For far too long freeholders have got away with creating a house of cards of bogus value by rigging the leasehold enfranchisement process, writes Sebastian O’Kelly.
Now the government is consulting on reforming it, but why pander to the freeholders’ methodology?
After all, the stakes could not be higher. If government messes up the setting of enfranchisement rates then the benefit of abolishing marriage value vanishes, commonhold won’t take off and the grisly leasehold game goes on.
Government ministers talked of ending ‘the feudal leasehold system’ and were gung-ho to killing it off when in Opposition. So it’s a bit feeble to launch a consultation without challenging some of the utter fiction underlying it all.
Not to be forgotten, is that freeholders are punters taking a risk on an investment. In contrast, the vast majority of leaseholders are just ordinary people who bought a home.
Far too many of them have been shafted by trickery in aggressive lease terms, conveyancing lawyers in fact in cahoots with the sellers, the building safety disaster and the collapse in flat re-sales.
Enfranchisement calculations for flats owners include a ‘risk premium’ making it cheaper to enfranchise than a leasehold house.
But why aren’t freeholds to flats also affected by this risk premium too: that is, worth rather a lot less given the utterly blighted market?
As Dr Hamilton asks below, does this valuation model even make sense? Punters pay 12-16 times annual ground rent for the freeholds – a consideration entirely absent in the rigged enfranchisement process. Why is that, do you suppose?
LKP will shortly be publishing a guide for leaseholders to respond to the consultation (deadline is September 23)
By Alexander Hamilton
Dr Alexander 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: Alexander Hamilton – Google Scholar
Introduction
The formal consultation on leasehold enfranchisement valuation rates, published on 15 July 2026, is not a peripheral technical exercise. It is one of the decisive implementation choices under the Leasehold and Freehold Reform Act 2024.
The consultation concerns the capitalisation and deferment rates that will be used in the Standard Valuation Method to calculate what leaseholders pay to extend their lease, acquire their freehold, or buy out ground rent liability.
In the consultation’s own formulation:
(1) the deferment rate is used to calculate the reversion value. That is the present value of the landlord’s right to vacant possession of the property at the end of the lease. While (2) the capitalisation rate is used to calculate the term value. That is the present value of the landlord’s right to receive ground rent during the remaining lease term.
This matters because LAFRA’s headline reforms do not operate in isolation.
The abolition of marriage value, the 0.1% cap on ground rent for valuation purposes, 990-year lease extensions and the shift towards each side bearing its own non-litigation costs all pass through a valuation framework in which these rates do much of the work. These reforms are intended to make lease extension and enfranchisement simpler, cheaper and less contentious.
The rates may sound technical, but their effect is straightforward. Lower rates increase the premium payable by leaseholders; higher rates reduce it.
The consultation says the purpose of the prescribed rates is not to reduce premiums for leaseholders or to compensate freeholders for the loss of income caused by other valuation reforms. Instead, the stated aim is to set rates that reasonably determine the present value of the reversion and term elements of the premium.
That sounds neutral. It is not. Rate-setting is distributional arithmetic with legal language wrapped around it.
As the current Housing Minister recently noted:
“Leasehold is blighting lives. Leasehold is a barrier to a fair and efficient modern residential property market. Leasehold is an anachronism in the twenty-first century.”
The Minister added that “it is not mere rhetoric” to describe leasehold as “essentially feudal in nature” (ibid).
Those statements are not a substitute for valuation evidence. However, they define the policy problem. If leasehold is a structurally defective tenure that not only blights the lives of leaseholders but imposes an external economic cost on society, and enfranchisement is one of the principal routes out of this tenure system, then the rates cannot be treated as though they were merely actuarial housekeeping.
The key question is therefore not simply whether policymakers choose a technically defensible number. It is whether the rate-setting framework, and the wider valuation framework around it, will make enfranchisement a real route out of leasehold or leave too many leaseholders with rights that exist in law but remain priced beyond their reach.
