Law Commission Valuation Report Proposals – will anything change?

Current position

One of the big issues with the current legislation is a payment by the leaseholder to the freeholder for “marriage value” . When a leaseholder acquires a freehold, the value of the combined freehold and leasehold interest is greater than the individual interests, the difference between the two being the “marriage value”. When acquiring the freehold, the current legislation requires the  leaseholder to pay half the marriage value to the landlord where the lease has less than 80 years to run. When a leaseholder extends a lease with fewer than 80 years left to run, marriage value is also payable.

There is also “hope value”, a deferred form of marriage value whereby the freehold hopes that they would sell the freehold to the leaseholder in the future, which in turn would realise marriage value. The leaseholder will pay a sum to reflect this “hope”. Hope value is always less than marriage value and the leaseholder would only ever pay one or the other.

Proposed options

The Law Commission has set out three alternative options for a new regime to calculate premiums. Within each option, there are sub-options.  The options are summarised below;

Option 1

The premium will be calculated by reference to term and ground rent only. No marriage value will be payable irrespective of the length of the lease term.

This option is likely to be met with much resistance from freeholders as they would receive a significantly lower payment. There would be a potential for a Human Rights challenge by freeholders as their property rights would be interfered with without any compensation.

Option 2

Hope value would be payable instead of marriage value.

This proposal would reduce the current premiums payable, particularly for leaseholders with short leases.

Option 3

The current position is maintained, but when combined with other reforms, the scheme could still be used to reduce premiums. The other reforms may include a prescriptive premium calculation.

The advantage of this option is that freeholders would not be as disadvantaged as with options 1 and 2, and the introduction of some “tweaks” may make it easier for people to know at the outset how much the purchase of their freehold or their lease extension will cost.

There are also sub-options within the paper which would (or could) reduce premiums.

So what would be the best outcome? 

Inevitably there will be winners and losers in the proposals that the government ultimately decide to adopt and we will be keeping a close eye on what the government decides.

In our view, option 3 would be the best option for both leaseholders and freeholders, giving greater certainty to leaseholders whilst ensuring that freeholders are not deprived of their property interest without proper compensation.

Further Law Commission Reports

The Law Commission is due to shortly publish 3 further reports covering the following;

1. All other aspects of a reformed enfranchisement regime;
2. A report on the project on the right to manage;
3. A report on the commonhold project considering an alternative way of owning property which may avoid the shortcomings of leasehold ownership.

When all the reports are published, we will have a greater idea on how the leasehold landscape will potentially change in the future.