Today (24 May 2025) the Leasehold Knowledge Partnership failed in its application to intervene on the side of the government against freehold owing group’s judicial review against aspects of the 2024 Leasehold and Freehold Reform Act (LAFRA), writes Sebastian O’Kelly.
Specifically, the freeholders claim the loss of marriage value – half the notional uplift in value of a property with a lease under 80 years – and the capping of ground rents in lease extension calculations to 0.1% of the property’s value (and the obligation to pay their own professional and legal costs rather than dump them on the leaseholder) – are an infringement of their human rights.
Obviously, it is desirable for leaseholders that the judicial review fails. But economist Alexander Hamilton argues below that while these LAFRA reforms will benefit owners of short leases, and owners of very long ones, leaseholders with leases between 80 and 150 years would end up paying more for a lease extension under LAFRA’s reforms than under the present unreformed regime.
For this reason we must press the housing secretary for the most favourable deferment rate. Sadly, the evidence of a blighted market in flats – owing to appalling build quality revealed post-Grenfell and well-founded wariness among buyers – means there is a very strong argument for a lower real growth rate in leasehold property values and therefore the deferment rate should go up significantly, to the advantage of leaseholders.
This is an issue that the present housing minister, Matthew Pennycook, understands clearly, and he referenced it when he addressed the All-Party Parliamentary Group on leasehold reform last March:
Path is set to kill off leasehold and replace it with commonhold
By Alexander Hamilton
Dr Hamilton analyses the effect of the Leasehold and Freehold Reform Act 2024 on enfranchisement, and demonstrates how leaseholders could be worse off than they are already. Dr Hamilton is an economic adviser and development economist at the UK’s FCDO, where he specialises in the economies of the Middle East and North Africa. He writes on the economics of leasehold in a private capacity. The views in this article are his own, and do not necessarily reflect those of the FCDO or the UK government. His scholarly work can be found here
There is considerable uncertainty over whether the commencement of the Leasehold and Freehold Reform Act 2024 (LAFRA) will make it cheaper for all or just some leaseholders to extend their lease.
This is because the premium payable for a lease extension is composed of three distinct elements – marriage value (where applicable), the present value of ground rents (term value), and the present value of the property (reversion value), and some of these costs may actually increase rather than decrease depending on how different elements of LAFRA are commenced.
Specifically, LAFRA stipulations that:
(1) Marriage value is to be abolished, which should represent an unambiguous cost saving for the sub-set of leaseholders with less than 80 years left on their lease.
(2) The capping of the value of ground rents, for the purposes of lease extensions to 0.1% of the value of the property might be assumed to represent a cost saving for many leaseholders, however this is actually contingent on the setting of:
(3) Capitalisation rates (which determine the present value of ground rents) and the deferment rate (which determines the present value of the property) for the purposes of calculating the premium payable.
If either or both of these rates is reduced sufficiently rather than maintained or increased, then at least a subset – and possibly even a majority of leaseholders, may find that it becomes more expensive to obtain a lease extension under the ‘LAFRA reform regime’ rather than the current status quo.
Of course, if the deferment and capitalisation rates are maintained at their present value or increased alongside the abolition of marriage value and the cap on ground rent values for the purposes of a lease extension applies, then this would, unambiguously, result in all leaseholders benefiting from a reduced premium payable for a lease extension under the LAFRA reform regime.
Using publicly available data, we model the impact on the cost of a lease extension for a hypothetical ‘typical’ or ‘average’ leasehold property using the current regime (with marriage value and uncapped ground rents for the purposes of valuation, but also a 5.0% deferment rate and 6.0% capitalisation rate).
We can then compare the results with what might happen if the LAFRA reform regime is implemented in the following way: no marriage value, capped ground rents for the purposes of lease extensions, but with the deferment rate set at 3.5%.
Our results show that the implementation of LAFRA in this manner has different welfare implications for typical leaseholders that vary depending on the time left on the current lease.
Specifically, if ‘average’ leaseholders have less than 80 years on the lease, they benefit modestly from the implementation of the reform regime because while the abolition of marriage value represents a big cost saving this is almost completely offset by the increase in the reversion value triggered by the reducing in the deferment rate.