What the consultation gets right
One of the most encouraging elements of the consultation is that it places the Sportelli framework back under serious scrutiny.
Since Earl Cadogan v Sportelli, the prevailing deferment rates have been 4.75% for leasehold houses and 5.0% for flats. The consultation explains that the tribunal set a different rate for flats because flats are subject to greater management complexities and risks, such as service charge disputes and communal repairs. The Government Actuary’s Department (GAD), restates the Sportelli formula as:
Deferment rate= [real risk-free rate]-[real growth rate] +[risk premium]
In Sportelli, the parameters were 2.25% for the real risk-free rate, 2.0% for expected real residential property growth, and a risk premium of 4.5% for houses and 4.75% for flats. That produced a deferment rate of 4.75% for houses and 5.0% for flats. GAD then considers two ways of updating the framework. Its first approach is a mechanical update, attempting to rerun Sportelli with recent data while keeping the original approach intact. That produces a deferment rate of about 1.61% in September 2025, but GAD does not recommend using it because it updates some parameters while leaving others effectively unchanged, thereby introducing inconsistencies. A mechanical answer can therefore be arithmetically precise and economically wrong.
GAD’s second approach is more useful. It re-estimates the components using recent data and actuarial judgment. GAD proposes a 40-year index-linked gilt spot yield averaged over six months, giving a real risk-free rate of 2.05%; reduces expected real growth in house prices to 0.5%; and retains the Sportelli risk premium of 4.5% for houses and 4.75% for flats. This produces a deferment rate of 6.05% for houses and 6.3% for flats. GAD also gives alternative examples, including 5.85% for houses if a one-year smoothing period is used and 5.05% if either real growth is assumed at 1.5% or the property risk premium is reduced to 3.5%; it stresses these are not upper and lower boundaries.
These may sound like small adjustments, but the impact on the price of a lease extension or enfranchisement claim is large. The practical importance can be shown using the following example: given the average flat price in England of £218,000 (UK House Price Index for April 2026), consider a simplified lease extension case with 112 years remaining on the lease, the median lease length according to LAFRA’s Impact Assessment, and no ground rent. The only component considered here is the reversion value. We can then compare the premium payable using the current deferment rate (5.0%) and the new rate estimated by GAD (6.3%):
So, the reversion falls from about £923 to about £233, a reduction of roughly 75%. The absolute values are small because 112 years is an extremely long period over which to discount a future cash flow. That is the economic point. For long leases, the freeholder’s right to vacant possession is a distant claim. It should not be inflated into a major obstacle to lease extension or enfranchisement.
The consultation also contains a useful capitalisation-rate evidence base. It reports that previous custom and practice typically fell between 5% and 8%, although some consultation responses to the Law Commission suggested a wider range from 3% to 10%. The department’s tribunal review found adopted capitalisation rates between 4.5% and 9.0%, with 88% of First-tier Tribunal cases between 6.0% and 7.0%, and mean and median values around 6.5% (ibid).
Critically, higher capitalisation rates were generally associated with lower ground rent values and less aggressive ground rent review clauses. Therefore, if under the Commonhold and Leasehold Reform Bill, ground rents are capped at £250 per year with no review period and then reduced to a peppercorn after 40 years, there is a strong case for setting the capitalisation rate towards the higher end of the range.
Why neutrality is not neutral
The bad part of the consultation is its insistence that the rates should not be used either to make enfranchisement cheaper or to compensate freeholders for other losses generated by the implementation of LAFRA.
That may be a legally cautious position and justifiable given the current wording of LAFRA, but it is analytically incomplete. Decision-makers cannot avoid distributional and economic consequences by declaring that it does not intend them. If the deferment rate is reduced, the present value of the reversion rises and leaseholders pay more. If it is increased, the reversion falls and leaseholders pay less. If the capitalisation rate is reduced, the value of ground rents rises. If it is increased, the value of ground rents falls. The policy may be framed as valuation, but the mechanism is redistribution.
