From property tribunal to Whitehall: what happens when ministers set the valuation rate?

Article by Vanessa Griffiths, ALEP Member

The government’s consultation on leasehold enfranchisement valuation rates, at its most basic level,  focuses on a choice between two percentages. But it is about so much more, in fact it potentially changes who makes one of the most important judgements in an enfranchisement valuation.

The Leasehold and Freehold Reform Act (LAFRA) gives the Secretary of State power to prescribe the deferment and capitalisation rates used under the new Standard Valuation Method. Technically, that makes valuations more predictable, but it also means that assumptions which have developed through valuation evidence and tribunal decisions will increasingly be fixed by government.

What is changing?

The current benchmark deferment rates (5% for flats and 4.75% for houses) originate in the 2007 Sportelli decision and were reached after expert valuation evidence was tested through the tribunal process. The government is now consulting on whether to retain those benchmarks, update the Sportelli methodology or use another approach.

Capitalisation rates are even less uniform than benchmark deferment rates. Government analysis of First-tier Tribunal decisions found rates ranging from 4.5% to 9%, with 88% of the sample between 6% and 7%. That spread reflects the fact that ground rent investments differ by lease structure, review pattern, risk and return.

Under a prescribed system, the tribunal will not disappear. There will still be disputes about valuations and the application of the statutory framework. But on these particular assumptions its room for case-specific judgement will be reduced. The rate will have been set in Whitehall before the individual property reaches the valuation table.

Certainty has a value

There is a strong argument for doing this. Enfranchisement can be expensive and difficult to understand. If both sides know the rate from the outset, there should be less scope for argument about one part of the calculation. That could reduce professional costs and give leaseholders, freeholders and investors greater certainty.

I support that objective. ALEP has consistently argued that leasehold reform is necessary and that the system should become clearer and more workable. Commonhold will also have an important role in the future. My concern is not with simplification itself, but with assuming that a prescribed number is therefore neutral.

A prescribed rate is still a valuation judgement

Government modelling shows why. For an illustrative £250,000 flat with 80 years remaining, reducing the deferment rate from 5% to 4% increases the reversion value from £5,044 to £10,846. Increasing it to 6% reduces that element to £2,363: a substantial difference.

Across the market, the government estimates that a 3% deferment rate could mean leaseholders paying around £6.3 billion more to freeholders over ten years than under a 5% baseline, everything else being equal. At 6%, leaseholders would instead pay around £1.1 billion less. These are transfers between the two groups rather than net economic gains or losses, but nevertheless show that the rate chosen determines where substantial value sits.

That is why I think the policy question is broader than a decision between the two rates. Questions also revolve around what level of compensation is fair and how much property-specific evidence are we prepared to lose in exchange for consistency.

The risk of rougher justice

A national prescribed rate cannot reflect every regional market, unusual lease or building characteristic. In the present system, evidence can sometimes justify a different assumption. Standardisation will inevitably produce cases where the prescribed result differs from the conclusion a valuer might have reached by considering the asset on its own merits.

That may be an acceptable price for a simpler system, but the government must acknowledge the trade-off. It should also consider the rates alongside the other changes in LAFRA, including the intended abolition of marriage value and the altered treatment of ground rent. Each reform changes the same overall premium.

Of course, I would not argue for retaining complexity for the sake of complexity, but I would argue for prescribed rates that are grounded in robust evidence, tested against a wide range of properties and reviewed in the context of the wider reform programme. Moving part of the valuation judgement from the tribunal to ministers can deliver certainty. The important question is whether prescribed rates can deliver greater certainty without moving too far away from the underlying value of the interests being acquired.

Vanessa Griffiths MRICS, is a leasehold reform and litigation consultant and ALEP member