If average leaseholders have an intermediate lease length (81 – 150 years) they will see a big increase in the premium payable.
This is because the average leaseholder in this scenario does not benefit from the abolition of marriage value and does not have so many years left on their lease as to minimise the effect of a reduction in the deferment rate.
Finally, if average leaseholders have a long lease (over 150 years) they are likely to benefit from the cap in ground rents, because the effect of the reduced deferment rate is minimised by the long-time period before the reversion of the property.
Given these potentially different welfare outcomes, in order to calculate the potential real world ‘average’ welfare implications for leaseholders of this shift we combine the insight of our hypothetical exercise with data on the actual lease lengths of leasehold properties.
As almost 2 in 3 (64%) of leasehold households with a known lease length have leases of intermediate duration (81-150 years), the implementation of the LAFRA reform regime represents an approximate £3.14 billion welfare loss for leaseholders due to the increase in the cost of the premium payable vs. the current regime for lease extensions.
The detail
The premium payable for a lease extension is determined by:
(1) marriage value – when applicable
(2) ground rents and their associated capitalisation rate
(3) the reversion value of the property and its associated deferment rate
LAFRA gives the government the ability to alter the relative contribution of these parameters with a stated objective of making lease extension (generally) cheaper.
The proposed mechanisms for changing the cost of lease extensions include:
1) Abolishing marriage value (affecting only properties with 80 years or less on their lease).
2) Capping the calculation of ground rents to 0.1% of the property value for the purposes of a lease extension.
3) The Secretary of State setting the capitalisation and deferment rates and reviewing these every 5 and 10 years respectively.
Since the Sportelli Case (2007) the reversion rate for flats has been set at 5.0% and the capitalisation rate has been set at 6.0%.
A higher discount rate would benefit leaseholders because the present value of the property and ground rents would be lower, but a lower rate would benefit freeholders.
However, even prior to LAFRA, these rates had been challenged in court because interest rates have generally fallen since the 2008 financial crisis.
In one famous case, Llangewydd Court Ground Rent Estate v Ralph & Anor (2021), the Court of Appeal acknowledged in its decision that the rates may be lowered in the future if compelling evidence is presented.
Since then, the rise in interest rates has muted the rationale for of any such argument.
However, if interest rates fall in the near future, and given that LAFRA (Schedule 5) compels the Secretary of State to review these rates at regular intervals, a reduction in these rates is a distinct possibility.
Furthermore, some of the advice – here’s RICS’s – that the government has received is that the deferment and capitalisation rates should be set at of 3.5% (the strong preference of freeholders).
Although, it is important to note that, even with falling interest rates, there are also compelling arguments that these rates should be increased not decreased:
We can model the potential impact of the implementation of LAFRA, for leaseholders’ lease extension costs with respect to the premium payable, to determine whether they will be better off under the current or (potential) future regime for lease extensions.
Specifically, we can compare two different ‘regimes’ for lease extensions: We can model the potential impact of the implementation of LAFRA, for leaseholders extension costs with respect to the premium payable, to determine whether they will be better-off under the current or (potential) future regime for lease extensions.
Specifically, we can compare two different ‘regimes’:
1) The ‘current regime’ for lease extensions in which the deferment rate is set at 5.0%, and the capitalisation rate is set at 6.0%, marriage value exists for properties with a lease below 80 years, and there is no cap on the value of ground rents when calculating the premium payable/total costs.
2) The LAFRA ‘reform regime’ for lease extensions in which deferment rate is set at 3.5%, marriage value no longer applies to any property, and the value of ground rents is capped at 0.1% per annum of the value of the property for the purposes of a lease extension. We explain below why we keep the capitalisation rate at 6.0%.
[For those interested in the general analysis of the impact of a 3.5% deferment rate see: Are Lease Extensions About To Get More Expensive?. We use 3.5% because there is evidence that this is the rate that many freeholders are advocating for and it was also the rate recommended by Tim Leunig, one of the government economic advisers. See: Leasehold and Freehold Reform Bill (Second sitting) – Hansard – UK Parliament. We explain below why we keep the capitalisation rate at 6.0% under the LAFRA Reform Regime.]In terms of comparing the impact of the different regimes it is important to explore the effect of different lease lengths.
