Leasehold Enfranchisement: Government Statement – 7 January 2021 and Parliamentary Statement – 11 January 2021

The Law Commission published its Report on enfranchisement valuation - ’Report on options to reduce the price payable’ - in January 2020 and its comprehensive Reports on enfranchisement, commonhold and right to manage in July 2020.

On 7 January 2021, MHCLG issued an Announcement setting out initial government thinking on those Reports (or at least certain elements of them). This was followed by a Statement in Parliament from Robert Jenrick MP, Secretary of State, on 11 January 2021 which has clarified some of the uncertainties from the initial Announcement.

The most significant part of the Statement relates to government plans to reform enfranchisement valuations. Their proposals can be summarised as:

1. The abolition of “marriage value”. Abolition is perhaps not quite the right word; existence of marriage value within a valuation long pre-dates enfranchisement. It might be better described as being payment of 100% of marriage value to the tenant, in place of the present 50%. However, any attempt to “abolish” marriage value is likely to be subject to challenge under the Human Rights Act.
2. A cap on the quantum of ground rent that can be capitalised in the valuation. The cap will be 0.1% of freehold value (presumably to be assessed at the valuation date). This is also likely to be subject to a human rights challenge.
3. Prescription of rates. This likely means capitalisation and deferment rates - relativity will become redundant if marriage value is no longer to be paid. The Statement says that rates will be set at “market value” but there is otherwise no indication of how or by whom those rates would be prescribed.
4. Tenants will be able to agree a voluntary restriction on development in order to avoid payment of development value (presumably just at the date of the valuation rather than in perpetuity).
5. Discounts from the enfranchisement price to reflect the value of (i) tenant’s improvements and (ii) rights of hold-over under Sch 10, will be retained (there was some suggestion in the Reports that these could be abolished).
6. The original valuation basis for low value houses (a “s.9(1) valuation”) will be retained. It is not immediately obvious why this would be needed if marriage value is to be “abolished”.
7. There will be an “on-line calculator” so that tenants can more easily ascertain what will be the enfranchisement price payable.

Otherwise, the government says that it intends to replace the existing rights to a lease extension. For a house, the present right is for an extended term of 50 years at a “modern ground rent; for a flat the existing right is for an extended term of 90 years at zero rent. These rights will be replaced by a single right for both houses and flats of a new lease for a term of 990 years at zero rent; as at present, there will be a redevelopment break at the end of the existing term and every 90 years thereafter.

A new right to allow leaseholders to “buy-out” their ground rent (without extending the lease) will also be introduced.

The Statement does not otherwise address the other recommendations in the Reports; there will be responses to those “in due course”. I believe however that the whole issue of leasehold reform is now being given priority by the government. It is clear from the Statement that it is the government’s intention to promote commonhold as the future mechanism for community ownership of property and that means that the leasehold system is likely over time to be phased out. The government is establishing a Commonhold Council - a partnership of leasehold groups, industry and government - that it hopes will prepare homeowners and the market for the widespread take-up of commonhold.

There is some indication of timing. The Statement indicates that legislation will be brought forward in the upcoming session of Parliament to set future ground rents in residential leases to zero. This has been government policy for some time (it was included in the Conservative Party Manifesto at the last general election) so is not surprising. This ban on ground rents will now include the retirement sector who had lobbied hard to be exempted. It is not clear whether this legislation will also include the ban on the sale of new leasehold houses – although not mentioned in the Statement, it seems likely, as this was also a Manifesto commitment.

Everything else (including the proposed valuation changes) will be left until the second stage. Having said that, it would certainly be possible to add some of the other proposals to the first stage Bill dealing with zero ground rents and there could be an attempt by backbenchers to do that. Otherwise, the more ambitious second stage (which would effectively be a comprehensive re-write of the existing law of enfranchisement, right to manage and commonhold by implementing the full range of the Law Commission’s recommendations) will likely be seen closer to the next general election in 2024.

Damian Greenish is a Senior Consultant in the Property Litigation team.