I have been reading through the recent Law Commission’s Report on Leasehold and I wanted to give a brief summary of how the proposals affect valuation and premiums etc.
As you are aware this review has come about mainly because of the 10 year doubling ground rent scandal in the North of England. It recommends significant changes to the Leasehold Sector and if implemented in full or part, which is inevitable, it will have an affect on leaseholders and freeholders.
The report is 586 pages and a root and branch examination of the current Leasehold Sector and proposals for new legislation.
The main reference of the Law Commission is to propose new legislation to make extending leases and buying freeholds cheaper and easier for leaseholders and landlords. The main proposal is to introduce one simplified system to cover flats and houses.
The crucial valuation Chapters are 13,14 and 15. These deal with costs and proposed new valuation methods. The report is of course only a proposal at the moment but some of these proposals will be adopted in due course.
How will this effect you?
The main costs and valuation issues that will affect you are as follows;
- Professional costs will be reduced by limiting the input of valuers and solicitors. In addition the full costs may not be recoverable or recoverable costs may be set to a fixed fee or capped in some way.
- The actual premiums for lease extensions and prices for collective enfranchisement will most likely go down although there is some speculation as to how the different revised valuation proposals will affect the amount paid. For example depending on which valuation method is adopted prices will either go up or down dependent mainly on lease length.
The proposed new methods are specifically tailored to be in line with the Law Commission’s prime directive in this which is the make the process easier and the premiums and prices lower;
New valuation methods
Proposals for new valuation methods are;
- A fixed simple formula.
- An online calculator probably utilising the above.
- Prescribed rates – deferment, capitalisation rates and relativity all to be fixed.
- The premium to be a percentage of the long lease value. 10% is given as an example. Good for long lease flats with low ground rents but not for short lease flats.
- The premium to be a multiplier of the ground rent. Reviews may or may not be taken into consideration. This will be good for your doubling ground rents but of course less palatable for short leases with nominal ground rents.
Incidentally they do determine that reductions in premiums will not be against the human rights of freeholders provided the amount paid is fair!
These are significant proposals and will mean a change to how premiums are calculated. There is of course much more detail in the report. The consultation phase ends on the 18th November 2018. I would imagine these proposals or at least some of them being implemented into legislation within the next 2 years.
On another point there are the big London Estates and Cadogan who will safeguard their investments by bringing to bear their significant influence in the corridors of Westminster. There is a flip side to this and it relates to other political changes. In other words the large estates might be prepared to give up the Leasehold sector as a kind of sacrificial lamb for other more beneficial political favours. We may therefore not be able to fully rely on a robust response to these proposals from the large Central London Freeholders.
It might also be the case that as leaseholders become aware of the new changes and potentially cheaper lease extensions they will wait until the legislation comes into force before making an application. There will therefore likely be a dropping off of lease extensions etc in the lead up to the legislation. The report has been widely reported on the news etc so the public will be fully informed and this is likely to increase as the new legislation gets closer.