Leasehold reform: The government is making promises it can’t deliver

Since January 7th, the Leasehold Sector has been recovering from an impromptu and knee jerk government press release, regarding their intention to reduce the costs of lease extensions and enfranchisements for leaseholders. Doing so by prescribing the rates to calculate the premium, as well as by removing marriage value.

Removing marriage value was the big headline, a ‘vote winner’ some may say, but the devil is in the detail. Lease extension premiums are made up of various factors and by simply adjusting other variables such as deferment rate (the discount rate used to calculate the reversionary value of the leasehold Interest,) the eradication of marriage value would be nominal and in some cases the premium could even be higher than a premium with marriage value.

As a firm of surveyors who handle around 500 cases a year, we have been inundated with enquiries about whether or not clients should withdraw from the process of extending their lease. Our advice is to approach this option with severe caution. We do not believe the drastic changes promised by the government will even resemble the final legislation produced, based on all of the pending Human Rights appeals we expect to see, as well as the sheer gravitas of what the government is planning or attempting to do.

As a leasehold valuation firm and a leaseholder myself, I fully endorse reform of the sector. However, the government making promises they can’t deliver is potentially catastrophic for the property sector, with virtually every chain in the UK having a leasehold flat involved. Buyers are increasingly looking to withdraw from purchases or renegotiate the price due to these promised changes, which to a layman appear to already be in place. They simply are not; we are at best at least 3-5 years away from any tangible changes and again as I’ve already mentioned, the phrase ‘Watered down’ seems appropriate.

The question we get asked a lot is about what happens to existing cases. As it stands, there’s no change, cases continue to proceed. Negotiations may be affected if a freeholder decides to take a view on matters, however we are not expecting this. Freeholders may look to extract as much value from their asset as possible. Every freeholder is different but in reality, I doubt very much there will be any impact on the current premiums paid and awarded by the first Tier Property Tribunal. The valuation date is locked in and the lease extension will reflect the market at this time; as it stands, marriage value is very much payable. We do not envisage any retrospective action at this point but there may be compensation payable in the future.

Our stance to clients is to press on with their case, whether that is a sale or a lease extension. Costs will have already been incurred on both sides and you will be liable for them whatever happens. If your client is selling and needs a lease extension, regrettably, it’s not something that can wait. However, they may experience some negotiation on the agreed price. Our advice if you do have a short lease seller, would be to never drop the price and in turn, potentially look at upping the price but again it is very difficult to say by how much specifically. By following our guidance to not drop the asking price, short lease flats should become more desirable.

If your clients are simply looking to extend their lease, they may wish to hold out and wait, but we do urge caution with this approach. As discussed, it may be two-five years and the cost of waiting could outweigh any potential benefits.

We find ourselves very much in the hands of MP’s, who sadly do not understand the metrics behind the property market and what makes the market move. The housing market does not thrive on uncertainty, which is exactly what we are currently facing at the moment. Beyond the completely irresponsible press release regarding leasehold reform, we’re also faced with the complete and utter devastating farce that is the remedial works to cladding, leaving people as prisoners in un-mortgageable homes and the dithering over whether or not to extend the SDLT holiday. We urge the government to give the sector clarity, timelines and most importantly, certainty.

Colin Horton is managing director of Hortons.

x

Email the story to a friend

4 Comments

  1. MarkJ

    In the interim what the Govt could do is educate leaseholders (particularly the elderly and their families) as to what their existing rights are to tide them over.  Many people bury their heads and only deal with the subject of a shortening lease at sale time….probably the worse time.

    Ive met people recently who have owned a house for 45 years and thought that they had to wait until the freeholder wanted to sell before acquiring it. They had no idea of their right to buy the freehold or the existence of the First Tier Property Tribunal as an independent adjudicator.

    Even more frightening was the fact that their solicitor didnt appear to know either.

    Its no wonder that freeholders get away with so much….

     

    Report
  2. WiltsAgent

    Given the spotlight Leasehold is now under and the dreadful way leaseholders have been treated with regards cladding I can’t see it being business as usual for Freeholders. Reform of this will be delivered and not before time.  This gravy train has gone on too long and the sooner leaseholders are given proper rights the better.

    Report
  3. Wizward

    Colin is right on the money about the deferment rate which is massively overdue for correction.  Any removal of marriage value would provide the political headroom for this to be reformed.

    The risk-free rate (RFR) element of the deferment rate for valuing reversions was set in 2005/6 by the Courts (following the Arbib and then Sportelli cases at the Lands Tribunal and Sportelli again at the Court of Appeal) at 2.25%.  Even at that time the RFR was hopelessly out of date since it was set by reference to prior 5-year average ILG 10-year rates which were in constant decline.  Thus the RFR was out of date even when it was originally set.

    In the subsequent years of the great financial crash of 2008/9 and thereafter anyone who has not been living in a cave will have noticed that real interest rates have been in continued decline making the RFR even more out of date and in need of reform.

    For example, even as far back as Feb 2017, the Lord Chancellor changed the Ogden discount rate to minus 0.75% for valuing long-term insurance payouts and any member of a pension scheme or purchaser of an annuity will have experienced the real-world effects of low long-term interest rates.

    Reform of the deferment rate is long-overdue, by some 15 years or so, and the sooner this miscarriage of “social justice” to freeholders, whose Human Rights have been abused for far too long, occurs the better.

    Report
  4. simondv

    The leasehold ship has sailed, it cannot be business as usual for freeholders. Too many issues around leasehold and cladding, the flats market is already struggling.

    I have great doubts about the efficacy of marriage value and reversion value when only one party usually adds all the value by maintaining and improving the property (the leaseholder), invariably has a much greater financial interest in it (the leaseholder), and many freeholders are only in the game to extract an income for no effort via the secret ingredient, the freehold. Leasehold has been corrupted far beyond its original purpose. An exception can be made where the freeholder has made a genuine contribution in looking after the building during the term of the lease.

    Commonhold for flats so England and Wales joins the rest of the civilised world, and leasehold games can then come to a natural end.

    Report
X

You must be logged in to report this comment!

Comments are closed.

More top news stories

Foxtons chief executive receives £1m bonus package despite shareholder revolt

Continue Reading ...

Thank you for signing up to our newsletter, we have sent you an email asking you to confirm your subscription. Additionally if you would like to create a free EYE account which allows you to comment on news stories and manage your email subscriptions please enter a password below.