This is because, as the lease length decreases the impact of a lower deferment rate drives the cost of the reversion value higher at an increasing rate.
While, as lease length increases, eventually the cost effect of different deferment rates becomes negligible, albeit at different time periods, as with increasing lease length the reversion value will tend towards zero.
Modelling the ‘average’ or ‘typical’ leaseholder
We can use data from LAFRA’s Impact Assessment , the Land Registry , English Housing Survey and the MHCLG’s Planning Portal to identify the characteristics of a ‘typical’ leasehold property.
Specifically:
1) The average ground rent for leaseholder properties in England is £300.
[There is considerable uncertainty over the average ground rent in England, with samples from the English Household Survey yielding estimates that fluctuate and range from £200 in 2016 to £419 in 2023. So, we use £300 as an approximate average. There is little information on the average rate of increase of ground rents, so in the baseline scenario we assume no annual increase. However, we subsequently relax this assumption.]2) The average cost of a flat in England is £230,000[v] – let us say £253,000 after lease extension using current deferment and capitalisation rates.
3) The average approximate length of remaining time on leases in England is 110 years.
[According to the LAFRA Impact Assessment p.127 the median leasehold property has between 99-125 years left on the lease- so the average is 112, which we round to 110 years remaining.]Assumption about the cost of escalating ground rents
While most leases contain ground rents that increase over time, we do not have good quality data to estimate what the average rate of increase is over time.
This is a significant challenge because escalating ground rents are capped, for the purposes of lease extension cost estimation under the terms of LAFRA, and therefore not accounting for escalating ground rents could underestimate the benefits of LAFRA with respect to minimising leaseholder lease extension costs.
In order to compensate for this fact, we assume that the capitalisation rate under the LAFRA reform regime remains at 6.0% (as is currently the case) and is not reduced like the deferment rate.
Should the capitalisation rate be reduced, it would increase the costs of the term value.
In fact, if the capitalisation rate were to be set at 3.5% in some, probably most, cases leaseholders would find that the term cost component of the lease extension would be higher under the LAFRA reform regime even with the 0.1% cap, as for a greater proportion of the outer years of a lease would still have non-zero value ground rents even if these are below the cap.
This would be the equivalent of having extremely aggressive rising ground rents under the current lease extension regime.
Thus, our proposed LAFRA reform regime is likely to overestimate the cost savings of LAFRA because it assumes that the capitalisation rate will stay exactly as it is at the time of writing.
The potential impact of LAFRA on the ‘typical’ leaseholder
Table 1 shows the cost of a lease extension for this ‘typical leaseholder’ assuming different lease lengths depending on whether the current regime for lease extensions or the LAFRA reform regime is used.
The Table shows the complex and non-linear effect of switching from the current regime to the LAFRA reform regime. There are three important insights revealed by this exercise.
Specifically:
(1) Modest cost reductions for a lease extension with a short lease.
In the case of a short lease (Row 3) the LAFRA reform regime provides a very modest reduction in costs (£3,938) vis-a-vis the current regime. This is because the impact of abolition marriage value (Column 4) is almost completely offset by the reduction in the deferment rate which increases the reversion value (Column 3 vs. Column 7).
Meaning that a leaseholder seeking to extend such a lease would still have to pay a very large sum under the LAFRA reform regime (£64,063 vs. £68,001).
(2) A very large increase in the cost for a lease extension with an intermediate lease length.
Leaseholders with leases above 80 years (who do not benefit from the abolition of marriage value) but whose leases are not long enough to diminish the effect of a change of the deferment rate (Rows 4,5, and 6) see a proportionately very large increase in costs.
At 90 years the cost of a lease extension under the LAFRA reform regime is 85% higher than the cost under the current regime (Column 10), and even at 136 years, the cost of a lease extension is still 20% higher under the LAFRA reform regime.
(3) A reduction in the cost of a lease extension for leaseholders with a very long lease.
Finally, with a very long lease length (Rows 7 and 8), a leaseholder would benefit from the LAFRA reform regime because the reversion value is now approximating zero.
