When is the time to enfranchise?

Has the bottom of the market been reached? The Land Registry’s index declined by 0.8% from March to May, and The Nationwide’s increased by 2.2% from May to June. Prices may fall again, if there are rises in unemployment and interest rates.

Is the bottom of the market the same for all sectors and regions? Lessees need to know the market for their property. Northampton was hit by declines of 17% in 2008. Here, there is over supply, to investors and first time buyers squeezed by low mortgage availability. In London, large prime properties have been favoured by overseas cash buyers, exploiting desirable exchange rates.

What is the premium comprised of? The premium, which usually increases as lease term shortens, compensates the landlord/s for the loss of ground rent, and loss, or deferment of their reversions. Additionally, where there are less than 80 years unexpired, 50% of marriage value is payable, by the enfranchising  participants, and all extending lessees. Marriage value is the amount by which the value of the interests of the freeholder, intermediate lessee (if there is one) and lessee/s after extension or enfranchisement exceeds the value of their interests prior to extension or enfranchisement.

Are lessees able to minimize the premium, by extending their lease or enfranchising, at the bottom of the market? Where there are in excess of 80 years unexpired, the differential between existing lease and freehold value is small, not increasing rapidly, and no marriage value is payable. Notice should be served at the bottom of the market.

It might be beneficial for the timing to be different in a falling market, where leases have less than 80 years unexpired, particularly if the differential between existing lease and freehold value is accelerating rapidly with time. The premium increase ascribed to lease shortening, might exceed savings from declines in value, making it sensible to proceed before the nadir is reached.

What happens if the market is already rising ? Maybe, there is no harm in waiting to extend or enfranchise, as long as the increase in value whilst waiting, exceeds the increased premium? Of more interest, might be whether the profit from enfranchisement / extension will be higher at a later date, if the notice is served earlier, rather than later. Or, more simply, will there be a loss of profit, as a result of waiting?

To conclude, if existing leases have over 80 years unexpired, wait until the bottom of the market before serving Notice, if not, it might be advantageous to serve sooner. In a rising market, serve Notice as soon as possible, whether or not there are less than 80 years unexpired.