The impact of the Leasehold and Freehold Act on local authorities

The Leasehold and Freehold Reform Bill has now been enacted, and its impact on local authorities is likely to be substantial when it comes into force.

The legislation would impact on local authorities’ finances in at least three ways: changes to the length of residential property leases will reduce their value to local authorities as freeholders; income from lease extension, enfranchisements and ground rents will be reduced and the ability for leaseholders in mixed use buildings to take on the freehold and management of their property will introduce a number of complexities. Additionally, a possible move towards commonhold would create new complexities in property management.

In my experience of advising local authorities on their landholdings, I have seen that their potential to generate income from property investments is considerable and this is crucial to supporting services including social care, police and fire services, transport and highways, refuse collection, cremation and burials, education and cultural services.

My first concern is the proposed exclusion of marriage value from premiums. Simply put, marriage value is the profit released by combining a freeholder’s and leaseholder’s interests in a property. Currently, to extend a lease which is less than 80 years, a leaseholder must pay 50% of the marriage value to the freeholder. The removal of marriage value artificially reduces the premium payable by the leaseholder to the detriment of freeholders, many of whom are local authorities.

It is very difficult to quantify this impact as each local authority’s property portfolio is different and the marriage value of each lease relates to its unexpired term. A rough assumption of the impact can be made by calculating the premium value of all leases owned by the council and reducing this by a third. The legislation does not propose any form of compensation to those impacted by this change.

A further proposal in the overall reforms was to reduce existing ground rents to ‘a peppercorn’ (zero financial value). This appears to have been parked for now, although the Act provides for ‘onerous’ ground rents to be capped at 0.1% of the freehold value. Many local authorities (along with charities and other non-profit making organisations) derive substantial income, quite legitimately, from ground rents - which fund both the management costs of the properties themselves and council services and so dropping this proposal to ‘peppercorn’ ground rents across the board seems sensible.

The impact of the legislation will be compounded by a revised allowance brought in by the Act which increases from 25% to 50% the ‘non-residential’ limit which prevented leaseholders in mixed use buildings from buying their freehold or taking on the management of their buildings. The change will enable tenants to assume a management responsibility but in many cases they would lack the means of doing so – financial or otherwise. And should the new owners of the lease abscond, it could fall to the local authority to rectify the situation.