Lease Extension Premiums

14/02/2020

Last month the Law Commission published its report on the options to reduce premiums payable for lease extensions.

​To understand the proposals we need to understand what makes up a premium under the Leasehold, Reform, Housing, and Urban Development Act 1993:

  • Term – A sum representing the ground rent lost by the Freeholder by the ground rent being reduced to £0 for the remainder of the original term.
  • Reversion – A sum representing the loss by the Freeholder from not receiving the leasehold interest back at the original expiry date of the lease.

​One of the following:

  • Marriage Value (where the lease term is less than 80 years) – 50% of the difference between:
  • The value of the freehold and leasehold interest when held by the Freeholder and Leaseholder; and
  • The theoretical value of the freehold and leasehold interest if they were held by the same person (this is always higher).
  • Hope Value (not currently applicable for lease extensions) – A sum in respect of the potential that in the future the leasehold interest and freehold interest could be held by the same person.

Proposals

The report puts forward three schemes for determining the premium, in all three the premium would continue to include the Term and the Reversion.

Scheme 1

The premium would not include Marriage Value or Hope Value.

This reflects what the Freeholder would receive if the lease ran its course and the Leaseholder never chose to extend their lease or acquire the freehold. They receive a sum equivalent to the ground rent for the duration of the term and the value of the leasehold interest at the end of the term.

Scheme 2

The premium would include Hope Value, but not Marriage Value.

This reflects what the Freeholder would receive if they sold their interest to a third party. An investor would not pay Marriage Value as the freehold and leasehold interests are not being joined together. However they would pay Hope Value on the basis that this could occur in the future.

Scheme 3

The premium would include marriage value, but not hope value.

This reflects the current way in which a premium is calculated.

Effect of the three schemes on the enfranchisement premium for House A

Details of exsisting lease

​Unexpired term76 years
Ground rent£50 per year rising to £200 per year
​Value on freehold basis​​£250,000

Enfranchisement premiums

Valuation under:​Current lawScheme 1Scheme 2Scheme 3
​Part (1) term: term​£1,806​£1,806​​£1,806​​£1,806​
​Part (2): reversion​£7,349​​£7,349​​​£7,349​​​£7,349​
​Part (3): marriage/hope value£7,298 (marriage value)​​£- (no marriage value)£1,460 (hope value)£7,298 (marriage value)
​Total premium​£16,453​£9,155​£10,615​£16,453

Sub-Options

Alongside the three schemes, the Law Commission has put forward a range of other options for reform. These include:

  • Prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable.
  • Helping Leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium.
  • Enabling Leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the Freeholder unless and until they actually undertake further development.
  • Different pricing tables for different types of Leaseholder e.g. buy-to-let leaseholders, occupier leaseholders.
  • Removing the 80 year point at which Marriage Value applies as it distorts the market.
  • Reducing the premium where the Leaseholder has improved the value of the leasehold interest.
  • Reducing the premium as the risk to the Freeholder from the Leaseholder holding over is postponed by the length of the extension.
  • The creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process.

Conclusion

The Law Commission sets out the pros and cons of each proposal in detail. However it is likely that any change will be criticised by some as going too far and by others as not going far enough.

Arguably, a more pressing area of reform is the issue of ground rent in leasehold properties. We have recently been instructed to act in several leasehold matters where the ground rent doubles every 10 years effectively making the properties unmarketable and unmortgageable.

Ultimately it is for Parliament to decide on which course to pursue; but given the recent high profile nature of leasehold properties it seems certain that these proposals will not simply be ignored.

We will publish a further article once further policy announcements are made. A copy of the report can be found here.

More information

Pinney Talfourd have experienced and specialist solicitors who regularly deal with the lease extension process, challenging extension claims, and representing clients in the First-tier Tribunal (Property Chamber).

We have established relationships with local surveyors who will be able to advise you on the premium payable and the best approach to take in negotiations.

We are experts in the field of enfranchisement and are committed to working with you to ensure you achieve the very best possible outcome.This article was written by Oliver-James Topping, Solicitor in the Residential Property Litigation Team at Pinney Talfourd LLP. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of February 2020.​

14/02/2020

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