A crucial government consultation is currently underway, inviting input on the valuation rates that will dictate future costs for landlords and leaseholders seeking to extend leases, purchase freeholds, or eliminate ground rent liabilities. The consultation, which delves into complex valuation methodologies, is open until 11:59 pm on 23 September 2026. While technical in nature, the rates ultimately selected could shift thousands of pounds between parties in leasehold transactions, making participation vital for those affected.
The reforms stem from the Leasehold and Freehold Reform Act 2024, which introduces a new Standard Valuation Method. Once fully implemented, this will apply to statutory lease extensions, freehold purchases, and ground rent buyouts. Key changes include leaseholders being entitled to 990-year lease extensions with a peppercorn ground rent. The new calculation method will also remove 'marriage value' and cap the ground rent considered in valuations at 0.1% of the property’s freehold vacant possession value. Additionally, the Act stipulates that each party will typically bear their own legal and valuation costs, though specific exceptions are being addressed in a separate consultation.
The current consultation specifically focuses on two critical rates: the capitalisation rate and the deferment rate. The capitalisation rate is used to determine the present-day value of future ground rent payments, forming the 'term value'. The deferment rate, on the other hand, values the freeholder's right to regain possession of the property when the lease expires, known as the 'reversion value'. These two values, along with any other applicable adjustments, are combined to calculate the premium payable by the leaseholder. Counterintuitively, higher valuation rates typically lead to a lower premium for the leaseholder because they act as discount rates, reducing the present value of future monies or property rights.
To illustrate the potential impact, the government provided an example of a £250,000 flat with 100 years remaining on its lease and a ground rent starting at £150, increasing by £25 every 20 years. Using a 6% capitalisation rate, the ground rent's present value is £2,675. With a 5% deferment rate, the freeholder's right to reclaim the £250,000 property after 100 years is valued at £1,901. This results in an illustrative premium of £4,576. Even small adjustments to these rates can significantly alter the final premium, highlighting the importance of the ongoing consultation.
It is important to note that these changes are not yet fully in force. The government still needs to prescribe the valuation rates through regulations and address acknowledged issues in the 2024 Act via further primary legislation. Furthermore, parts of the reforms are currently subject to a legal challenge by a group of freeholders, with a High Court decision in the government's favour currently under appeal. Therefore, leaseholders considering an urgent lease extension should not delay solely in anticipation of a cheaper regime, as the timing of such decisions will depend on individual circumstances and legislative certainty.