RFA responds to MHCLG reforms on enfranchisement valuation rates

The Residential Freehold Association (RFA) has submitted its response to the Government’s leasehold enfranchisement valuation rates consultation.

As the representative organisation for professional freeholders, the RFA has provided extensive technical data to the consultation, constituting the largest body of transaction-level evidence aggregated to date. Drawing on relevant data covering almost half a million leasehold properties, this stands in stark contrast to the Government’s limited evidence base, which relied on just 341 Tribunal decisions in its assessment of capitalisation rates.

The ability for the Secretary of State to unilaterally prescribe rates allows for arbitrary movement away from true market value. The existing framework allows departures from standard rates where the circumstances of an individual property or transaction justify them, supported by both established valuation principles and case law.

By prescribing rates, this flexibility will be removed and risks creating valuations that do not accurately or fairly reflect the characteristics of a property interest being valued, creating a situation where leaseholders will not be paying true market value. This concern is reflected in the advice of the Law Commission’s 2020 report, which warned against prescribed rates being so inflexible that they fail to account for differences between properties.

In particular, the RFA is concerned with the Government’s reliance on historical market evidence, which fails to adequately account for the impact of recent interventions in the leasehold market that have materially distorted the market for residential freehold investments.

Drawing evidence from a market already blighted by these interventions creates a circularity whereby Government policy has depressed investment values, which are then used to justify higher capitalisation rates and lower enfranchisement premiums. This would effectively compound the financial impact of Government intervention, moving away from the fundamental premise of true market value and further undermine the principle that freeholders should be properly compensated for the loss of legitimate property interests.

This is of particular importance given the timing and uncertainty of the Commonhold and Leasehold Reform Bill. In its draft form, the Bill will cause fundamental changes to the leasehold market that have significant implications for property valuations. The proposed ten-year review compounds all this and risks detaching prescribed rates even further from prevailing economic conditions, without the flexibility to respond to market changes.  

The evidence is clear that these impacts cannot be explained by financial market movements alone. We are therefore urging the Government to give appropriate weight and consideration to the scale of this evidence when considering its options for rate setting.