents on voluntary renewal so that they can only remain the same as they were during the old lease term. Practitioner discussion on the implications of this Act has been interesting, with commentators asking whether, for instance, a lease of a part of a property that is not a flat (for example a free-standing lease of a storeroom or a garage) will be caught? The 2022 Act applies a ‘long lease of a single dwelling’ definition so perhaps not, but we may see aspects of the new Act being tested in the courts.
Given that the Government is in a state of flux and with Parliament in summer recess, there will be no further news on leasehold reform until the autumn. How and when DLUHC will seek to move ahead with these proposed changes remains to be seen, but the prospect of further change seems almost inevitable.
| Choose an expert to value your lease extension - ALEP |
How to choose a leasehold legal expert - ALEP |
Legals of buying & selling a home - The Society of Licensed Conveyancers |
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