Proposed Changes to Leasehold Properties
Many leaseholders have been waiting for leasehold reform, with the hope that it will improve their situation in relation to their lease. This article explains how and when this might happen.
The government have been discussing changes to leasehold law since 2017, and the most recent milestone in this journey was the King’s Speech on 7 November 2023 where they announced a new Leasehold and Freehold Reform Bill. The hope is that the new Leasehold Reform Bill will be discussed (and hopefully passed) before the next general election, which is expected in 2024.
It is important to state that the proposed changes announced in the King’s Speech will not immediately become law. Nor is it guaranteed that the bill will be passed before the next general election.
What can we expect from a Leasehold Reform Act?
For many leaseholders, the hope for new leasehold law is related to reducing the cost of extending their lease or purchasing their freehold. However, until a draft Leasehold and Freehold bill has been introduced, we can not be certain what exactly the reform will include.
What reforms are we likely to see?
1. Allow an extension of 990 years
Existing legislation (the Leasehold Reform Housing and Urban Development Act 1993) allows leaseholders of flats to extend their leases by an additional 90 years. The government promised in the King’s Speech to give leaseholders the right to do 990-year lease extensions. This means if you have 85 years now, you would have 1075 years after the extension.
2. Abolish the two-year ownership condition
Currently leaseholders have to wait two years before they can extend your lease (or buy the freehold to their house).
They government are talking about removing this requirement. You can already start a lease extension and “assign” it to a buyer, so doing this is very uncontentious.
3. Abolish new Leasehold Houses
The percentage of new houses sold as leasehold is much lower than flats. On the basis that there is rarely a good reason to sell a house as leasehold, abolishing the sale of new leasehold houses is likely to happen.
4. Abolish Marriage Value
Flats with short leases tend to sell for less than flats with long leases. A flat with a short lease is likely to increase in value as soon as the lease is extended. This hypothetical profit that the leaseholder makes is called “Marriage Value”. If a lease is below 80 years, a tenant must split the Marriage Value with the freeholder.
It is thought that for leaseholders, Marriage Value is unfair for several reasons and the government have previously said that they are going to abolish it – although it wasn’t included specifically in the King’s Speech or briefing notes.
5. Abolish Ground Rents entirely
The Leasehold Reform (Ground Rent) Act 2022 prevented ground rent being charged in most new leases. If you buy a new flat on a new lease, it won’t have a ground rent. If you extend your lease it either won’t have a ground rent at all (statutory lease extensions) or the ground rent will be reduced to a peppercorn rent under the extended portion of the lease (informal lease extensions).
This particular change was suggested by the press ahead of the King’s speech, but wasn’t included in these terms in the King’s Speech or the briefing note. This change is highly contentious, as it would transfer a huge amount of value from freeholders to leaseholders.
6. Share Lease Extension / Freehold Purchase professional fees
Under current legislation, the leaseholder is required to cover the freeholder’s legal and valuation costs associated with their lease extension.
There is a possibility that under the new legislation that each side will pay their own costs.
When will reform happen?
The government have promised a Leasehold Reform Bill in the King’s Speech. Assuming it is introduced promptly, the bill will then have a maximum of about a year to get through the legislative process before the next general election.
Should I extend my lease?
It is particularly difficult to give a “one size fits all” answer because we don’t know (a) what the changes will be or (b) when they will happen.
We find that large investors sometimes wait, but homeowners or small landlords decide to press ahead with their lease extensions because they don’t want to put their lives on hold. When leasehold reform finally makes it onto the statute books there will be some people who have already extended and will be disappointed they didn’t wait. Equally there will probably be some people who waited and wish they hadn’t.
Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.
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