This is because even with a lower deferment rate the discounting of the reversion value due to the many years left on the lease minimises this cost component, but the leaseholder would still benefit from the cap on the value of ground rents (Column 6 vs. Column 2).
What proportion of leaseholders are more at risk of higher vs. lower costs under our hypothetical LAFRA reform regime?
While we don’t know whether all aspects of LAFRA will be implemented and what deferment and capitalisation rates will be used, we can use our hypothetical ‘average’ leasehold property results above alongside data on actual lease length to identify what proportion of leasehold properties may be at most risk of higher costs for lease extensions if LAFRA is implemented as we suggest.
Of course, this is only a very crude approximation, but it does allow us to identify, for the first time what proportion of leasehold properties may face the biggest increase in risk that the cost of lease extension increases rather than decreases with LAFRA implementation.
Specifically, we use data collected in the LAFRA’s Impact Assessment to identify the proportion of properties with different lease values and therefore particularly/not particularly affected by a change in the deferment rate.
As Table 2 below shows, a critical mass of leaseholders (63.5% of leaseholders with a known lease length- Column 4) have leases of an ‘intermediate value’ (81-150 years remaining-Rows 3-5) that make them particularly vulnerable to increased costs should LAFRA be implemented as suggested in our LAFRA reform regime (see analysis above).
Furthermore, we can use the fact that we know how many leasehold households there are for different lease lengths (Columns 1 and 2), coupled with the net effect of shifting from the current regime to the LAFRA reform regime (Column 6), to calculate a crude ‘average’ welfare effect by multiplying the ‘average expected’ change in the cost for the typical leaseholder property (Column 6) by the number of households with a given lease length (Column 7).
Adding the cost savings (negative changes in costs) and the cost increases (positive changes in costs) allows us to estimate that the net aggregate cost effect of switching from the current regime to the LAFRA Reform Regime would result in leaseholder lease extension costs rising by a total of £3.14bn.
In other words, if the LAFRA reform regime were implemented tomorrow and every single leaseholder sought to extend their lease, they would, in total, pay £3.14bn more than if they extended their lease under the current regime today.
Table 2: The welfare effects of shifting from the current regime to the LAFRA reform regime across different cohorts of leaseholder households.
Limitations and suggested next steps
Our results are similar to those of other analyses that have found that similar patterns/groups of leaseholders will/will not benefit from the implementation of LAFRA in a manner comparable to the one we have explored.
For example:
Our analysis is based on a set of assumptions about the average characteristics of leasehold properties and a specific proposal regarding how LAFRA may be implemented.
Future analysis should vary both these attributes, to explore the effect of:
(1) different implementation possibilities, and
(2) the effects on different leasehold characteristics.
Furthermore, our analysis has focused on the implementation of one element of LAFRA, the determinants of the premium payable.
However, LAFRA also stipulates that leaseholders should not, ordinarily, have to pay all or most of the legal costs of freeholders when extending their lease. This is not considered in our analysis but should certainly form the basis of a fuller analysis on the total welfare effect of LAFRA on leaseholders’ lease extension costs.
The Leasehold Advisory Service’s guidance to lease extension calculations is here
Linz Darlington of Homehold, which handles lease extensions, argued similar points to Dr Hamilton here:
Related posts:
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Metropolitan housing association MTVH tells MPs: we won’t collect ground rent, we have ditched marriage value and all leases are 990 years (where possible)
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Leaseholders blocked from intervening against freeholders’ judicial review against reforms
Using the same rate (5%) for all years whether the reversion is 20 years away or 115 years is too simplistic
For shorter leases the rate could well be below 5% and for reversions over 100 years higher then 5%
What is often overlooked in the discussion on Marriage Value is this:-
Prior to 1993 a leaseholder of a flat did not have a right to extend the lease – therefore the premiums paid on the granting of leases were less but the freeholder was in a stronger bargaining position when a lease extension was sought
The 1993 Act resulted in an improvement in the value of the flat and meant the freeholder would get less for a lease extension
Therefore, at the time it was agreed to fend off a human rights challenge that the marriage value would be split 50;50 between the freeholder and leaseholder
But since 1993 the freeholder got a better price when the lease was granted and therefore there is no real justification for giving marriage value on lease granted post 1993
To take away marriage value on pre-1993 leases would be to row back on previously agreed compensation to address human rights and would indeed be challenging
And at the time objections were made that it made extending a lease or buying Enfranchisement too expensive for many. Lots of Lords with Establishment connections – one Lord Young got it through. Tony Blair objected but like this lot didn’t remedy when they got power.
