The King's Speech - A Damp Squib?

Anyone who has been following the government’s various statements about proposals for change to the leasehold system would have been disappointed by yesterday’s King’s Speech.  Sadly, the proposals were few, meek and no surprise.

Instead, much of the surprise lay in what was left out.  It is as though the government has recognised late in the day how difficult it is going to be to deliver some of its reforms within the time available (or at all) and only offered up the easy low hanging fruit to be able to say that they are honouring a commitment.

As valuers, in this article we consider the implications of the proposals for the cost of buying the freehold or extending the lease (the enfranchisement price).  They are:

• The proposal to make enfranchisement easier and cheaper is vague.  Some have suggested that ‘cheaper’ in this context is referring to transaction costs rather than the overall enfranchisement price, but either way further explanation and greater clarity is needed before we can comment in more detail.
• A proposal to increase the term of the standard lease extension from 90 to 990 years and reduce the ground rent to £nil for both flats and houses.
  • In respect of flats, extending the term is relatively uncontroversial and unlikely to cost leaseholders substantially more, but since new leases have been granted at £nil ground rent for the last 30 years there is nothing new in that.
  • As regards houses, we believe this proposal refers to new leases of existing houses as distinct from leases of newly built houses which the government is proposing to ban.  These new leases will also replace the old (and now fairly rare) 50 year extensions which are granted at a ‘modern ground rent’ rather than at a premium.  While the availability of a new lease certainly improves choice for the leaseholder it is hard to see significant take-up of the option if, as is currently the case, there is little difference in price between an extended lease and the freehold.  
• The two year ownership condition will be removed and brought into line with the current position for tenants in collective claims for blocks of flats.  Again, this is not earth-shattering, and on its own makes no difference to the enfranchisement price.  It will, however, de-risk the conveyancing process where buyers are acquiring a short lease with the benefit of the assignor’s notice of claim, and this might actually push up the market price of a short lease a little in response.
• Increasing the 25% ‘non residential’ limit in collective enfranchisements to 50%.  This will allow more leaseholders in mixed use buildings to enfranchise and will particularly benefit leaseholders in blocks above shops.  Those landlords who have made great efforts in cultivating certain streets into retail destinations (for example Marylebone High Street) and who wish to hold on to their shops may lobby to retain some degree of strategic control in order to preserve that cohesion, but otherwise this is a measure intended to extend existing rights to more leaseholders rather than introduce new rights altogether.  As such there is no impact on the enfranchisement price.  Take up by leaseholders will almost certainly depend on the extent to which the value of the commercial space impacts on the overall enfranchisement price.  In this regard, at present a freeholder has a right to claim a 999 year leaseback of that space, but the earlier government proposal for leaseholders to be able to compel the landlord to do so is now absent (or at least has not been specifically mentioned).
• A further proposal on which for the moment the government only intends to consult, is to cap all existing ground rents at a peppercorn.  This goes significantly further than the previous proposal to cap them at 0.1% of freehold value for the limited purpose of calculating the enfranchisement price because what is now being suggested appears to deprive landlords of their income irrespective of whether the leaseholder enfranchises or not.  Without some kind of compensation this measure looks confiscatory and is likely to be met by a challenge from landlords and other ground rent investors.  However, to the extent that this is merely a proposal to consult, it is neither in nor out of the Bill and for now just remains an uncertainty.

The previously well trailed proposals that are missing are:

• The proposed abolition of marriage value from the calculation of the enfranchisement price is not included in the background briefing notes that were published after the King’s Speech, but it is understood that it is the government’s intention to abolish it.  However, if the intention is as unequivocal as that it is difficult to understand why it was not stated in clear terms in the briefing notes.  One theory is that it was implicit in the worked examples that accompanied the briefing notes, but various valuers have attempted to analyse them and, unsurprisingly, there is no consensus among them as to how the government arrived at its figures.  We are told it has also been suggested by the government that once a 990 year lease has been granted marriage value will disappear from the enfranchisement price anyway, but that view fails to appreciate that a leaseholder will have to pay marriage value in order to get the 990 year lease in the first place.  Whatever the situation, more clarity is badly needed on this issue.
• Part of the government’s early proposals to streamline the valuation was to fix or prescribe certain components such as the capitalisation and deferment rates and possibly relativity, combined with the introduction of a standardised online calculator.  For leaseholders with long leases at low ground rents where the enfranchisement price would always be small relative to the overall value of the property this would have made great sense by making the valuation simpler, less open to argument and far cheaper in terms of professional fees.  However, the absence of any proposals suggests the government recognises either that there is no simple one-size-fits-all solution to these valuation components or that they do not want to get into a fight over how and at what level they are set.  Without knowing those levels it is impossible to say whether the proposal would have been financially good or bad for landlords or leaseholders.
• Finally, there is no sign of the government’s previously stated intention to gradually replace leasehold with a system of commonhold.  This is probably recognition of the huge legislative and legal undertaking it would be, but also acceptance of the ongoing unpopularity of commonhold as a form of tenure and of the old adage that you can lead a horse to water but you can’t make it drink.

For Leasehold Reform practitioners and their clients who have waited for them for so long, these reforms are distinctly underwhelming, lacking in detail, certainty and arguably political conviction given all the earlier hype.  It is greatly hoped that more detail will begin to emerge that will give better guidance and clarity, but for the moment it just isn’t there, meaning that professionals cannot advise their clients who, in turn, cannot plan.  For now, particularly given the shortage of parliamentary time and the prospect of a General Election next year it looks as though the uncertainty will continue beyond this parliament and quite likely into the next government.