Leasehold and Freehold Reform Act 2024 human rights challenge: Court upholds 0.1% ground rent cap, abolition of marriage value and cost recovery changes
Summary
The High Court has dismissed challenges brought by 6 landlord groups to three key provisions of the Leasehold and Freehold Reform Act 2024 (“LAFRA”). The High Court found that the capping of ground rent to 0.1% of the freehold vacant possession value (“FVPV”) in enfranchisement valuations, the effective removal of marriage and hope value, and the move to each party bearing their own non‑litigation costs, are compatible with Article 1 of Protocol 1 of the European Convention on Human Rights (“ECHR”) (ARC Time Freehold Income Authorised Fund v Secretary of State for Housing, Communities and Local Government [2025]).
Key Arguments
There were three main challenges to LAFRA from the landlord Claimants, along with additional arguments relating to charity landlords, by which the Claimants requested that the High Court declare, under s.4 of the Human Rights Act 1998, that the amendments made by LAFRA are incompatible with Article 1 of the First Protocol (“A1P1”) of the ECHR. A1P1 represents the right to protection of property.
In reaching its decision, the High Court identified the legitimate objects of LAFRA as:
- Making enfranchisement cheaper and easier.
- Addressing the inherent unfairness in leasehold as a property ownership model, particularly by reference to it being a wasting asset.
Whilst the High Court noted that improving the position of owner-occupiers was a broad objective of LAFRA, it did not consider that the objects were limited to benefiting this smaller category of leaseholder.
Ground Rent Cap
The first of the main challenges related to the capping of ground rents for valuation purposes. LAFRA amends the valuation of premiums payable in lease extension and enfranchisement claims by capping the actual ground rent payable to 0.1% of the FVPV.
Arguments
The Claimants argued that the cap was arbitrary and inadequately evidenced; operated retrospectively by diminishing contractual rights to future rent; and could have been replaced with less intrusive alternatives (for example, limiting the benefit to owner‑occupiers or those with particular hardship). Alternatively it suggested Parliament could have relied on voluntary industry change, noting that institutional landlords had already voluntarily taken action to reduce ground rents.
Decision
The court held that there was a wide margin of appreciation and the test was not whether the legislature could have adopted a less restrictive measure, rather whether in adopting its measure and striking the balance it did strike, the legislature “acted within the margin of appreciation allowed to it”.
The Court found that the 0.1% figure arrived at had a reasonable evidential basis in the Law Commission’s work, Competition and Markets Authority analysis and the Government’s Impact Assessment of the Leasehold and Freehold Reform Bill. The Court also noted that the effect of the cap being expressed as a percentage means it effectively scales with property value.
Arguments as to retrospective effect also failed. The Court noted that the measure adjusts compensation when a statutory right is exercised but does not deprive landlords of existing possessions outside that context.
It found that less‑intrusive alternatives would undermine coherence and simplicity, and Parliament was entitled to reject reliance on voluntary action by Landlords.
In conclusion, the Court held that the capping of ground rents in this manner would not result in a landlord receiving compensation which “is not reasonably related to the market value of the interest of which he is being deprived”.
Abolition of marriage (and hope) value
Marriage value is a valuation concept which arises in this context from the “marrying” of the leasehold and freehold interests, when enfranchisement rights are exercised. Hope value in this context relates to any other element which may be payable by a third party in the expectation that the tenant may wish to acquire the reversion at some point in the future.
Under the current law, where a lease is below 80 years, a landlord is entitled to 50% of the marriage value. LAFRA amends the assumptions which apply to valuation of premiums and as a result removes any marriage (and hope) value, with the effect that landlords will lose the benefit.
Arguments
The payment of 50% of the marriage value was an established principle (with reference to cases treating equal division as fair). LAFRA’s removal of it would upset market expectations and create windfalls, particularly for investors. Additionally the effect would be disproportionately concentrated in London.
Decision
The Court found that the authorities dealt with distinct expropriation, whereas the removal of marriage value in enfranchisement cases was a socio‑economic choice before Parliament.
In particular, by reference to the second of the “legitimate objectives” above, the payment of marriage value only arises because of the nature of the lease as a wasting asset. The Court considered that at the time of purchase, leaseholders will have paid near FVPV for the leasehold interest and only because the lease term reduces are they then required to pay additional premium. In this respect the Court considered that there was no difference between owner-occupiers and investor tenants. The concentration of the benefit in London did not defeat justification since, whilst the impacts varies geographically, the underlying problem is nationwide.
Non‑litigation costs recovery
Under the existing enfranchisement regime, landlords are entitled to recover their non-litigation costs from leaseholders who exercised enfranchisement rights. LAFRA removes this entitlement, save in certain narrow circumstances.
Arguments
The Claimants argued that requiring landlords to bear their own non‑litigation costs further depressed compensation below market value, since these are costs uniquely triggered by statutory enfranchisement and the landlord being forced to dispose of its property involuntarily.
Decision
The Court considered that in ordinary open‑market transactions (with specific reference to the previously active ground rent investment market) each party bears their own costs. The market values used in the valuation (including FVPV) assume that baseline.
It felt that requiring tenants to pay landlords’ non‑litigation costs would mean paying above market value. The reform removes a significant barrier to claims, encourages efficiency, and shares costs symmetrically. The Court noted the exception for low‑value cases (to avoid excessive burdens where costs would otherwise swallow compensation).
Other arguments
The charity Claimants argued that the loss of marriage value (and related changes) would reduce grant‑making and so an exemption was warranted.
This was rejected by the Court, who considered that Parliament could treat charity freeholds held as investment assets like other investments. From a leaseholder standpoint, the unfairness of leasehold is the same irrespective of landlord identity.
The Claimants also argued that the effect of the reforms considered cumulatively, with extended 990‑year lease extension rights, the higher mixed‑use threshold (50%, from 25%), and mandatory leasebacks (see our previous Law-Now on LAFRA Navigating new horizons: the impact of LAFRA on mixed-use premises and the right to manage) was to break the fair balance.
The Court considered that each measure was proportionate on its own terms; taken together they still strike a fair balance. The Court emphasised Parliament’s wide margin in socio‑economic policy and that compensation need only be reasonably related to value, not full market value, in this context.
Next Steps
The Claimants now have a 21-day period to request permission to appeal the decision.
Matthew Pennycook, in his 21 November 2024 ministerial statement, committed to consulting on the remaining components of the valuation method in enfranchisement claims “next summer” (being Summer 2025). No such consultation has been brought forward, neither has draft legislation to fix “the small number of specific but serious flaws in [LAFRA]” been introduced. Government appear to be behind on their programme of reform and it remains to be seen as to whether, now that a decision has been received, it will seek to press on.
For more information on the implications of this decision and of LAFRA, please contact your usual CMS contact.
