Government proposes reforms to leasehold enfranchisement process in England and Wales

The government plans to introduce legislation in the current session of parliament which could bring major changes to the leasehold enfranchisement regime in England and Wales. The  proposals as tabled do look extremely favourable to leaseholders, but there is a long way to go before these proposals pass into legislation and caution should be applied when making decisions based on proposed changes which are still at a very early stage.

Under the proposed changes, qualifying leaseholders of both houses and flats will be entitled to new extended leases of 990 years at a zero ground rent. Under current legislation, leaseholders of flats are entitled to a new lease of 90 years plus the unexpired term of the current lease at a peppercorn ground rent, whilst leaseholders of houses are entitled to 50 years plus the unexpired term.

Whilst the existing peppercorn ground rents are already equivalent to a zero rent, the vastly increased length of new leases which are proposed under the prospective legislation is significant because it means that a lease need only be extended once in a leaseholder’s life time in order to maximise the value of the interest.

In addition, the government also promises that the process will become more straightforward and, crucially, cheaper. There are plans to introduce an online calculator through which leaseholders will be able to find out how much it will cost them to either extend their leases or purchase their freehold, before they begin the process.

Perhaps most significantly of all, the plans would see the abolition of the notorious “Marriage Value.” Marriage Value is the uplift in the market value of the property which an extended lease bestows. Given that this uplift only occurs after a landlord has granted an extended lease, current legislation dictates that a leaseholder and their freeholder must share the benefit of this uplift when extensions of leases are granted with less than 80 years remaining on their current term.

The determination of the landlord’s share of the Marriage Value in these circumstances is a major part of negotiations on the premium payable by a leaseholder and Marriage Value itself is a major contributing factor to the cost of the extension.

As such, if the concept of Marriage Value is to be abolished, it should become more straightforward to agree the premium payable for an extended lease and the premium itself should be significantly lower.

The proposals as they currently stand seem highly favourable to leaseholders and highly detrimental to landlords and freeholders. As such, we have already seen a temptation amongst leaseholders to either abandon enfranchisement claims already under way or to hold back from serving notices to commence prospective claims, in the hope that they may be able to get a much better deal in the not too distant future.

Whilst this is a decision for each individual leaseholder to take, we urge caution in waiting for the implementation of the proposed reforms, for a number of reasons.

Firstly, substantial leasehold and commonhold reform has long been mooted but rarely delivered on. The vicissitudes of politics and the changing priorities of different governments and different politicians have often meant that promises of reform by various ministers have not been followed through by their successors.

Secondly, these proposals will, of course, have to pass through parliament and undergo all of the scrutiny that entails. We do not know what form any eventual legislation will take or what resemblance it will ultimately bear to the current proposals. There is every chance that the final legislation could be very different from the proposals currently tabled.

Finally, these proposals can expect to receive a lot of opposition and resistance from those who stand to lose the most if they are passed into law. Some of the country’s largest investment and pensions funds have substantial amounts tied up in ground rent investments. If marriage value is abolished and is not replaced with something equivalent, billions could be wiped off those investments in one fell swoop. There is likely to be lobbying against the proposals and possible even legal challenges if they are introduced in their current form.

Michael Adamson

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The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.