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At the start of last month, we covered the Government's announcement of proposed leasehold reforms. Pinney Talfourd recently attended a discussion group held by the Association of Leasehold Enfranchisement Practitioners (ALEP) on this subject. Below we cover some of the issues that emerged from this discussion.
What will be in the legislation?
Currently, very few specifics have been published. A key proposal is the removal of marriage value in calculating the premium payable when extending your lease or purchasing your freehold. This could substantially benefit leaseholders where marriage value is a factor.
However, if the legislation only includes leaseholder friendly reforms, then it could be subject to challenge in the Courts under the Human Rights Act. The Law Commission considered that this was a serious issue when it published its report on its proposal for leasehold reform in 2020.
Article 1 of the First Protocol of the Human Rights Act provides for the peaceful enjoyment of property. A one-sided reform of the valuation process could easily fall foul of this. It is therefore probably that the legislation will also include changes that benefit freeholders.
The specifics of this will be highly important as although removing marriage value on its own would make the process cheaper, if you combine this with lowering the deferment rate, then actually the premium payable could end up higher.
Overall, the good headlines obtained by the Government may be short lived as more details of the legislation are announced.
What are potential side effects of the proposals?
A potential side effect to consider is how these changes will affect investors who finance enfranchisement claims. Investors are typically paid from the premium payable for lease extensions by non-participating flats. By lowering the premium payable, it lowers the investment return, and may deter some investors from offering finance.
Another potential impact is that leases may become more expensive because buyers will take into account that any future lease extensions will be cheaper. However, when calculating the premium payable for lease extensions, you take into account the current value of the lease. Therefore, any lease extensions which take place before the legislation comes into force may actually be more expensive because the value has been pushed up by the expectation that lease extensions will be cheaper in the future.
Should I wait to extend my lease/purchase the freehold?
If there are minimal adverse effects from waiting and no time pressure to take action, then it makes sense to wait.
However, most people extending their leases are doing so for a specific reason e.g. to enable a re-mortgage or to sell their property. With enfranchisement claims there is also the risk that the momentum behind an action could drain away if you wait for the legislation to be passed. In these scenarios it makes sense to proceed as planned rather than wait an unknown length of time for unknown reforms.
Once further timeframes and details of the legislation are announced it may become more beneficial to wait.
Pinney Talfourd are experts in residential property litigation and can advise you on changes to the law so you are given up to date advice.
This article was written by Oliver-James Topping, Solicitor in our Residential Property Litigation Team. 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 January 2021.