
Insight
On 9 January 2020, the Law Commission published its report on the options for reducing the costs payable by leaseholders extending their leases or purchasing the freeholds of their properties. The report is focuses on the premium payable by leaseholders to freeholders when they extend a lease or acquire a freehold, but also touches on other costs payable by leaseholders, such as professional fees.
The biggest changes proposed are to the method of calculating the premium. Three ‘schemes’ have been proposed, with differences in the treatment of ‘marriage value’ and ‘hope value’.
A freehold which is not subject to a lease is usually worth more than the combined value of a freehold which is subject to a lease, and the value of that lease itself. This is because when the freehold and the leasehold are in the same ownership, the owner has greater freedom over their use of the property than either a leaseholder or a freeholder subject to a lease. The difference between the two values is known as marriage value. A freeholder selling their freehold to a leaseholder will be able to charge a higher sum to reflect the additional value realised by the leaseholder. A freeholder selling to a third party will not be able to charge as high a sum, but may charge some uplift, to reflect the fact that the third party might some day be able to sell to the leaseholder and charge marriage value at that stage. This is known as ‘hope value’.
Schemes 1 & 2 will reduce the premium payable. Scheme 3 is the existing method of calculating the premium.
The report also raises the possibility of other changes to the leasehold system. The possible changes likely to have the biggest impact are:
The report does not recommend which of the above options the Government should progress, but it is clear that any of the major changes are likely to reduce the premiums payable, reducing the value of freeholders’ investments. Further reports from the Law Commission with more possible reforms to the leasehold system are due in the next few months.