Proposed Leasehold & Freehold Bill Valuation proposals – a viewpoint.

Whenever a Chancellor of the Exchequer delivers the annual budget, it is often best to avoid the excitement of the day and look at the detail the following morning when the dust has settled.  The same could be said of the recent King’s Speech when trying to work out the Government’s intentions to reform leasehold and freehold valuations.  Frustratingly, several days later, we are little further forward in having a clear idea of what the Government proposes.

For several months, the Government has said it wants to ‘ban’ leasehold, reintroduce commonhold, and make it cheaper and easier for leaseholders to extend their leases and buy their freeholds by fixing capitalisation and deferment rates and ‘abolishing’ marriage value.

The King’s Speech, and the accompanying Government briefing statement on leasehold reform issued the same day, had been long awaited and was trailed by the Government to the Sunday Times a few weeks earlier confirming a number of significant proposals.  On the day itself some of these proposals were mentioned in the briefing paper, but the big-ticket items, commonhold, fixing rates and abolishing marriage value were absent.  So, are these going to be introduced or not? 

Let’s start at what we expect to be introduced:

Removal of the two-year ownership rule for lease extension applications: relatively uncontroversial and this is expected to be introduced

Lease extension term to be increased from 90 years to 99 years: again, relatively uncontroversial and expected to be introduced

Increasing the 25% non-residential limit on buildings to 50%: it is slightly odd this proposal has been set out in the speech when we are still awaiting the results of a Government consultation.  But it’s in the King’s Speech, so again, we expect it to be introduced.

What appears less likely to be introduced:

Capping or abolishing ground rent in existing leases

Very controversial. There has been previous talk of capping ground rents to 0.1% of a property’s value but the briefing statement’s announcement of a possible total abolition of ground rents (one of several options) does come as a surprise. The Government has just launched a consultation on ground rents, so we will see the results, maybe sometime in the new year. 

Abolishing marriage value

Again, very controversial. Abolishing marriage value was the big-ticket item, and depending on the lease length remaining, abolishing marriage value can substantially reduce the cost to extend a lease or buy the freehold.  Its omission from the narrative of the Government’s statement is a surprise.  There is a very subtle hint at the end of the Government statement where there is a flat lease extension illustration showing the saving the proposed changes would make to a flat lease extension calculation, and the numbers quoted in the illustration do appear to omit any marriage value.  Many commentators read this as a commitment to marriage value being abolished.  However, the illustration in the statement appears very clumsy, seemingly lifted from the Law Commission’s consultation on houses – not on flats.  Possibly too much is being read into this illustration.  If the Government’s intention was to abolish marriage value, then why doesn’t it simply say so in the statement?  It’s surely far too important a change to not be mentioned.

Removing freeholder’s recoverable costs

This has been proposed previously, but again no mention in the statement, although a very subtle suggestion in the illustration at the end of the statement, but as with marriage value, little perhaps should be read into the illustration.  If the Government wants to make the change, why didn’t it say so?

Prescribing rates

This is the fixing of the deferment rate and (if applicable to ground rent) the capitalisation rate.  Very controversial.  Again, this has been trailed by the government, with the introduction of a simple online calculator.  No mention of this in the statement, and so possibly unlikely to be introduced.

Commonhold and possibly ‘banning’ leasehold

While this is the Government’s long-term objective, possibly to ban leasehold in new developments, there was no mention of commonhold in the statement.  This can probably be parked for the moment.

So how much of all this can we expect to be imminent?  At a meeting following the King’s Speech, the Housing Minister is reported to have said that the intention to ban marriage value is in place, but accepted there was the possibility of a legal challenge it may shy away from. 

It has to be expected that if the Government introduces some of the controversial proposals, there will be a legal challenge by freeholders.  Freeholders regard many of the proposals as too confiscatory. 

Article 1 of the Human Rights Act says a legal person has the right to “peaceful enjoyment of their possessions’ such as ‘land, houses, money” etc.  It then goes on to say, “if a person’s property is taken away, they should be entitled to compensation.”  While the system that has been in place since 1993 complies with Article 1, it is difficult to see how the removal of marriage value, removal of ground rent, and possibly prescription of rates at anything other than market value, is anything other than confiscation of a freeholder’s property rights without compensation.

So are we expecting changes?  The answer has to be that we expect some – but nothing imminently that is going to bring about a significant reduction to a lease extension or freehold valuation – and all not without a lengthy battle.