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Why is leasehold enfranchisement much more common than it used to
be? The main answer lies in Commonhold and Leasehold Reform Act
2002, which says that Ts no longer have to occupy the property as their
residence to qualify. So, a developer can now buy a lease of a house or
a flat, and then claim the freehold (or a 90-year lease extension) even
though he has no intention of ever living in the property. Even
institutional investors with portfolios of ground rents in the residential
markets can do this.
It has even been possible, in one case, for the
head lessee of a large mansion block to claim statutory lease
extensions on all 28 of the flats within the building.
At the same time, more people are becoming aware of the financial
benefits of enfranchisement. As everyone knows, the lease and
reversion are worth more together than they are worth separately. When
the two come together in the hands of the lessee then this latent value
(‘marriage value’) is realised. That marriage value then has to be split
between L and T, but the key point is that T only has to pay half to L (eg
a T who buys the freehold might pay £100,000 for a reversion which,
once it is in his hands, is worth £50,000 more than he paid). At the
same time, Ls tend to do quite well out of enfranchisement as well.
Ordinarily, Ls selling the freehold or a lease extension would have to pay
tax on the premium they receive, but if the sale takes place under the
legislation there will be roll-over tax relief. Accordingly, large Ls, who
were previously in the business of selling lease extensions, can carry on
almost as usual but under a more advantageous tax regime.
This increasing focus on enfranchisement has, in turn, placed greater
emphasis upon valuation techniques and that, in turn, has largely
focused on the calculation of the appropriate ‘deferment rate’. As we
noted previously, this is basically the yearly rate of
return that a buyer of the reversion would be looking to achieve on the
investment. Because the reversion often needs to be discounted over a
long period of time (ie the duration of an existing lease) small changes
in the deferment rate can cause large changes in the final figure (eg in
a recent case a deferment rate of 6% gave a value of £1.3m; a 5%
deferment rate increased the value of the reversion to £2.3m). The case
of Sportelli has caused much joy to Ls by laying down nationwide
deferment rates of 4.5% or 4.75% (lower than previously expected – and
thus benefiting Ls). As a note in the NLJ points out, the financial impact
of this can only be guessed at, but it is probably true to say that it has
taken billions of pounds out of the hands of Ts and put it into the hands
of Ls. Furthermore, the Lands Tribunal in that case was at pains to stop
any further litigation on this issue by saying that there should be a
guideline figure across the whole country (even thought the deferment
rate is just a component of a factual valuation, and is therefore surely
affected by local conditions). Having said that, it is surely only a matter
of time before this issue ends up in the CA. In the meantime, for a useful
introduction see [2007] NLJ 26.
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