Fortunately, there is a simple and elegant fix to this issue, proposed by the Housing Minister himself. His committee-stage amendment to LAFRA stated that:
“In setting the deferment rate the Secretary of State must have regard to the desirability of encouraging leaseholders to extend their lease at the lowest possible cost.”
The amendment was not adopted, but the wording captures the central issue: rate-setting cannot be separated from the statutory objective of making enfranchisement cheaper and easier. If ministers accept that leasehold is socially and economically undesirable, the rate-setting framework should be expressly allowed to reflect the public interest in making exit from leasehold affordable. Justifying a higher rate via statute in order to achieve a desirable social objective, is also less likely to be successfully challenged in court.
LAFRA instead requires prescribed rates to be set by reference to market value principles and reviewed at least every ten years. Given the asymmetry of power between leaseholders and freeholders, freeholders will be better placed to commission reports arguing for lower rates, co-ordinate lobbying, or threaten legal challenge. Leaseholders are much less likely to be able to match that capacity. This matters because, if the rates fall sufficiently, they could reverse much of the impact of the other reforms in LAFRA. For example, abolishing marriage value but setting the deferment rate at 3.5% could leave the cost of a lease extension close to the position where marriage value remained payable, but the deferment rate stayed at 5.0% (see: here).
To see how lower rates can reverse the financial effect of even a powerful leasehold reform, consider the proposed cap on ground rents at £250 for 40 years, after which they are reduced to a peppercorn, as proposed by the Commonhold and Leasehold Reform Bill 2026.
According to the English Housing Survey 2023–24, the median annual ground rent in England was £120 among leaseholders who pay ground rent. As noted above, the median lease length is 112 years. We can compare the present value of £120 per year for 112 years at a capitalisation rate of 6% with the present value of £120 per year for 40 years at 3%:
A 40-year rent stream at 3.0% is therefore worth about £973 more than a 112-year rent stream at 6%. That is counterintuitive only if one ignores discounting. The rate can dominate the cap. This is why the capitalisation rate is not a technical sideshow.
More fundamentally, the consultation does not fully engage with the wider costs of preserving leasehold.
The LAFRA Impact Assessment identifies a separation of control and cost: landlords appoint and supervise managers while leaseholders bear the cost, creating misaligned incentives because landlords do not carry the ultimate costs of maintenance.
The leasehold-freehold relationship can therefore be understood as a dysfunctional principal–agent problem that incentivises rent-seeking and adversarial confrontation (see: here).
Leaseholders fund the expenses and bear the financial risk, while freeholders, head lessors and managing agents often control budgets for maintenance, insurance and repairs. That misalignment creates incentives for monitoring, disputes and tribunal use.
To the extent that leasehold makes flats less attractive than houses, it may also be imposing substantial wider costs on the housing market and society as a whole.
Of course, it is at this point that freeholders often argue that leasehold reform could cause economic damage by harming the UK’s reputation for respecting property rights.
However, this argument is difficult to sustain, the prospective banning of fees is embedded in the market economy, and besides, evidence from Ireland’s much more radical leasehold reforms were not associated with a decline in property rights, investment, or economic growth (see here).
Faster exit from leasehold, facilitated by higher rates, therefore has benefits beyond the private transfer from freeholder to leaseholder: it helps correct a market failure in which the costs of the leasehold system are borne not only by individual leaseholders, but by the wider housing market.
What the valuation framework misses
The consultation also leaves two important valuation questions underdeveloped: whether the risk premium still reflects the risks of holding a residential freehold, and whether the growth assumption should be based on the performance of all housing or on the weaker performance of leasehold flats.
The risk premium in Sportelli (2007) was explicitly designed to capture the fact that residential property is not a gilt: it is volatile, illiquid, depreciating and subject to obsolescence. For flats, the tribunal added a further 0.25 percentage point because flats carried additional management and maintenance risks. GAD’s report recognises this structure and retains the risk premium at 4.5% for houses and 4.75% for flats.
