by Ian Macfarlane | Sep 22, 2026 | Uncategorized
A personal view by Ian Macfarlane
Buried inside a technical-sounding consultation that closes on 21 October is a question that will quietly determine how much every leaseholder pays, and every landlord receives, on enfranchisement claims for the next decade: what rate should be used to discount the value of getting a property back at the end of a lease? It sounds like an actuary's problem. It is actually a legal one, and the government's preferred answer to it does not yet meet the standard the law itself has set for changing that rate.
Where we are currently
The Leasehold and Freehold Reform Act 2024 requires the government to prescribe standard rates for enfranchisement valuations rather than leaving them to expert evidence case by case. Since 2007, that rate has been governed by Earl Cadogan v Sportelli — 4.75% for houses, 5% for flats — built from a risk-free rate, a real growth rate and a risk premium, and upheld by the Court of Appeal after detailed argument about what a fair balance between leaseholder and landlord looks like. The Ministry of Housing, Communities and Local Government's consultation now offers three options: keep Sportelli, adopt the Government Actuary's Department's recalculated figures (6.05% houses, 6.3% flats), or invite a further alternative. GAD's own analysis shows what that difference is worth: on a typical flat, moving from Sportelli to its Option 2 figure cuts the reversion element of the compensation payable to the landlord by roughly two-thirds. Nothing about the property changes. Only the arithmetic does.
Freeholder groups have naturally opposed the increase. Leasehold reform advocates have, with equal predictability, welcomed it as correcting a rate that has favoured landlords for too long. Both positions are, in their own terms, understandable. Neither, on its own, answers the question a court would actually ask if this rate were challenged.
The evidence for review is not really in dispute
Nobody seriously argues that Sportelli's inputs should be permanently frozen. Gilt yields, growth expectations and risk conditions all move, and a rate fixed in 2007 is not sacred simply because it is old. GAD's mandate — to test whether an update is warranted — is a legitimate exercise, and the Regulatory Policy Committee's own scrutiny of this consultation's impact assessment did not dispute that principle. What it did flag is more specific: that the government's approaches to the deferment and capitalisation rates may not be methodologically aligned with each other, that the cost-benefit case rests on transfers between parties rather than a demonstrated net benefit, and that several of the proposed indicators for monitoring the policy's effects rely on data that does not yet exist. An independent body set up to test the government's own evidence base has, in substance, reached the same conclusion critics on the landlord side have: this is not yet a sufficiently evidenced basis for a rate meant to hold for ten years.
Why the legal starting point matters more than either side has acknowledged
Sportelli was not an arbitrary number plucked from the air. It was reached by the Lands Tribunal, and upheld by the Court of Appeal in 2008, after argument directed specifically at the fair balance Article 1 of Protocol 1 to the European Convention requires between a leaseholder's interest in affordable enfranchisement and a landlord's right to proper compensation for a property interest being compulsorily acquired. That balance is not incidental to the rate; it is the reason the rate takes the form it does. A change that simply substitutes new inputs into the same formula, without revisiting the fairness analysis that produced the formula in the first place, is doing something narrower than it looks — and a court asked to review it would notice the difference.
The Upper Tribunal has already told us what it takes to move away from Sportelli. In Zuckerman v Trustees of the Calthorpe Estates [2009] UKUT 235 (LC), it treated Sportelli as the settled starting point but accepted a departure — to 6% — where specific, well-evidenced regional and building factors justified it. In Llangewydd Court Ground Rent Estate v Ralph [2021] UKUT 251 (LC), by contrast, it rejected a landlord's attempt to move the rate on the general argument that economic conditions had changed since 2007, precisely because the evidence fell short of what departing from Sportelli requires: expert economic and financial forecasting evidence, backed by robust, properly attributed data, not an assertion that circumstances have moved on. That is a fair benchmark to hold any legislative change to as well. GAD's Option 2 exercise uses a six-month average for the risk-free rate and a five-year forecast for real growth — inputs considerably shorter-run than either the original Sportelli methodology or the standard Llangewydd itself sets for departing from it.
