Introduction

The introduction of the Leasehold and Freehold Reform Act 2024 was intended to facilitate major changes in property ownership. However, a crucial legal clash is now holding back parts of the legislation.

At the centre of this challenge is the issue of development rights held by freeholders and their impact on leaseholders’ ability to buy the freehold of their homes collectively.

A judicial review is due to be heard in July.

Enfranchisement reform scuppered by proposed removal of Freeholders development rights?

Developers want their potential development value, it is that simple. Some developers even create airspace leases to lock in potential development value simply to scubber the ability of leaseholders to afford to buy their freehold. A judicial review is due to be heard in July. However, as it stands legal mechanisms have been proposed to reduce or eliminate it, but these were not included in the 2024 Act and remain under discussion.

Is the aim to devalue enfranchisement to align leasehold retrospectively to commonhold?

The outcome of the judicial review could affect not only the future of enfranchisement but also progress towards commonhold. Secondary legislation is needed to activate some elements of the 2024 Act, but this has stalled.

Until the legal position on freeholders’ rights is resolved, significant parts of leasehold reform are on hold.

Why the market value of a freehold includes development rights

The financial value of freeholders’ development rights is at the heart of the debate and delays in leasehold reform. Freeholder development rights relate to the potential to build additional units or extend existing buildings. When leaseholders attempt collective enfranchisement, they must pay the market value of the freehold which includes 'hope value'. And under the RICS Red Book, the guide all valuers have to adhere to 'market value' includes 'hope value' the hope of any future development. The extent of hope value is weighted depending on whether planning permission is or is not in place, and local prescedents as to whether the 'hope value' is likely to be achievable.

Development value claims by Freeholders make freehold enfranchisement unaffordable

For many leaseholders, this added cost of development value or hope value is unaffordable. As a result, collective enfranchisement becomes out of reach. This undermines the wider policy goal of promoting commonhold ownership, where leaseholders collectively own and manage their homes. A key concern is that development value often exists in more buildings than many assume. Properties constructed between 1948 and 2014 are especially likely to hold development value. This is largely due to changes introduced in planning rules in 2020. Though limited by certain restrictions, these rules allow adding new floors to many buildings without the need for full planning permission.

Planning rules in 2020 - new floors to many buildings without the need for full planning consent

Though some buildings are excluded, such as those in conservation areas or those that would exceed certain height limits, many others still qualify. Even buildings constructed before 1948 or after 2018 may have development potential, depending on location and structure.

A crude analysis based on data from national housing surveys suggests that many leasehold homes were built during the period likely to be affected. The estimate assumes a steady rate of leasehold construction and indicates that most leasehold homes in England may contain development value. While this method has limitations, it highlights the scale of the issue.

The effect of development value on collective enfranchisement is not just theoretical. For leaseholders, the additional cost can make the process financially unviable. Even mechanisms like compulsory leasebacks, where the freeholder retains units not involved in the enfranchisement, fail to offset the increase caused by development rights. This creates a major barrier for leaseholders seeking to move from leasehold to commonhold. They cannot begin the process without the ability to afford collective enfranchisement. The result may be a two-tier housing market. Flats under leasehold could become less desirable than commonhold properties, reducing their value and appeal.

Efforts were made during the passage of the 2024 Act to address this concern. However, the final legislation did not include proposed amendments that would have reduced the impact of development value.

Recommendations have been made to exclude or reduce development value when calculating the cost of collective enfranchisement. These proposals aim to level the playing field and ensure that the move to commonhold is open to more leaseholders. Without action, the financial burden imposed by development rights will continue to prevent many leaseholders from enfranchising. As a result, the shift to commonhold could stall before it begins.

Policymakers now face a choice.

Either find a way to limit the impact of development rights or accept that many leaseholders will remain oblivious to ownership reforms.

A possible model could be adapted from existing property law, such as the controls used to protect charity-owned assets. These tools could provide a practical way to manage development value while preserving a degree of flexibility for freeholders.

As it stands, freeholders' retention of development rights presents one of the most significant obstacles to leasehold reform. Unless addressed, it threatens the future success of commonhold and limits the reach of the 2024 Act.

The upcoming judicial review may clarify some legal questions, but unless the cost barrier created by development value is tackled, meaningful reform will remain out of reach for many leaseholders.

FAQs

1. What is the development value in leasehold property in the context of freehold purchase or leasehold enfranchisement?

Development value refers to the financial potential of land or buildings that could be extended or redeveloped, increasing the freeholder's interest. And under the RICS Red Book, the guide all valuers have to adhere to 'market value' includes 'hope value' the hope of any future development.

2. Why is development value a problem for leaseholders trying to buy their freehold or enfranchise?

It increases the cost of collective enfranchisement, making it harder for leaseholders to buy the freehold and convert to commonhold.

3. Can development value be removed from the cost of freehold purchase or enfranchisement?

Yes, legal mechanisms have been proposed to reduce or eliminate it, but these were not included in the 2024 Act and remain under discussion.