Newsflash: Law Commission proposals for calculating leasehold enfranchisement premiums

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Leasehold enfranchisement is the process by which qualifying long leaseholders may extend their lease or buy the freehold of their property. In order to exercise enfranchisement rights, leaseholders must pay a premium to their landlord.

Following its recent wide-ranging consultation on leasehold enfranchisement reform (explained in our earlier briefing), the Law Commission has published a report which sets out options to reduce the premium payable by existing and future leaseholders to enfranchise, whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests.

The Law Commission has also published a summary of its report. The summary explains the background to the Commission’s work, the respective issues facing long leaseholders and their landlords under the current law, and the thinking and methodologies underpinning the proposed options for reform.

The report emphasises that how premiums should be calculated is a not solely a legal question: it involves considerations of law, valuation, social policy, and political judgement. It is therefore for Government and ultimately Parliament to decide how premiums should be calculated.

The Commission, however, proposes three alternative options to reform premium calculations.  Within each are a series of sub-options.  The enfranchisement premium under all three schemes would include an amount to reflect the value of the lease term and the landlord’s reversionary interest. The main difference between the three schemes is whether or not the premium calculation includes marriage value [1] or hope value [2].

The Commission also confirms that it will shortly publish three further reports which will respectively address:

  1. other aspects of a reformed enfranchisement regime (such as who qualifies to make an enfranchisement claim and the process that they must follow to exercise their rights)
  2. the right for leaseholders to take over the management of their building without buying the freehold [3]
  3. commonhold [4], which allows for the freehold ownership of flats, offering an alternative way of owning property which avoids the shortcomings of leasehold ownership.

Walker Morris will continue to monitor and report on developments.  At present, there is no indication as to when the reforms will become law. It is however unlikely to be in 2020.

[1] Marriage value is the difference between the higher value of the property if it was in single ownership and the lower value of the property when it is owned separately by both a landlord and a leaseholder

[2] Hope value is an additional amount which a purchaser may pay to reflect the fact that the freeholder may sell the freehold to the leaseholder in the future, at which point the interests in the property are ‘married’ together, bringing the property into higher value single ownership.

[3] See Walker Morris’ briefings on this subject, which can be accessed here, for further information and advice.

[4] Please see our previous briefing.