Ireland 1978, Northern Ireland 2001, and Scotland 2000, all modernised their feudal systems to align with the modern world, restore equity and to achieve true home ownership. What did England do? Went backwards, made things worse, denied home ownership and entrenched feudal laws. The only real difference between their situations and ours was that ours was more entrenched and more monetised – at the expense of Leaseholders. It’s all feudal in origin and not fit for the modern world.
England is the outlier – unable to think out of the box and to get rid of the whole iniquitous system like they have. In Ireland the Landlords made the same claims about their “rights” and made HR challenges – overruled in the Public Interest.
Quote: “The aim of the Bill is to reform the law relating to ground rents by providing a scheme for their redemption, thereby simplifying the conveyancing process and removing an outdated burden on property owners.” – Mr. Mark Durkan, Minister of Finance and Personnel, Northern Ireland Assembly, Second Stage Debate, 5 June 2000 (Northern Ireland Assembly Official Report, Hansard).
Quote: “The Bill seeks to abolish the feudal system of land tenure, which is an anachronism that has no place in a modern Scotland, and to replace it with a system of outright ownership that benefits the people who live and work on the land.” – Jim Wallace, Deputy First Minister and Minister for Justice, Scottish Parliament, Stage 1 Debate, 29 June 1999 (Official Report of the Scottish Parliament, Vol. 1, No. 14).
Their systems buy out the ground rent and convert to fee simple. No fuss, no deferment values, capitalisation, marriage value – the racket that we have entrenched in the minds of everybody involved. We can and should have the same system.
Marriage Value in Leasehold is a fiction invented by greedy landlords and promoted by lawyers and judges. It wasn’t even a common factor until 1993. Its another way of getting free money for doing absolutely nothing and as the Law Commission proposed, should go. “Deserving” doesn’t come into it.
The 1986 Human Rights challenge that failed was well before Marriage Value. In other words the level of compensation without MV was perfectly acceptable then and so unjustified now. It’s just an additional feudal burden. It is not a Human Right to specify a particular level of anyway undeserved “compensation.”
The goal should be to get rid of all these false valuation assumptions and follow our neighbours who are way ahead of us.
Here is another simple idea:
Ground rents are mostly banned on new builds but that leaves 5m people still paying groundrent.
Why doesn’t England do as the Irish and Scottish did: allow a “buy out” of the ground rent at say 10x which is more than enough considering that ground rent is money for doing nothing.
In Ireland that applies to flats too though doesn’t make them freehold like houses.
Is that too simple, straightforward and fair for the English Parliament? Probably.
If it isn’t cheaper for everybody, a lot cheaper and not just a bit cheaper, and not just for a few then they are breaking their promises and the whole point of the Law Commission findings. The promise was “easier, cheaper and quicker” using a simple Calculator. Where has all that gone in that complicated description?
I could not agree more with the above posting. Absolutely correct.
This obsession with abolishing marriage value has been foolish in my view, not least because it won’t happen, in my view.
Marriage value is a legitimate part of value, and by focussing on its abolition, as opposed to the disgusting way that deeply immoral and greedy freeholders have used to the law to massively inflate marriage value payments at a given lease length, was foolish. It is the inflation of marriage value – and the failure of conveyancers to demand that all leasehold buyers take specific specialist advice on the economic impact of the lease not being 999 years no ground rent – is and always was the issue, not marriage value per se.
£10 says marriage value stays and cap. rates and deferment rates are set at levels more favourable to freeholders than the market evidence suggests they should be. Net result, savings for most leaseholders, but not as much as hoped, and not enough to compensate those who have waited 3 years let alone those who have been waiting 9 years.
All guesswork of course – I have no crystal ball.