Residential Lease Extension – Proposals for Reform

Over recent years there has been much anger expressed about the complexity and cost of extending leases and the government has stepped in and said they are looking in to alternatives. The Law Commission has been briefed to come up with options to reduce the premiums payable on lease extensions while ensuring appropriate compensation is paid to the landlord – what most people would call a no-win situation.

On 20 September 2018, the Law Commission published its paper laying down some options for satisfying this seemingly impossible task.

Proposals Put Forward by the Law Commission

The least radical proposal for reform put forward is to keep the valuation method essentially as it is now, but to prescribe rates for some or all of the more contentious elements, namely: relativity, the value of Act rights, and the capitalisation and deferment rates. There might still be a dispute on the freehold value of the flat but, once established, the rest of the valuation would be straightforward. There would still be much to debate on what the prescribed rates should be but, once fixed, the opportunity for arguments would be much reduced.

A more radical proposal is to stick with the current approach but ignore marriage value. The landlord would only be entitled to be compensated for loss of the deferred freehold value and the capitalised rent. The abolition of marriage value would significantly reduce premiums and simplify the valuation process but, as marriage value exists, it would mean depriving the landlord of the full value for the asset being expropriated.

As an alternative, the compensation could ignore the value of the landlord’s asset altogether and be calculated as a multiplier of the ground rent. A formula based on 10 times the ground rent has been suggested in parliament. The problem with this approach is that the level of ground rent is often arbitrary – a flat in Skegness might have a ground rent which is significantly higher than that of a flat in Mayfair – and the landlord would receive no compensation for the loss of the reversion. It might work for very long leases where there is no reversionary value but in most cases, it would lead to the taking of property without payment of an amount reasonably related to its value.

Another “simple formula” would be to set the premium as a percentage – say 10% – of the freehold value of the flat. This, though, would result in premiums which do not reflect the different lease lengths or any difference in the ground rent payable. A 25-year lease could be extended for the same cost as a 125-year lease.

The Law Commission has suggested that it might not be appropriate to have a “one size fits all” method of valuation. Perhaps there could be a different method for valuing flats which are homes rather than investments or there could be a different scheme for low value claims. It has invited views on its proposals and it will be interesting to see what emerges from this process in due course.

 

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