What is Leasehold Enfranchisement?

What is Leasehold Enfranchisement?

Leasehold enfranchisement is the process you go through to either extend your lease, or purchase a share of the freehold (collective enfranchisement). When you buy a leasehold property, you enter a legal agreement with the landlord known as a lease.

Leasehold Enfranchisement is the statutory process by which qualifying tenants on long leases have the right to renew the term of their lease or acquire the freehold of their building.

When a leaseholder either extends their lease or purchases the freehold to their property, they receive an “enhanced interest” in the property. Therefore, they must pay a premium to the landlord to be able to benefit from this interest.

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As the law currently stands, there are three elements to calculating the premium for leasehold enfranchisement:

Reversion – to compensate the landlord for the fact that they will not be able to take back possession of the property for another 90 years (in extension) or ever (in enfranchisement).

Term – To compensate the landlord for the lost ground rent to which they would have been entitled if the lease ran for the full term at the current rates payable.

Marriage Value or Hope Value – extensions of leases under 80 years will attract Marriage Value or Hope Value. Marriage Value is based on the assumption that the freehold interest and leasehold interest in a property are worth more together than their respective parts. The difference between the value in single ownership and the value in separate ownership is the Marriage Value. Hope Value is a deferred form of Marriage Value. It is based on the “hope” that if the freeholder sold the freehold in the future, the third party might realise the Marriage Value, and is a lower monetary value than Marriage Value.

What is a collective enfranchisement?

Collective enfranchisement is the process by which the leaseholders in a building join together and buy the freehold. This right to do so comes under the Leasehold Reform Housing & Urban Development Act 1993.

Reforming valuation in leasehold enfranchisement published by Law Commission

Reforming valuation in leasehold enfranchisement published by Law Commission

The Law Commission of England and Wales has [09 January 2020] published a report setting out options to reduce the cost that leaseholders have to pay to buy the freehold or extend the lease of their homes (known as “enfranchisement”). The reforms have the potential to make the process easier and more affordable for millions of leaseholders across England and Wales.

The Law Commission’s report puts forward a range of options to make it cheaper for leaseholders to buy their freehold or extend their lease. As well as reducing the price, these options can clarify and simplify the law, making the process of leasehold enfranchisement easier and less expensive to operate.

The Government asked the Law Commission to review the law of leasehold Enfranchisement in order to promote transparency and fairness in the residential leasehold sector and provide a better deal for leaseholders. On valuation, the Law Commission was asked to provide options to reduce the premium (price) payable for existing and future leaseholders to enfranchise their homes, whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests. The report examines the method by which the value of the landlord’s interest is calculated, to identify reforms that could lower premiums without breaching the UK’s human rights legislation that protects the landlord’s property interests.

The options for reform

The report puts forward three key schemes for determining the premium, each of which will make enfranchisement cheaper, saving leaseholders money. Each scheme uses a different method to determine the price of enfranchisement and allow further reforms to make the process simpler and to reduce uncertainty. 

The report also explains the role that simple formulae – such as a multiple of ground rent – could play in delivering reforms, while explaining that their wider use is not possible under the UK’s human rights laws.

Alongside the three schemes, the Law Commission has put forward a range of other options for reform. These include:

Prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable.

Helping leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium.

The creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process.

Enabling leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the landlord unless and until they actually undertake further development.

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Professor Nicholas Hopkins, Property Law Commissioner said:

We were asked to provide options for reform that save leaseholders money when buying their freehold or extending their lease, while ensuring that sufficient compensation is paid to landlords. This is what we’ve done.

We are ready to help the Government in implementing whichever options for reform they choose.

Housing Secretary Rt Hon Robert Jenrick MP said:

I welcome these proposals from the Law Commission which provide options to make it simpler and faster for leaseholders to buy their freehold or extend their lease.

I will consider the proposals outlined in this report carefully and set out our preferred way forward in due course.

“We have already committed to addressing the abuses of leasehold seen in recent years, by reducing ground rents to a peppercorn level and limiting new leasehold to apartments, save in the most exceptional circumstances. The Competition and Markets Authority is examining the alleged misselling of leasehold properties and I will also await their findings with interest.”

Next steps

We consulted widely in putting together the options for reform. Leaseholders have advocated sweeping reform to lower the cost of enfranchisement of their homes. We have heard contrary arguments from landlords and investors – including charities and pension providers – the value of whose interests would fall if premiums are reduced.

The Law Commission doesn’t hold views on which scheme and which other options for reform should be adopted, as this is ultimately a decision for the Government.

The Law Commission will be making further recommendations in the coming months for reforms to improve the current complex enfranchisement system.

We will also be publishing reports on reforms to make common hold a viable alternative to leasehold, and on improvements to the law that gives leaseholders the right to manage their properties.

What you know about Leasehold Valuation Calculator?

One common question we get asked is what is my lease extension cost? how can I know that value? For that we added a tool to our website that allows you to get an idea as to the cost of your lease extension. To use our lease extension calculator simply fill out the required information and our easy to use calculator will produce an estimate and give an estimated value for your property.

We have recently added a tool to our website that allows you to get an idea as to the cost of your lease extension. So it made sense for this information to be available to the public to use.

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And another question we get asked is ‘how accurate is your estimate?’

The answer to this is that the calculator is reasonably accurate, in so far that it is useful to obtain an initial estimate but it is still only a ball park figure. In order to gain an accurate figure we will need to undertake a details valuation.

The calculation is only an estimate and doesn’t qualify as professional advice. The calculation doesn’t take into account future changing ground rents, specific details related to the property, specific issues relating to a location nor if there’s an intermediate lease involved.

In addition to our free calculator ​Leasehold Valuations offers a range of leasehold and freehold valuation services and solutions to both Landlords and Leaseholders, depending on your requirements and objectives.

How much will it cost you to extend your lease? Get an estimate using our lease extension calculator.

The first step within the lease extension process ​is to have a valuation carried out to assess the likely premium payable. even if you choose to proceed with a voluntary lease extension we might advise you to still take valuation advice to make sure the premium your freeholder is voluntarily offering is a “good deal”.

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