This is not solely a landlord's complaint about method. Analysis on the leaseholder side of the debate has reached its own critical conclusion about GAD's exercise, arguing — for different reasons — that its risk premium has not been updated for post-2007 changes in landlord risk and that its growth assumption leans on national housing data rather than the weaker performance of leasehold flats specifically. The two critiques point in opposite directions on where the rate should ultimately land. But their existence together is itself informative: when critics who disagree about the answer converge on the same short-term, thinly evidenced inputs as the weak point in GAD's methodology, that is a reasonably strong signal that those inputs are not yet fit to be prescribed for a decade, whatever direction one thinks they should eventually move in.
What the numbers actually do
The scale of what is at stake is easy to understate in the abstract. Writing in Estates Gazette this month, Vanessa Griffiths MRICS — a leasehold reform specialist with no stake in either side of this argument — ran a sensitivity check on a modest £250,000 flat with 80 years unexpired: a reversion value of £5,044 at the current 5% Sportelli rate, rising to £10,846 at 4%, or falling to £2,363 at 6%. On exactly the same property, with exactly the same lease term, the compensation payable can move by a factor of more than four depending purely on which rate is chosen. That is not a rounding difference in a technical consultation. It is the entire substance of what enfranchisement will cost, or pay, for a generation of transactions — decided by an input most of the people affected by it will never see argued over.
What a legally sound version would need
None of this means Sportelli is beyond updating, or that GAD's work should be dismissed. It means the standard for updating it should match the standard the tribunal itself has already applied: long-run data rather than short-term snapshots, a risk premium adjusted only where the evidence for adjusting it is genuinely there, and a transparent methodology tested publicly before it is locked in for ten years. A rate built that way would survive scrutiny whichever direction it moved the needle, because it would have done the thing GAD's current exercise has not — engaged with the fairness analysis Sportelli itself was built on, rather than simply updating its inputs and assuming the balance holds.
Conclusion
The government is entitled to ask whether 2007's numbers still fit 2026's conditions. That is a fair question, and one the profession on both sides largely agrees deserves an answer. But the answer the consultation currently offers rests on the same kind of short-term evidence the Upper Tribunal has already told parties is not enough to depart from Sportelli, and on an impact assessment its own independent scrutineer has found wanting. A rate that reopens a balance struck after detailed argument about fairness between leaseholders and landlords deserves at least the same order of reasoned scrutiny that produced it — not a lesser one, delivered at speed because a statutory timetable requires an answer by a fixed date. Get that scrutiny right, in either direction, and the result is a rate that can actually hold for a decade. Skip it, and the same short-term inputs that are unravelling this consultation's credibility now will be doing the same work again in five years' time.
Ian Macfarlane
by Ian Macfarlane | Sep 2, 2026 | Recent Cases
A personal view by Ian Macfarlane
A new prime minister, a new Lord Chancellor, and an inherited consultation nobody has yet answered — the Interest on Lawyers' Client Accounts (ILCA) scheme is exactly the kind of file that tends to get quietly shelved in a reshuffle. That would be a mistake, but not for the reason usually given. The stronger argument for reviving ILCA is not simply that access to justice needs the money, real as that need is. It is that a properly redesigned scheme would actually be more defensible in law than the version the outgoing administration consulted on — while a scheme built the way that version was drafted invites exactly the kind of legal challenge that would tie the policy up for years and hand its critics a win they don't currently have.
Where we are currently
The Ministry of Justice's consultation ran from January to March 2026, under David Lammy as Lord Chancellor, proposing that government take 75% of interest earned on pooled client accounts and 50% of interest on individual, designated client accounts, with the proceeds flowing into the MoJ's general budget. It closed without a government response before Lammy left the justice brief in the cabinet reshuffle that followed Andy Burnham's arrival in Downing Street. Alex Norris, a former trade union organiser with no legal background, now holds the post — the tenth person, and by some counts the fifth non-lawyer, to do so within a decade. Nothing has yet committed the new ministerial team to any particular version of ILCA. That is an unusual amount of room to manoeuvre for a policy this far along.