The real question is whether the risk premium should have increased since 2007. On this point, the consultation is underdeveloped.
Since Sportelli, the freehold interest in a block of flats has become more legally complex, more exposed to regulatory shock and less like a passive financial claim. A gilt pays according to fixed contractual terms and does not suddenly acquire cladding remediation exposure, statutory process costs, tribunal risk, or a changing legal regime that limits cost recovery. A freehold of a residential block increasingly does just that.
Specifically, the first major post-Sportelli change is building safety.
After Grenfell in 2017, cladding and fire-safety liabilities became a central risk in blocks of flats. The LAFRA Impact Assessment recognises that building safety obligations and liabilities, where enfranchising leaseholders of buildings over 11 metres would acquire associated remediation obligations and costs, may deter leaseholders from taking up additional rights.
The second change is process-cost exposure. Under LAFRA, the direction of travel is that each side bears its own non-litigation costs in enfranchisement (in the future) and Right to Manage (commenced in 2025), subject to limited exceptions, and the consultation itself states that many leaseholders will save money because each party should pay its own costs.
For leaseholders, this is a saving. For freeholders, it is a new cost exposure.
The third change is litigation and tribunal exposure. LAFRA’s Impact Assessment describes leaseholders’ historic unequal liability for legal costs, including situations where freeholders can recover legal costs through leases even where leaseholders win disputes, and notes that the tribunal process can deter leaseholders from challenging charges.
Reforming that imbalance, due to be achieved by commencing the relevant parts of LAFRA in early 2027, again alters the expected cost of holding the freehold. The fourth change is income uncertainty. The consultation notes the removal of the assured tenancy trap, proposed forfeiture reform, the 0.1% valuation cap and the proposed £250 ground rent cap falling to peppercorn after 40 years, all of which may affect the attractiveness and recovery risk of ground rent income streams.
The implication follows directly from the formula:
Deferment rate= [real risk-free rate]-[real growth rate]+[risk premium]
If post-Sportelli changes increase freehold-specific risk, the risk premium should rise, all else equal. GAD’s choice to retain the Sportelli premium may be defensible as a cautious evidential stance, but it is not the same as proving that the risk premium is unchanged. The burden of argument should be on those who say that cladding risk, cost-shifting, litigation exposure and regulatory restriction have not materially altered the freehold risk profile.
The next part of the formula that has not been reviewed is the growth term, and this is where the consultation may be just as vulnerable.
Because real growth is subtracted, a higher assumed growth rate lowers the deferment rate and increases the reversion value; a lower assumed growth rate raises the deferment rate and reduces the reversion value.
GAD’s Exercise 2 uses a real growth assumption of 0.5%, drawing on UK residential property evidence and the OBR’s five-year real house price growth forecast, which GAD continues into the future. But the relevant asset is not “all housing”; it is the reversion of leasehold houses and flats, in a market where leasehold flats appear to be underperforming wider housing.
The UK HPI for April 2026 shows exactly why that distinction matters. In England, all property values rose 3.9% annually, detached houses rose 3.0%, semi-detached houses rose 5.2%, terraced houses rose 6.0%, but flats and maisonettes (virtually all leasehold) were flat at 0.0%, with the average price falling from £219,000 to £218,000.
In London, where leasehold flats are especially important, flats and maisonettes fell 4.3% annually, compared with a 2.1% fall for all London property. Hamptons’ market evidence points in the same direction: freehold homes are selling 57 days faster on average than leasehold homes, leasehold successful sales have fallen to an 18-year low, and in 2025 freeholds took a median 60 days from listing to offer compared with 83 days for leaseholds, with freeholds taking 100 days to exchange after offer compared with 133 days for leaseholds.
