What has the enfranchisement valuation consultation failed to ask?

Article by Vanessa Griffiths, ALEP Member

I welcome the Government’s consultation on leasehold enfranchisement valuation rates. The deferment and capitalisation rates to be prescribed under the Leasehold and Freehold Reform Act (LAFRA) are important and specialist evidence should inform what they are set at.

My concern is that the consultation is largely framed around how to implement a simpler valuation system. It asks which rates should apply, but in my view it gives too little attention to the questions that should come first: what is the new system intended to value, what level of compensation is fair and how should the different strands of leasehold reform work together?

What is fair compensation?

The choice of rate determines where value sits between leaseholder and freeholder. A lower deferment rate increases the present value of the freeholder’s reversion and a higher rate reduces it.

Government modelling estimates that, against the existing 5% baseline for flats, a 3% deferment rate could mean leaseholders paying around £6.3 billion more to freeholders over ten years, everything else being equal. At 6%, leaseholders would pay around £1.1 billion less.

Those are transfers between parties involved in the leasehold enfranchisement process rather than net economic gains or losses to the economy, but they are very important in illustrating why the consultation should have asked more explicitly what principle of compensation the government is trying to achieve.

Historically, enfranchisement valuation has sought to approximate the value of the interests being acquired through market evidence and established valuation principles. Prescribed rates inevitably introduce a stronger policy judgement into that process.

Can one national rate be fair?

The consultation also proceeds on the basis of prescribed rates applying across England and Wales. Yet property markets are not uniform. The assumptions that make sense for prime central London may not be identical to those for Cardiff, Manchester or the North East. Real growth expectations can differ and individual buildings can carry different risks or levels of obsolescence.

I accept the attraction of a national rate, primarily that it should reduce disputes and improve predictability. But standardisation comes at the cost of some individual precision.

I would have liked more direct examination of how much divergence from property-specific market evidence is considered acceptable in return for simplicity.

What happens when several valuation rules change at once?

Unfortunately, the rates are not being changed in isolation. LAFRA sets out to abolish marriage value and restrict the ground rent taken into account in the statutory calculation. Separate proposals would also alter existing ground rents. Each change affects a different part of the same enfranchisement premium.

That makes it difficult to judge a deferment or capitalisation rate without testing the combined outcome. A rate which appears reasonable under today’s valuation structure could produce a different balance once marriage value has disappeared and the income stream from ground rent has been reduced.

I would like the final analysis to model the package across different lease lengths, values, ground-rent structures and property types rather than treating each reform as a separate exercise.

How should valuation support the move towards commonhold?

This is a wider question. Government policy is moving towards a greater role for commonhold. As ALEP, we support meaningful leasehold reform and recognise the potential of commonhold, but existing leasehold interests will remain relevant for many years. Enfranchisement may also form part of the route by which some buildings eventually move away from leasehold.

We would therefore like to ask what valuation framework best supports a fair and workable transition. If enfranchisement becomes prohibitively expensive, change may be harder for leaseholders; whereas if compensation is set too low, confidence in existing property rights may suffer. And neither outcome helps the reform programme.

The missing question is about the system as a whole

ALEP wants the government to use the consultation to secure a simpler and more predictable system, but we question whether success can be measured only by whether two prescribed percentages reduce the scope for dispute.

I believe there is a need to explain the principle of compensation, the limits of national standardisation and the combined effect of all the valuation reforms. The rates matter enormously, but the most important task is to make sure the valuation system around them is coherent.

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