We had the announcement at the end of September that the Law Commission is going to publish its report on the first part of its objective in the 13th Programme of law reform looking at enfranchisement.
What does this mean?
This is the first part of the Commission’s report – on the stated objective of ‘making the enfranchisement process cheaper’ – in other words these are going to be the proposals on reforming the law on valuation – how the cost of buying your freehold or extending your lease is worked out.
What are they likely to say?
Here are some of my personal predictions … these are purely guess work, so please do take them with a large pinch of salt. Please also bear in mind that they are only likely at this stage to be setting out the ‘options’ for reform that government will in due course need to select from.
Obviously, nobody can say for sure before the report is published, but my bets are on a number of options some of which appear below:
The 1967 Act – protect the position for 9(1)
Firstly, it is very likely that there will be a ‘carve out’ for the sort of valuation that applies to a claim for a leasehold house under section 9(1) of the Leasehold Reform Act 1967. This is highly favourable to tenants and it is likely that there will either be a sunset clause – stopping there being any new claims on this basis after a set date to allow claims to be made, or some kind of differential in the new valuation process to allow this type of valuation to continue for these cases.
Prescribed rates or parts of the formula?
Secondly, my prediction is that it is very likely that there may be a prescription of one or more of the key ingredients that are used to work out the price paid in an enfranchisement calculation.
Of these the most contentious to prescribe would be ‘relativity’ – the much argued about differential between short lease and long lease value. A graph that is ‘somewhere in the middle’ but slightly more favourable to tenants could be chosen.
Other candidates would be the deferment rate – effectively set by case law at 5% for flats and 4.75% for houses. Although, the position here is more or less established already so this would be simply codifying an existing position.
That then only leaves the capitalisation rate applied to the ground rent. Historically, this has been set at around 6-8% but recent case law such as the All Saints case has argued for 3% or thereabouts. Perhaps a prescribed rate would be slightly higher than this?
This is all assuming that the proposed reform works on the basis of the ‘old paradigm’.
Enfranchisement process – what else might they do?
There is also the chance that something far more radical might be proposed. Possibly a calculation that uses a fraction of the freehold value to determine the enfranchisement price, for leases up to a certain length – say, more than 80 years, with a more complex treatment for the ‘marriage value’ cases where the lease is under this threshold and the values may be more significant.
A universal or government calculator?
Another option is to make one or more of the ‘lease extension calculators’ such as the one that appears at (https://www.bishopandsewell.co.uk/lease-extension-calculator/) a standard or prescribed version on a government website. I am pleased to say that the Law Commission mentioned our site in its report.
The use of a calculator for claims up to a certain value might in fact be the ‘easiest’ and simplest way of making a lasting reform. If this were to apply for leases of less than 80 years – or be set within defined parameters then this would provide a prompt resolution to the question of the price to be paid. Even if no other elements of the system were reformed, this one simple step would make access to a ‘final’ answer simpler, quicker and cheaper.
Will the Law Commission move in this way? We will have to wait and see …
If there are changes, when will they come into effect?
If you are reading this and thinking ‘that’s all right then, I don’t need to do anything then because the government are going to sort all this out for me’ – I would suggest that you pause for thought before adopting this view.
Before any change (not yet proposed or reported on by the Law Commission) can become law, we would need a future government to adopt the recommendations of the Law Commission and put these to parliament as part of a legislative programme.
Depending on what the Law Commission report contains, this could require a draft bill to be written by parliamentary draftsmen and then put through parliament where it would be debated and might be amended before being adopted. It is possible that their report might contain a draft bill, but I suspect this is unlikely. All of this would of course take time.
There is also no guarantee that any given report however good or bad it is will in fact be acted on, although the government did give a commitment to the Law Commission that they would be seriously looking at reforming the law in relation to leasehold before commissioning the report on leasehold.
However, history is littered with excellent reports and recommendations from the Law Commission that have sat on the shelves gathering dust waiting for the ‘right moment’ for parliament to look at them.
In addition, given that the Law Commission’s main proposals on leasehold are not due until February 2020 any changes to the system (including valuation) are be much more likely to be acted upon as a whole. That means that any change in the law is likely to be 2-3 years plus away at the earliest, and possibly more.
That also says nothing of the prospect of a challenge under the Human Rights legislation (or otherwise) by freeholders who may use significant resource to argue against change.
And finally …
I don’t really need to mention the B (is for Brexit) word to remind you that of course to bring in any legislative change, we would also need: (a) a government and (b) sufficient space on the parliamentary timetable to deal with this issue.