High Court Judgment on Leasehold and Freehold Reform Act 2024 (LAFRA): Next Steps for Freeholders
Following the recent landmark High Court judgment, it is now clear that the government’s Leasehold and Freehold Reform Act 2024 (LAFRA) has received the judicial endorsement it needed to proceed, albeit with some delays. The two judges in the case unequivocally dismissed the claims made by freehold investors who argued that the Act violates human rights, particularly focusing on three key provisions of the reform writes Clive Scrivener, Founder Partner at Wimbledon-based Chartered Surveyors, Scrivener Tibbatts Ltd.
These provisions include:
The Removal of the 50% Marriage Value in Lease Extensions
Under the current system, when leaseholders with less than 80 years remaining on their lease seek to extend their term, they are required to pay a ‘marriage value’ – 50% of the increase in the value of the property due to the extension. This provision has been a significant revenue stream for freeholders, but the government’s reform seeks to eliminate this practice. The Court has upheld the removal of this charge, ruling that it does not constitute an unjust expropriation of property.
Cap on Ground Rent in Lease Extensions
Another pivotal change in the Act is the introduction of a cap on the ground rent that can be factored into the price of a lease extension. Historically, ground rents have been a key income stream for freeholders, and the Court’s ruling signifies a substantial shift in how leasehold agreements are structured, with the government asserting that the interests of leaseholders outweigh the traditional financial arrangements enjoyed by freeholders.
Elimination of Legal and Professional Fees in Lease Extensions
The third major reform the Act introduces is the removal of freeholders’ right to charge legal and professional fees for lease extensions. The Court upheld this provision, concluding that freeholders have no inherent right to charge such fees and that doing so imposes an unfair financial burden on leaseholders.
The claimants, including major property holders such as Grosvenor Estates and Cadogan Estates, as well as institutional investors like the ARC Time Freehold Income Fund, had all joined forces to challenge these reforms, arguing that they amount to an unconstitutional taking of property without just compensation. However, the Court firmly rejected this argument, emphasizing that Parliament has the sovereign right to make laws that alter the distribution of property rights, even if those changes disadvantage certain groups.
The Court’s Findings
The judgment came as a blow to the freeholder community, particularly those who rely heavily on income from leasehold extensions and associated charges. It marks a significant victory for the government in its ongoing efforts to overhaul the leasehold system, which has long been criticised for its perceived injustices toward leaseholders.
The Court rejected the claimants’ central argument that the provisions in LAFRA expropriate property rights in violation of Article 1, Protocol 1 of the European Convention on Human Rights (ECHR), which protects individuals’ right to property. The judges pointed out that property rights are not absolute and that governments have the power to reform systems of property ownership to address perceived social or economic imbalances.
Importantly, the Court also addressed the relationship between market value and property rights, ruling that the reform does not diminish the value of freehold interests in any substantial way, nor does it undermine the overall fairness of the property market. Instead, it was determined that the changes would likely lead to a more balanced system, with the interests of leaseholders receiving greater protection and fairness.
However, the ruling was not without a certain degree of caution. The Court noted that while the government had the legal right to implement such reforms, it was crucial for freeholders to explore potential compensation mechanisms if their interests were disproportionately affected by the new rules. This opens the door for further negotiations on potential compensation, but the government’s clear position – backed by the Court – remains that the changes will proceed as planned.
Delays to Implementation
While the judgment is a significant setback for freeholders, one potential silver lining is the continuing delay in the implementation of LAFRA, which now stands at more than 18 months. This delay, initially seen as a mere technicality, may offer freeholders a small window of opportunity to reassess their strategies, particularly in terms of financial planning, portfolio management, and legal strategies.
The delay, however, should not be interpreted as a long-term reprieve. With the government now armed with the Court’s ruling, the road is clear for the eventual rollout of the reforms. The primary question remains whether the government will take any further steps to soften the impact of the Act, particularly in the face of potential political pressure from freeholder groups and property investors.
Next Steps for Freeholders
The deadline for applying for permission to appeal is 21 days from the date of the judgment, which means that freeholders must act swiftly if they intend to pursue that route. It may be better to focus efforts on strategies to minimize the impact of LAFRA when it comes into effect. Several possible approaches could help mitigate the financial fallout and safeguard long-term interests.
Prepare for the Inevitable
It is increasingly clear that LAFRA is likely to be implemented, regardless of ongoing litigation. With the High Court ruling in the government’s favour, freeholders must begin making adjustments to their portfolios, financial models, and strategies. This could involve assessing the impact of the removal of marriage value, ground rent caps, and the elimination of legal and professional fees on income streams.
Consider Financial Compensation Options
While the government has not yet indicated whether it will offer compensation for the loss of revenue associated with these reforms, freeholders may want to explore the possibility of negotiating compensation agreements. These could come in the form of tax relief, transitional arrangements, or other financial incentives that ease the burden of the reforms. Engaging with government representatives, especially those familiar with the political and economic landscape, will be essential.
Review Leasehold Portfolios for Potential Sale
With the prospect of the reforms becoming law, freeholders may want to explore the option of selling certain leasehold assets while their value remains relatively high. Some leasehold interests may still have considerable market value, particularly in prime locations or for leases with more than 80 years remaining. A strategic sell-off could help freeholders capitalise on existing property values before the full impact of the Act is felt.
Lobby for Further Reforms
While the Court has backed the government’s legal right to introduce these changes, freeholders can still lobby for adjustments to specific provisions of the Act. For example, they could advocate for a reconsideration of the ground rent cap or for the introduction of compensation mechanisms to offset the financial losses incurred by freeholders. Engaging with MPs and other stakeholders in the property industry could help generate political momentum for such reforms.
Prepare for a New Property Market Landscape
Finally, freeholders should prepare for a shifting property market that will be heavily influenced by the full implementation of LAFRA. Changes in leasehold pricing, valuations, and leasehold investor behaviour are expected as the market adapts to the new rules. Freeholders may want to reassess their property management practices, lease agreements, and overall investment strategies to better align with the new regulatory environment.
The High Court judgment represents a significant moment in the ongoing saga of the Leasehold and Freehold Reform Act 2024 (LAFRA). For freeholders, the ruling is a heavy blow, but it is not the end of the road. While the immediate prospects for an appeal appear dim, freeholders still have options to mitigate the impact of these reforms.
By focusing on strategic planning, financial adjustments, and lobbying efforts, freeholders can navigate the changing landscape of property ownership and leasing. The key to success will be adaptability, foresight, and a willingness to engage with both legal and political avenues to secure the best possible outcomes in the face of inevitable reform.
If you would like to discuss something related to a property valuation please contact Clive Scrivener direct via email at Clive@scrivenertibbatts.co.uk or call 020 8971 2983.
