High Court clears the way for leasehold reform

The High Court has rejected a challenge brought by freeholders against parts of the Leasehold and Freehold Reform Act, paving the way for leasehold reforms to continue.

While this is good news for leaseholders seeking fairer terms, it could leave freeholders significantly out of pocket.

In a judgment handed down last week, the Court dismissed six linked judicial review claims brought by institutional and individual freeholders who argued that the new enfranchisement rules – including the removal of marriage value, caps on ground rent contributions, and limits on legal cost recovery – were unlawful.

The claimants said the changes infringed their property rights under the European Convention on Human Rights, but judges disagreed, finding the reforms to be lawful.

Leasehold reforms can now move forward

The decision effectively clears the way for the Government to proceed with the next stage of leasehold reform. For leaseholders, this ruling provides much-needed certainty after months of speculation about whether the Act’s key provisions might be overturned.

Though not yet in force, it means that:

• Leaseholders are likely to benefit from the removal of marriage value when buying their freehold or extending their lease.
• The capping of ground rent to a peppercorn caps and restrictions on cost recovery will stay in place – though they are subject to further consultation.
• Future reforms, including to deferment rates and valuation methodology, are expected to follow in due course.

For many leaseholders this ruling is a step toward a fairer and more transparent system.

A tougher landscape for freeholders

For freeholders, the picture is more challenging.

The combined effect of the reforms is likely – though not certain – to reduce the sums payable by leaseholders in enfranchisement and lease extensions.

The removal of marriage value is particularly significant, stripping away a long-established uplift that reflected the increased value of uniting the leasehold and freehold interests.

In addition:

• For the purposes of lease extension calculations, ground rent will be capped at 0.1% of the property’s freehold value, potentially lowering premiums considerably.
• Freeholders will no longer be able to recover many non-litigation costs, meaning legal and administrative expenses are likely to fall directly on them.

The claimants in this case argued that the cumulative financial loss was disproportionate and unlawful.

The High Court disagreed, ruling that the government was entitled to rebalance the system in favour of leaseholders.

A ruling with lasting impact

This decision sets an important precedent. It confirms that leasehold reform is here to stay, and that freeholders are unlikely to succeed in future legal challenges on similar grounds.

For landlords, it underlines the importance of understanding how the new rules will affect their portfolios, particularly those with leasehold flats and freehold reversionary interests.

A blow for building safety

While leasehold reforms can now resume, an amendment to the Planning and Infrastructure Bill was rejected in the House of Lords this week, which would have ensured that ‘non-qualifying leaseholders’ affected by the building safety crisis were protected from uncapped remediation costs.

The amendment, proposed by Baroness Pinnock, aimed to prevent some of the major developers from applying for planning permission until protections are extended to all leaseholders to ensure that all buildings with historic safety defects are remediated.

Though ultimately rejected, the debate highlighted growing pressure on the Government to clarify how those responsible for building safety defects will be held to account.  

Next steps for leasehold reform

• Valuation details: The Government still needs to confirm the final approach to deferment rates and other technical valuation elements that determine what leaseholders will pay.
• Market impact: The removal of marriage value and limits on cost recovery could reshape investment decisions in prime leasehold areas, especially in London and other high-value regions.

The High Court ruling marks a turning point in the long-running battle over leasehold reform. For leaseholders, it’s a welcome sign that long-promised changes can finally move forward. For freeholders, however, it signals a period of adjustment — and potentially a hit to future asset values.