On the 19th December 2019, the Queen’s Speech – delivered at the opening of Parliament, set out the government’s proposed legislative policies for the forthcoming year. High up on the agenda was the issue of leasehold enfranchisement, which has been a contentious area between landlords and leaseholders for a number of years.
The Law Commission was assigned by the government to review, amongst other things, the valuation process in relation to leasehold enfranchisement. The Law Commission published a report on 9 January 2020 which set out various options for the government to consider.
This niche area of law is particularly complex and this article aims to provide landlords, leaseholders and future leaseholders with an understanding into the risks and pitfalls associated with leasehold enfranchisement.
Extending your Lease
One of the crucial aspects in relation to leasehold property is that as the number of years on the lease decreases, the value follows suit. Therefore, extending your lease, which is known as leasehold enfranchisement, will increase the value of the property. However, a premium is payable to the landlord to extend the lease. This payment has come under severe scrutiny.
Typically, residential leases on flats are granted for a term of 125 years. Once the term falls below 80 years, the premium payable to the landlord significantly increases and this additional payment is known as the ‘marriage value’. Essentially, the ‘marriage value’ is the increase in the value of the lease as a result of extending it when the lease falls below 80 years. Marriage value is not payable on leases with more than 80 years remaining on the lease.
For example, if a leaseholder’s current interest in the property was £250,000 and after extending the lease it rose to £275,000, the marriage value would be £25,000, provided that the lease has a term of less than 80 years remaining. Therefore, the leaseholder would have to pay the landlord £12,500, which is just one element of the total premium payable to the landlord.
The report specifies three key options for the government to consider. Firstly, the Commission suggests that you could assume that the leaseholder is never in the market and therefore removes the requirement to pay marriage value. The second option is to assume that the leaseholder is not currently in the market but might be in the future – the result of this being that only ‘hope’ value would be payable (the possibility of the freehold being acquired by the leaseholder in the future and thus realising the marriage value). The final option reflects the present system.
Additionally, the report provides for seven sub-options which can be incorporated within each of the three options to reduce the premiums payable by the leaseholders.
We shall wait to see whether the government implements any of the schemes and sub-options throughout the course of this year. Though one thing that is for certain – and must not be ignored – is that the Commission places considerable emphasis on the fact that landlords must be sufficiently compensated by way a premium. This ensures that their property rights, as outlined in the Human Rights Act 1998 and in accordance with the European Convention of Human Rights, are not interfered with and the Commission places considerable emphasis on this throughout their report.