This matters mechanically. If GAD uses overall house price growth as the proxy for the growth term, but leasehold flats are structurally underperforming the wider market, then the growth term used in the formula may be too high for the asset being valued. Since growth is subtracted in the formula, overestimating growth biases the deferment rate downward. A downward-biased deferment rate inflates the present value of the reversion.
Put plainly, if leasehold flats are no longer growing like “all property”, then “all property” growth should not be used to value a leasehold flat reversion without careful adjustment.
Finally, there is the critical existential point: does this valuation model even make sense?
A further factor missing from all these calculations is the price actually paid by investors purchasing freeholds. Residential freeholds have often been traded at only around 12 to 16 times annual ground rent (see: here).
That matters because the valuation debate too often starts from the premise that the landlord is surrendering a valuable long-term asset, rather than asking whether the statutory premium bears any rational relationship to the price paid for that asset.
As the Select Committee found in November 2018, the housebuilders who created these leases were themselves often remarkably ignorant of their alleged investment value once the freeholds had been sold on. That evidence exposed the artificiality of treating residential freeholds as if they were carefully priced, risk-adjusted investments whose full claimed value must be protected at every stage of reform (see: here).
Why rates are not enough: development value
The enfranchisement rates are crucial because they determine how much of LAFRA’s promise survives in the actual premium a leaseholder is asked to pay.
A higher deferment rate can sharply reduce the reversion value, while a higher capitalisation rate can reduce the value attributed to ground rent. But these rates affect only parts of the valuation. They do not, on their own, remove other components that can make enfranchisement unaffordable.
The most important of these is development value. Unless the Commonhold and Leasehold Reform Bill addresses development value directly, even high deferment and capitalisation rates may still leave many leaseholders with a legal right that is practically impossible to exercise.
As has been documented here, registered section 13 notices, used as a proxy for formal collective enfranchisement claims, peaked at 894 in 2016 but fell to around 232 confirmed notices in 2024, or 274 on an upper-bound estimate — a decline of almost 75%.
Because these notices record attempts to begin the statutory process rather than completed acquisitions, the fall is best read as evidence that fewer leaseholders are even able to start down the route to collective control.
The fact that Right to Manage formations rose while collective enfranchisement fell points away from apathy and towards affordability or feasibility constraints.
Development value is central to that constraint.
Since the expansion of permitted development rights, more blocks may carry rooftop or airspace development potential. Where that potential is priced into the freehold, leaseholders seeking to enfranchise may have to pay not only for ground rents and reversionary value, but also for speculative future development value.
Modelling shows that development value can increase the typical cost of enfranchisement per participating leaseholder from £8,000 to £80,286, with the development value component alone accounting for £72,286 (see: here).
That is not a deferment-rate problem in the narrow technical sense, but it is part of the same policy question: whether statutory rights are meaningful routes to control, commonhold conversion and market reform, or merely formal rights priced beyond the reach of the very leaseholders they are supposed to empower.
Next steps for abolishing feudalism
The consultation is therefore both better and more concerning than expected.
It is better because GAD’s full re-estimation of Sportelli produces a house deferment rate of 6.05% and a flat deferment rate of 6.3%, materially above the current flat rate, and because prescribed rates can simplify a system currently distorted by bargaining power, expert costs and uncertainty. It is concerning because policymaker’s stated neutrality about the role of rates risks obscuring the fact that rates determine who receives the economic benefit of reform.
A system that reviews these rates without regard to the social desirability of ending leasehold will create repeated opportunities for the freehold lobby to press for lower rates.
If leasehold is “blighting lives,” “distorting the property market,” and “essentially feudal in nature” then rate-setting cannot be treated as a search for abstract neutrality. It should reflect the full economic effects that the continuation of this system imposes, not just on individual leaseholders and freeholders, but the UK economy and society as a whole.
Policymakers could bring the consultation, LAFRA and the draft Commonhold and Leasehold Reform Bill into alignment by making two targeted amendments.