The Law Society and the SRA opposed the scheme as consulted on, calling it an unevidenced, unring-fenced tax on legal clients that risked closing high-street firms and pushing up fees. Recent advocacy from the access-to-justice side of the profession — including Law Centres Network, drawing on Professor Linda Mulcahy's evidence to the Justice Select Committee and Oxford's Centre for Socio-Legal Studies research (funded by the Nuffield Foundation) into roughly 78 ILCA-style schemes operating worldwide — has made a different case: that the concept is sound and long-proven abroad, and that what discredited the UK version was not the idea of pooling client account interest but the specific design choices the MoJ made, chiefly the absence of any ring-fencing for access-to-justice spending and the flat treatment of designated accounts.
Both critiques are right, and both are incomplete on their own. The access-to-justice case explains why the money matters. It does not, by itself, explain why the government would be entitled to take it. That second question is where trust law does the real work — and it points toward a design that is narrower, and more carefully differentiated, than either side's headline argument suggests.
The evidence for urgency is not in dispute
The case for funding is not really contested at this point. The Public Accounts Committee's report earlier this year described a legal aid system in severe decline, with whole regions lacking meaningful face-to-face advice on housing and debt and warned that the 2013 reforms risk becoming close to an extinction event for the entitlement to legal advice. The Justice Select Committee went further, finding substantial evidence that the Lord Chancellor is failing the statutory duty to secure legal aid, and identifying a justice gap in which people are simultaneously ineligible for legal aid and unable to afford private advice — on evidence put to the committee, a large majority of single parents with a child in primary school fall into exactly that gap. For people in that position, a Law Centre or free advice service is not one option among several; as the committee put it, a system nobody can qualify for, access, or sustainably run is no system at all.
None of that is in serious dispute across the profession. What is disputed is whether ILCA, as drafted, is a legitimate way to close the gap — and that is a legal question as much as a political one.
Why the legal starting point matters more than either side has acknowledged
Client account money, and the interest it earns, is not the solicitor's property. That has long been settled law since Brown v Inland Revenue Commissioners [1964] UKHL TC_42_42 (28 July 1964), where the House of Lords held that a solicitor holding client funds does so in a fiduciary capacity and is not beneficially entitled to interest generated on them, notwithstanding a common professional practice of retaining it. The client, not the firm, is the beneficial owner. Advocates on both sides of the ILCA debate now invoke this case for the same conclusion — that the money was never really the firm's to keep, so redirecting it is not, in substance, a tax on solicitors' profits. That much is correct. But it is only half the analysis, because the same principle that defeats the "it's a tax on lawyers" objection also undercuts the government's right to take the money for itself. If the interest belongs in equity to the client, the state does not automatically inherit it merely because the firm doesn't own it either. Something has to justify moving beneficial entitlement from client to Exchequer, and "the firm wasn't entitled to it" is not that justification.
In practice, English law already contains a narrow, regulator-sanctioned exception: SRA Accounts Rule 7 lets firms retain a self-defined "fair sum" of interest below a documented threshold, on the reasoning that individually allocating small amounts of pooled-account interest is administratively impractical. That is a real precedent for overriding strict beneficial entitlement where allocation to the individual client is genuinely impracticable — and it is precisely the situation Brown itself concerned, a general pooled account where interest could not sensibly be traced to individual clients. It is a much weaker precedent for designated accounts, where a client's funds sit identifiably alone, the interest they generate is directly calculable, and there is no administrative impossibility standing in the way of paying it to the person it belongs to.
This is exactly the distinction the access-to-justice case for ILCA gestures toward without fully landing. The argument that "the question of ownership must be settled openly rather than assumed" for designated accounts is the right instinct, but it undersells what follows from it. Once ownership is settled — and on existing authority, it settles in the client's favour — a scheme that takes 50% of a designated account's interest by default is not filling a legal grey area. It is legislating past a fairly clear equitable entitlement, for a class of people (home buyers mid-transaction, probate beneficiaries, people with money held for a specific purpose) who did nothing to consent to the arrangement and who, unlike firms, have no seat at the table in a consultation run through the legal profession's representative bodies.
