The main points that came out of the Westminster Legal Policy Forum keynote seminar on “Leasehold reform in England and Wales – implementing the legislation, its impact, and option for further reform” last month in respect of acquiring the freehold or extending a lease were as follows:
- Grounds rents that double / treble are ‘bad news’ and are likely to outlawed in line with the Leasehold Reform (Ground Rent) Act 2022 that became law on 30th June year (where the ground rents on most new qualifying leases cannot legally be for anything more than one peppercorn pa).
- An alternative of replacing doubling ground rents linked to say RPI is fine save that if inflation (as is now currently the case) rises to double digits, then the revised rent will also be somewhat onerous.
- There was no discussion though on the issue of commuting onerous ground rents to 0.1% of freehold value as proposed by the Law Commission.
- There was no issue on the prescription of capitalisation rates.
- The abolition of marriage value – which is a more difficult subject as its enactment will result in £billions of lost income streams to landlords / pension funds and as a result open to legal challenge (e.g.: Human Rights legislation or some other judicial review).
- Relativity – This could be adjusted based on an underlying hedonic regression model carried out by the Bates (formerly Cass) Business School over the past 2 years on some 13,500 transactions to establish a with rights (i.e. market value) graph to determine the percentage freehold value of a lease before then adjusting to Option Price Modelling to find the relevant relativity for the value of a lease in a No Act World.
- There was real concern that politicians won’t be able to get their heads around Option Price Modelling and “will have a real battle” before Parliament can get to legislate “as to what the implications are for all the different actions they might take.”
In summing up:
The valuation solution could be to compensate landlords fairly per the points listed above but without abolishing marriage value altogether to avoid the risk of legal challenges under Human Rights legislation or some other judicial review.
And most importantly –
This is a one in a 20 year opportunity to reform the leasehold reform acts and it is essential that those advising the government can “speak in language that parliamentarians understand and that the ministers are well advised as well as the MP’s and peers who will scrutinise the legislation.” Everything should be thought through and put into a new Bill rather than come up with a series of amendments to the existing legislation later on to try and get it right.