News

The Law Commission's leasehold reform recommendations for leasehold houses have now been published. The proposed simplification of freehold purchase and lease extensions is generally great news for leaseholders but less so for freeholders.

In terms of freehold valuation procedures, the headline proposals are as follows:

• Removal of value limits.

This is eminently sensible as currently determination of valuation methodology can depend on domestic rateable values which haven't been used since the early 90's and are often impossible to obtain. Arguably this may simplify matters for leaseholders and freeholders.

Valuation methodology is to be simplified with the following options being considered:

• Value using a version of the current methodology but with Marriage Value taken out of the equation (hence removing conflicts over relativity - the difference between the value with current lease and value with freehold).
• Value at 10x ground rent.
• Value at 1/10th the value of the current property value.

The first and second of these proposed valuation methodology changes will be heavily challenged by vested interests (pension companies, the Crown and Church Estates, The Wellcome Trust etc.) as they will, in some cases, cause significant asset devaluation. We hence do not believe these recommendations will be implemented in their current form.

The final proposal may give significant concern to leaseholders as, for a purchaser of a new leasehold house with low ground rent, their freehold would currently cost a few hundred pounds. If they were to be required to pay 10% of their property value, the premium would rise to tens of thousands of pounds overnight. We await the Law Commission's final report in the Autumn for clarification.

As much of the contention, and cost, with current freehold valuation methodology relates to determining relativity, a reasonable final solution would be the application of a proscribed system for doing so.

With respect to procedural reform, the process of freehold purchase is intended to be greatly simplified:

• No 2 year requirement to own a leasehold house before leaseholders are eligible to buy the freehold.
• Right to unlimited lease extensions on zero ground rent at the end of the lease.
• Simplified claim Notices and improved ease of Notice service.
• Draft TR1 freehold transfer to be provided with the freeholder's counter-Notice.
• Limits to challenges to validity of leaseholder claim Notices. 
• The freeholder will potentially cover their own non-litigation costs (valuation and Notice review/preparation costs).

These measures would remove many of the artificial means used by freeholders to frustrate freehold purchases by leaseholders. In particular, threats of high freeholders' non-litigation costs are often used to extort abnormally high premiums during informal sales - by sometimes as much as 10x the asset book value. The removal of this option for freeholders may mean many freehold purchases could be resolved informally.

The majority of these measures would have little effect on freehold value and hence, whilst they may cause complaints from freeholders, they have a reasonable chance of being implemented in some form. The right to lease extensions on leasehold houses is very rarely used and hence any changes would have limited impact on value.

The Law Commission's report also does much to address problems for flat owners:

• Valuation changes for leasehold houses will apply to leasehold flats.
• There will be a similar simplification of procedures and removal of several approaches used by freeholders to frustrate freehold purchases.

The time-line for reform proposals is as follows:

• A detailed consultation report will be published in Autumn 2018.
• A final report, and assistance with implementation, will be provided in 2019.

In normal times such a time-line might be doable (although lobbying against the proposals will be intense). With Brexit fast approaching, however, and particularly with a no-deal Brexit now being the default position given the red lines of the respective negotiating parties, the chances of new leasehold legislation being enacted in the next 1-2 years are, in our opinion, minimal. Watch this space.