So we now have the eagerly awaited paper from the Law Commission on their ‘options for reform’ as regards the law on valuation.
What does this mean?
The Law Commission were given the objective of making it cheaper and easier to buy your freehold or extend your lease.
Ultimately that involves a political choice for government about how to do this. Reforming the basis of on which valuations are carried out of necessity means making ‘winners and losers’ between landlord and tenant.
Clearly, given the direction of travel on this the Law Commission have explored various ways to bring down the cost but ultimately recognise that the choice of which path to follow is a political rather than a purely legal decision and as such they have set out three main options which are set out below.
Option 1
Term and reversion – essentially allowing the premium to be calculated by reference to lease length and ground rent only. There would be no marriage value regardless of lease length.
Comment
Essentially this would do away with marriage value entirely and be massively unpopular with freeholders. It might also be open to challenge by freeholders under the Human Rights legislation.
Option 2
Get rid of marriage value and replace it with Hope value.
In other words in cases where the lease has under 80 years the tenant would have to pay only a fraction of the marriage value – as if the fact that the tenant were actually carrying out the transaction was to be disregarded and the freeholder would only get compensated relative to what a third party (who wouldn’t know that the transaction was actually going through) would pay.
Typically hope value is between 10-20% of the full marriage value and so this reform would make it cheaper instantly for the 20-30% of transactions every year that have less than 80 years to run.
Comment
This would be unpopular with freeholders, but less so than option 1 above. Tenants and particularly those with short leases would be very much better off overnight.
The paper discusses how in the case of a freehold the collective might defer ‘hope value’ by agreeing an overage clause with the freeholder meaning that this sort of value would be paid out in the future when and if the development might actually take place.
Option 3
Leave things ‘as they are’ but prescribe certain parts of the calculation.
This has the advantage of brining more certainty, but comes with the extremely political choice of where to draw the line (quite literally, in the case of a relativity curve) or in terms of the specifics of say the capitalisation rate or discount rate. Both of these have been the subject of tribunal decisions, but this could be ‘set in stone’ thereby avoiding argument.
Comment
Option 3 is essentially the ‘status quo’ with some tweaks. Those tweaks might well make it easier as they would prescribe some or all elements of the calculation and it set in a particular way would also lean towards leaseholders by making the premium cheaper.
In addition, the more parts that are prescribed the less work that there is for valuers to do. Bad news for valuers, but better news for public certainty. It would be easier for people to know ‘up front’ what their lease extension or freehold is going to cost.
Other options
The paper is not short (242 pages to be precise), and so it does also outline some other ideas, which the Law Commission call ‘sub-options’ – these essentially blend in some other ideas with the 3 main suggestions. The best of which, in my view, is the development and use of a prescribed calculator for lower value or straightforward claims.
In summary
This paper gives government lots of good options to consider when drawing the political lines on what really does amount to the redistribution of both wealth and power in the leasehold sector.
It won’t be radical enough for some people, but then that is entirely to be expected. The Law Commission are at pains to point out that any change that is too radical would be open to challenge under the Human Rights legislation, a point which those who want to see real and lasting change for leaseholders would do well to bear in mind.
Mark Chick
9th January 2020