Law Commission's suggested schemes For Leasehold reform

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    Law Commission's suggested schemes For Leasehold reform

    Has anyone had a chance to read through the new proposals for leasehold reform? What do you make of the three schemes suggested by the Law Commission? Which scheme do you favor?

    #2
    Scheme 3 is the status quo. Schemes 1 and 2 seem rather artificial - you are selling to the leaseholder, but we're supposed to pretend they are not in the market? It merely results in an unfair windfall to the leaseholder, when metaphorically speaking, they remove the mask to reveal they were in the market all along! Schemes 1 and 2 smack of the Law Commission answering the question "how can we reduce premiums" rather too literally.

    So I suppose I do favour Scheme 3 but with the cap to deal with onerous ground rents (Sub-Option 2) which should deal with the most egregious cases that have gathered press attention. This has been gone over too many times, buyers should have been better protected by their legal advisers, but they were not and now something needs to be done to rectify, it is not good public policy to see many householders with unmortgageable and unsaleable homes. As for the freeholders, there would have to be some compensation, from public money, perhaps funded by stamp duty ("funded" in marketing terms, that is, of course unlikely to be truly hypothecated).

    The development value proposal (Sub-Option 3) is also attractive, albeit I foresee some practical difficulties if the former freeholder has dissolved by the time any hypothetical decision to develop is made.

    Prescribing the rates (Sub-Option 1) is superficially attractive but I fear the prescribed rates would severely lag market values creating distorted valuations.

    Comment


      #3
      The Law Commission website for leasehold reform is shown below :

      https://www.lawcom.gov.uk/project/le...franchisement/

      Comment


        #4
        The current formula has been in existence for 25 years - therefore the cost of a lease extension as the lease gets shorter should (however unfair the formula may appear to be) be reflected in the price a lease should sell for as the lease gets shorter.

        Therefore any removal or change in the percentage of marriage value would hand a windfall to the leaseholder

        there are areas where now with the benefit of 25 years experience changes could be made so it is cheaper for the leaseholder to get a lease extension - the legal and professional fees the lessee pay could be reduced if prescribed rates were used - further if a landlord acquired his interest post 1993 then the risk of enfranchisement or a lease extension was always a possibility and maybe the landlord should bear his own fees in the event the transaction goes ahead

        On a 66 year lease in the London suburbs a lease ext on a 275k flat may cost £25k but the lessees legal costs and that of the landlord could amount to some £4K to £5k

        Without sounding like a record stuck in a groove the NPV of the ground rent needs to be disclosed so lessee appreciate the value of the financial burden a ground rent places on the property - there is nothing unfair about the imposition of a ground rent which is of course for no service - but it needs to be valued and the burden appreciated so the price paid for the property reflects that burden - the government to set the prescribed rent from time to time.

        Marriage value is the by-product of an inefficient market. If the world was populated solely by accountants, actuaries and surveyors the value of a short lease would be almost but not quite the difference in the flats liability to pay the ground rent and the delay in receiving the reversion. One of the chief drivers which explains the difference over those two figures just mentioned which gives rise to marriage value is the transaction costs and time and effort in getting a lease extension done.

        Therefore if better information prevailed and transaction costs on straight forward lease extensions cut then marriage value would fall I believe significantly. There is a growing feeling that as the Risk Free Rate has collapsed from the days of Sportelli then the deferment rate and capitalisation rates could also fall. This would further eradicated marriage value and supports the idea that Marriage Value is the by-product of an inefficient market

        Comment


          #5
          Some figures presented for cost of enfranchising a leasehold house :

          Premium to buy the freehold ( valued at £250,000 ) :

          House 1 ( 125 years Lease from 1995 and GR = £50 p.a doubling every 25 years )
          unexpired term 101 years , Premium = £4,147

          House 2 ( 125 years Lease from 1995 and GR = £50 p.a doubling every 25 years )
          Unexpired term 76 years , Premium = £16,453

          House 3 ( 241 years lease GR = £300 p.a increase every 10 years at RPI )
          Unexpired term 241 years , Premium = £9,557

          House 4 ( 241 years lease GR= £300 ,doubling every 10 years )
          Unexpired term 241 years, Premium = £79, 425 .

          Comment


            #6
            The doubling of ground rent over a certain period REALLY needs to done away with and so is marriage value and hope value. I also like the idea of not having to pay future ground rent. Of course, it's down to the government to pick and choose from the Law Commission's suggestions and hope for our best interests. I won't hold my breath though.

            Comment


              #7
              The Law Commission website announces that Professor Sarah Green and Professor Penney Lewis were appointed on 1 Jan 2020 to replace two commissioners Professor David Ormond QC and Stephen Lewis who have left.

              The Law Commissioners are:
              The Right Honourable Lord Justice Green, Chairman
              Professor Sarah Green
              Professor Nick Hopkins
              Professor Penney Lewis
              Nicholas Paines QC

              I wonder how many of these Commissioners have had real experience of buying a leasehold house ?

              Comment


                #8
                That is a solid question. Given the prestige titles though, I seriously doubt it, especially someone going by "The Right Honourable Lord Justice". Not a chance. On that note, isn't interesting that the replacements are two women? A strategic PR move? But, who are they fooling?

                Comment


                  #9
                  I dont see how in fairness payment of half of the Marriage Value to the lessor for a lease extension can be abolished. This legislation ought not to be confiscatory. It would be a windfall gain to the present leaseholder, but at the expense of future leaseholders to push up the value of shorter leaseholds by giving the present leasehold proprietor the ability to nick the extension rather than pay its true value!
                  I'd prefer to see a cap on costs recoverable by landlords and a single relativity curve set for the whole country settling by statute the relativity quotient for any given length of lease. As far as the appropriate rate of interest to use in these calculations is concerned there is a cohesive argument for it to fall as have interest rates over the last twelve years

                  Comment

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