By Colin Wiles, housing consultant.

The buying and selling of freeholds is one of the murkier corners of the property market. Along with spiralling ground rents and the complexities of leasehold enfranchisement, these are areas where urgent reforms are required to ensure fairness for leaseholders.

As it happens, I have had some experience of this. I’m the director of a management company that looks after six flats, one of which I own and occupy.

We pay an annual ground rent (effectively a rent for the land that the flats sit upon) of £270 per year for the six flats, but the freehold has been sold at least twice over the past 15 years. Our leases are for terms of 999 years so the landlord (ie, the freeholder) basically owns an asset that potentially pays £270 a year for a thousand years – a total, in theory, of £270,000, but what the freeholder has bought is not an asset (he can’t get his hands on it for a thousand years) but an income stream, which is capitalised to a present value.

If you look at property auction websites you’ll see that freeholds are bought and sold over the heads of leaseholders, mostly without their
knowledge or say so. It’s like a modern-day form of semi-feudalism.

When I worked for a housing association in Cambridge, we also had a number of leases from Jesus College that were less than 80 years in length. At that point, the market value of the property starts to reduce and it’s difficult to put them up as security on loans; but if you want
to extend the lease there is a complex formula that requires you to pay a premium to the freeholder for the loss of his or her asset.

Readers of this blog will also be aware of the recent scandal of housebuilders selling houses on long leases with spiralling ground rents, increasing to as much as £10,000 a year. It’s all very unfair and very un-British.

Anyway, all this is a preamble to a couple of recent developments that have the potential to improve the lot of long-suffering leaseholders. Firstly, last year the government pledged to legislate in 2020 to reform leaseholds by requiring that: leases are only used for flats and not houses; ground rents on new leases are at a peppercorn; and service charges are fair and transparent.

Just a couple of weeks ago the Law Commission published a report, requested by the government, setting out proposals for reforming the way that Britain’s four million leaseholders can either buy their freehold or extend their lease.

The Leasehold Reform Act 1967 gave leaseholders of houses the right to buy their freehold or extend their lease, and the Leasehold Reform Act 1993 gave the same right individually to leaseholders to extend their lease, or with other flat owners to buy the freehold as a collective. This is the principle of enfranchisement.

Campaigners asked for a simple formula where a lease could be extended or bought out at 10 times the ground rent, but the Commission has rejected this because of worries about the human rights of freeholders under the European Convention on Human Rights, which “provides for the peaceful enjoyment of property”. (Yes, it seems that even wealthy landowners like the Duke of Westminster, the Crown or the Church have human rights!)

Instead the Commission came up with three options: first, broadly, sticking with the status quo; second, eliminating the marriage value in enfranchisement; and third, also removing any hope value from enfranchisements. The second two options would have the effect of reducing
the premium paid for leaseholds or the granting of freeholds, albeit not by as much as campaigners had hoped for.

Marriage value is the added value when a person owns the whole of the property: ie, where both the freehold and the leasehold value are “married” together and it amounts to more than the sum of the two parts. For example, a leasehold property might be worth £231,000 and
the freehold (with a leaseholder in occupation) is worth £9,000 – a total of £240,000, but the freehold value is £250,000 so the marriage value is £10,000.

Where the lease has 80 years or less to run, the law requires the leaseholder to pay half of the marriage value to the landlord, but if it has more than 80 years to run the leaseholder doesn’t have to pay any marriage value to the landlord.

The hope value is a deferred form of marriage value whereby a purchaser might buy a leasehold with the “hope” that it’ll be sold to the leaseholder in the future, so they’re prepared to pay a higher price now.

The Law Commission report gives a worked example of a property worth £250,000 with 76 years on the lease and a ground rent of £50 rising to £200 a year. Under existing calculations the leaseholder would have to pay £16,453 to buy out the lease, but this would fall to £10,61 if “hope” value is reformed and drop to £9,155 if there’s no “marriage value”.

Either way, it would be a better deal for leaseholders This is a complex area that has some implications for housing providers, particularly those that have taken on long leases from freeholders. You’ll need to make sure that your business plans are taking account of any changes, but the overall impact will be good for leaseholders.

I only hope that the government does make time for legislation, as it’s promised.