Leasehold valuation reform: Why lenders should watch the small print – Griffiths
The government wants a simpler enfranchisement system, but the rates it chooses could affect premiums, borrower decisions and the marketability of short-lease property.
The government’s consultation on leasehold enfranchisement valuation rates looks highly technical, but mortgage lenders should pay close attention. The deferment and capitalisation rates that will be prescribed under the Leasehold and Freehold Reform Act (LAFRA) will help determine what leaseholders pay to extend leases or buy freeholds and what freeholders receive in return.
The significance to lenders is that lease length and the cost of curing a shortening lease can affect a property’s marketability. In practice, I see lender choice narrow at the very short end of the lease-length spectrum.
A borrower may therefore have a perfectly rational reason to delay a lease extension in anticipation of reform, while a lender may be more concerned with the value and saleability of its security today.
There is no neutral rate
The deferment rate discounts the value of the freeholder’s right to recover the property when the lease expires. The current benchmark, as detailed in the Leasehold enfranchisement valuation rates consultation, is 5% for flats and 4.75% for houses. The capitalisation rate values the ground rent income stream and is currently much less standardised.
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Government analysis of First-tier Tribunal decisions found rates between 4.5% and 9%, although 88% of the sample fell between 6% and 7%.
Where the government sets these rates can materially alter a premium. Its own modelling shows that 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. Raising it to 6% reduces that element to £2,363. These figures are not the total premium, but they demonstrate why apparently small changes in the rate can have large effects.
At market level, the point is even clearer. Against the existing 5% baseline for flats, the government estimates that a 3% deferment rate could mean leaseholders paying around £6.3bn more to freeholders over 10 years, all else equal. At 6%, leaseholders would instead pay around £1.1bn less.
These are transfers between the two groups, not net gains or losses to the economy, but they are relevant because they show that prescribing a rate is an economic judgement as well as a simplification measure.
The importance of the transition
For mortgage lenders, the period before implementation could be particularly awkward. One of the objectives of LAFRA was to abolish marriage value, which is currently payable where a lease has 80 years or fewer remaining, and to change the treatment of ground rent in statutory valuations. Some owners with leases of below 80 years will understandably consider waiting to extend their lease if they expect the future system to reduce the premium payable.
The difficulty is that the final rates and commencement arrangements are not yet known.
A borrower who waits may save money, but may also face a narrowing mortgage market, a delayed remortgage or a more difficult sale in the meantime. The correct decision depends on the lease length, property value, ground rent, intended transaction timetable and the borrower’s circumstances. I do not think ‘wait for reform’ should become default advice.
Why the consultation should look beyond the two percentages
My broader concern is that the rates are being considered alongside several other major changes. Abolition of marriage value, limits on the ground rent used in valuation and separate proposals for existing ground rents all affect the same calculation. A rate that appears reasonable in isolation may produce a different result once the rest of the framework changes.
I would like the government’s final analysis to show the combined impact on different lease lengths, values, ground rent structures and property markets. That would be useful not only to leaseholders and freeholders but to lenders and valuers assessing security and marketability. A national prescribed rate may reduce disputes and professional costs, but it also reduces the scope to reflect individual property characteristics.
As an Association of Leasehold Enfranchisement Practitioners (ALEP) member, I support meaningful leasehold reform and recognise that commonhold will play an important role in the future. I also think reform needs to be implemented in a way that protects confidence during the transition.
For lenders, the issue is not whether leasehold should remain unchanged, but whether the new valuation framework is sufficiently clear, evidence-based and joined-up for property values and lending decisions to adjust to it sensibly.