That matters practically as well as doctrinally. Parliament can, through clear statutory words, override background trust principles — sovereignty is not in question. But a court asked to review the scheme, or a claim brought under Article 1 of Protocol 1 to the European Convention (peaceful enjoyment of possessions), would ask whether the interference strikes a fair balance between the public interest and the individual's property rights. A scheme that channels proceeds into a ring-fenced, independently governed access-to-justice fund, drawn overwhelmingly from pooled accounts where individual entitlement was already administratively unallocable, has a real fair-balance argument available to it — it looks like the state solving a genuine collective-action problem for the benefit of a comparable population. A scheme that also reaches into individually attributable designated-account interest, with the proceeds absorbed into general departmental spending, does not have the same argument available, because both the class deprived of property and the purpose it serves have become harder to connect. That gap is precisely what critics identified when the MoJ's version proposed no ring-fencing at all; it does not disappear just because a future version adds one, unless the differential treatment of pooled and designated accounts is built into the scheme's architecture from the start, not treated as a detail to be resolved later.
There is also a framing problem worth naming plainly. The government's public case for ILCA — that law firms benefit from a functioning justice system and should contribute to it — describes the pooled-account portion reasonably well, since that money was already administratively unattributable to any individual and firms had been retaining the surplus as, in effect, working capital. It does not describe the designated-account portion at all. There, the economic burden of a 50% levy falls on identified clients, not on solicitors' profits. Marketing that as a contribution from the legal profession, when a meaningful share of it is actually a deduction from money that would otherwise reach ordinary people mid-transaction, is the kind of mismatch between political framing and legal substance that erodes public confidence in exactly the sort of institution-building this reform is meant to demonstrate.
What a legally sound version would need
Read together, the access-to-justice case and the trust-law analysis point toward the same design, for overlapping but distinct reasons. An independently governed fund, statutorily mandated to spend on access to justice and insulated from the ordinary spending review, is not just good governance — it is close to a legal precondition for the scheme to survive a fair-balance challenge at all, because it is what connects the class of people whose property is being redirected to the purpose it serves. Transparent, accountable design, with input from the profession and the communities the money is meant to help, both legitimises the scheme politically and creates the kind of documented, evidence-based justification that would matter if the rules were ever tested in court. Exempting legal aid and not-for-profit providers, who already operate on the thinnest of margins, avoids the scheme cannibalising the very sector it exists to fund — an internal-consistency point rather than strictly a legal one, but a serious design flaw if missed.
To that, the trust analysis adds a fourth requirement the debate so far has treated as secondary: pooled and designated accounts are not the same problem and should not receive the same treatment. The strongest, least legally exposed version of ILCA would draw the bulk of its funding from pooled-account interest, where impracticability of individual allocation already has real legal cover, and would either exclude designated-account interest entirely, cap any levy on it well below the pooled-account rate, or build in an explicit consent or opt-out mechanism so that a client's clearer beneficial claim is not simply overridden by default. A scheme built that way answers the Law Society's objection that this is an unfair tax on clients, because for the bulk of the money it demonstrably isn't one, and it removes the single argument most likely to end up in front of a court.
Conclusion
The instinct now circulating in parts of the profession — revisit, redesign, don't abandon — is the right one, and the evidence of need is not seriously contestable. But the case for that redesign is stronger, and more precise, than "the previous version wasn't ring-fenced." The previous version also asked the wrong legal question by treating all client account interest as a single, undifferentiated pool available to the state once the firm's claim to it was ruled out. Trust law does not stop there: ruling out the firm's claim leaves the client's claim standing, and that claim is far sturdier for a designated account than for a pooled one. A new Lord Chancellor with no history on this file has an unusually clean opportunity to fix that, not as a political concession to the profession, but because getting the pooled/designated distinction right is what would make a ring-fenced, independently governed ILCA scheme durable rather than provisional — a piece of institution-building that survives its first legal challenge, rather than a policy that has to be defended anew every time a firm or a client decides to test it. Done that way, ILCA would be a rare thing in justice policy: a reform that costs the Exchequer nothing, commands a genuine legal justification rather than an assumed one, and could plausibly outlast the government that built it.
Ian Macfarlane
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