Associate solicitor Pippa Garrod, in our Dispute Resolution team, provides an update on the recently announced leasehold reforms.
On 7 January 2021 Robert Jenrick, the Housing Secretary, made an announcement that the Government intends to introduce reforms which will mean that millions of leaseholders will be given a new right to extend their lease by 990 years.
The announcement followed a series of three reports by the Law Commission which made a number of recommendations relating to leasehold enfranchisement, commonhold and the right to manage.
The Government’s proposed reforms included:
- Giving leaseholders the right to extend their lease by 990 years;
- Zero ground rent;
- Abolition of ‘marriage value’ when valuing the amount payable by leaseholders when extending their lease; and
- Retirement property leases will be included in the nil ground rent.
Why have these proposed reforms made the headlines?
Currently, leaseholders have a statutory right to a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993. The statue allows leaseholders to extend their lease term by 90 years and reduces the ground rent to a zero ‘peppercorn’ rent. Leaseholders will pay a premium to the freeholder for this lease extension which can be a substantial sum of money.
The proposal to increase a leaseholder’s entitlement to a 990 year extension from 90 years is a significant change. The Government intends for this to make home ownership more secure for leaseholders and their successors.
The proposed abolition of the ‘marriage value’ will have surprised many, and will cause concern for freeholders. The ‘marriage value’ takes into account the value if one party were to hold both the leasehold and the freehold interest in the property and the likely increase in market value in this situation, compared with the sum of the value of the lease and the freehold subject to the lease. Where a lease has a term of 80 years or less remaining, the marriage value is included in the calculation of the premium payable by the leaseholder when extending their lease under the current legislation. If the marriage value is removed from the premium calculation in future, then it will reduce the premium and make lease extensions cheaper for many leaseholders.
The Government are also proposing measures to protect the elderly by restricting ground rents to zero for retirement leasehold properties which are built specifically for older people. This is likely to be met with resistance from retirement property developers and freeholders of such properties, who have argued that it would be unfair to abolish ground rents because they have more communal spaces which require upkeep. The Government had previously announced in June 2019 that a ground rent exemption would apply to retirement properties, and so to mitigate the potential impact of these reforms announced in January on developers, the Government have proposed to defer the commencement of this provision so that it comes into force 12 months after the legislation receives Royal Assent.
There is a concern that ultimately developers and freeholders will seek to recover the costs that they will lose from the ground rent, by adding it to the service charge or the initial purchase price. So in reality it may not provide a saving for elderly leaseholders. However, hopefully it will provide more transparency and certainty for leaseholders who will not need to be concerned about periodic increases in the ground rent.
What does the future hold for leaseholders, landlords and freeholders?
Robert Jenrick stated that being a leaseholder is “far too bureaucratic, burdensome and expensive”. If the proposed reforms come into force then it will certainly be beneficial to leaseholders, making it cheaper to obtain a lease extension and providing long-term security in owning the leasehold property.
Freeholders and landlords will be concerned about the likely reduction in the value of their asset, both because of the proposal to abolish the marriage value and the increased lease term of 990 years. There is a possibility that freeholders and landlords will challenge the validity of any such legislation, which would drastically impact their existing property rights.
When presented to Parliament, it is hoped that the proposed reforms will strike a fair balance between the property rights and interests of leaseholders, landlord and freeholders.
Should leaseholders wait to extend their leases until the legislation comes into force?
This is going to be a difficult decision for leaseholders. We do not know how long it will take for the legislation to come into force and it could be a number of years away. We also need a lot more information and clarity around the proposals that have been made, the timescales, and how they will work in practice. There are also no guarantees that the legislation will include all of the proposals referred to above which would benefit tenants.
The timing of when to extend will depend on the circumstances of each individual leaseholder. A number of factors will need to be considered, including the term that they have left on their current lease and whether they are looking to sell the flat in the short-term. Leaseholders considering a lease extension should seek legal advice before proceeding with a lease extension, or delaying such action.
For further information or legal advice, please contact firstname.lastname@example.org or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.