First, the Pennycook amendment should be revived so that, when setting prescribed rates, the Housing Minister must have regard to the desirability of encouraging leaseholders to extend their leases and acquire their freeholds at the lowest possible cost.
Secondly, the Bill should adopt the amendment on development value proposed during LAFRA’s passage, so that leaseholders are not forced to pay upfront for speculative development potential they do not intend to realise.
These are small legislative changes with large practical consequences. Without them, policymakers risk generating new statutory rights that look generous on paper but remain unaffordable in practice.
Related posts:
Even if government wins Judicial Review, half of all leaseholders could be left worse off by unfavourable deferment and capitalisation rates. (And conversion to commonhold would be toast, too)
Why it is going to be so important to shout in 2025 – and loudly – when government sets the leasehold Deferment Rate
Leasehold and Freehold Reform Bill: the most important part of the enfranchisement bit is missing
Ending marriage value would benefit short-lease owners. But leaseholders with 80-150 years left could face a considerable hike in extension costs over the current unreformed regime
Leasehold reforms: respond to government consultation over ground rents before 17 January (because those legging you over will certainly be doing so)
Quid pro quo leases: The freeholders’ blade to neuter ground rent reform
I am glad that some of the points raised here chime with my own thoughts as I try and navigate the consultation. Including the sudden amnesia on the amendments offered to LFRA 2024.
One point of concern is the suggestion for lower capitalisation rates for escalating ground rents. If the LFRA 2024 formula applied the capitalisation rate to the pre-escalation ground rent that would make sense. But LFRA 2024 doesn’t do that; it applies the capitalisation rate to the post-escalation ground rent. So Leaseholders with escalating ground rents get ‘double charged’ in the formula from a higher simulated post-escalation ground rent and a lower capitalisation rate
I suspect.that there will disappointment. If the proposition were to be too favourable the the leaseholders the Government would be sued for what amounts to unjust enrichment. If someone has a shortish lease they would have to pay proper money to lengthen it. Commonhold is no better and possibly less practical than leaseholders acquiring the freehold and each leaseholder having a share in the freehold if they so wish
Landlord’s “human rights” again?! Another word for Marriage Value is HOPE Value. It is priced into the cake when they buy / sell these “investments”.
I suspect policymakers underestimate the difficulty of collecting service charges. I know if one lessee who has three county court judgements against himself and two charging order yet still refuses to pay anything. It will be even more difficult where the block manager cannot if he has no alternative ultimately apply for an order for sale. Sometimes it is not a problem of disputing the charges (particularly with landlords who have let and whereabouts uncertain) simply that the grab every penny in revenue other than the mortgage and their lifestyle is supported by this stream of money. This is not common and tends to happen more at lower value leasehold property but nonetheless it does happen
They can charge interest and will EVENTUALLY get their ‘Pound of Flesh’ …. even if the flat ‘owner’ dies and so the estate sells. NO SYMPATHY! It is reflected in the buying / selling yield of the property: there are 3 UK REITs listed on the stock market that buy this kind of thing.
Thanks for a great article, some of it slightly over my head
I really found the part of the freeholders cost in purchased price cost, as in my case a new freeholder purchased 105 leases 80% short leases approximately 47yrs left with the rest exstend by 99yrs for about £2500 per property,
When I entered into discussion with them to exstend lease they wanted £22000, plus legal and valuation fee another £2500,
So I really think this should be taken into account.
So, …. when you gona get on the blower to Angela Rayner (the latest Housing Minister – No. 36 since ‘The Beloved Margaret?’). I am a Chartered Surveyor too, …. and short-leaseholder – and maybe ONLY Lefty in the RICS? – well almost! Would LOVE to join you at your – hopefully VERY SOON – meeting. PS – I’m looking for work / a job.
I’d like to commend you on an excellent article; very clearly explained. Will be a great help as I tackle the consultation.