Leasehold Reform – An end to Leasehold as we know it?
With around 4.5 million leaseholders in England and Wales, the Government’s current proposals to reform the leasehold system is a hot topic which, if implemented, will have effects across the board, not only for individuals who occupy a leasehold property, but also management agents and investors. In this article, Zoë Paton-Crockett, Head of Commercial Property, outlines the new reforms and what this could mean for leaseholders and freeholders.
In England and Wales, properties may be:
- ‘Freehold’– where the property and land are owned indefinitely;
- ‘Leasehold’ – where the legal title to the property is granted from a Lease for a specified number of years and which may be subject to, amongst other matters, a Ground Rent; and
- ‘Commonhold’ – where there is indefinite ownership of part of the property, for example an individual flat within a building, with the remainder of the building, including shared or communal areas being managed by a commonhold association.
Why the need for Leasehold Reform?
Under the current law, leaseholders of houses can only extend the term of their Lease once and by 50 years. Conversely, leaseholders of flats are entitled to extend their Lease for 90 years at a time over and over again, whilst also benefitting from a ‘peppercorn’ ground rent (which broadly speaking is £nil). The caveat to the peppercorn ground rent from extending the lease term is that a premium may be payable to take account of the benefit derived from the leaseholder no longer being liable for ground rent and the freeholders loss for the same.
The practical reality of the situation is that most mortgage lenders will not advance a loan where there are 80 years or less left to run on the Lease. This means that before, or during the time of selling/buying a leasehold property, the Lease will need to be extended which can be costly and time-consuming, unless of course there is a cash-buyer involved in the transaction.
Should an extension of the Lease term be required, another consideration to take into account is that of ‘Marriage Value’. Marriage Value is a payment made by the leaseholder to the Landlord to reflect the increase in the value of the property following the lease extension, reflecting the additional market value of the longer lease – the less time there is left to run on the lease, the higher the Marriage Value will be. If there is more than 80 years left on the term of the lease, no Marriage Value is payable.
Additionally, whilst a ground rent provided for in the Lease may be of a notional value of £1 or £2 a year, spiralling or doubling ground rents have become more problematic in recent years. For example, a Lease granted in 2015 for a ground rent of £10.00, doubling annually, the ground rent would now be £640.00. Problematic ground rent provisions can not only be financially burdensome, but unattractive to mortgage lenders and potential new owners, reducing the value of the property over time.
What Reforms Are The Government Proposing?
Some of the current reforms put forward by the Government include:-
- A statutory right to extend a lease for 990 years at zero ground rent;
- To simplify the lease extension process, making it more accessible and cost effective;
- Abolishment of marriage value;
- Establishment of a Commonhold Council
What does this mean for you – Freeholder or Superior Landlord
A statutory extension to create 990 year leases would demote the value of the reversionary interest (the right to take back possession of the property at the end of the term specified in the lease). The freehold title would essentially only be a formality and hold no tangible value, meaning that those who have a property portfolio of freehold titles could see their investment fall overnight.
One means of alleviating this issue would be to create a system of compensation to reflect and balance the interests of a landlord against the leaseholder, perhaps incorporating a premium payable on the extension, based on a calculation incorporating different factors such as years left to run on the term, the ground rent and inflation. This raises further questions however, of who would be liable for the compensation – would it be the leaseholder at the time of the extension or would there be a top-up by the Government available? There is no doubt that these considerations must be consulted on by each group within the property industry.
What does this mean for you – Leaseholder
Following the Governments’ announcement for reform, leaseholders who are thinking of selling their property may find renewed comfort in the marketability of their property with a shorter lease. Likewise, for those eager to step onto the property ladder, or accomplished investors looking to expand their portfolio, there may be increased opportunities to take advantage of.
Additionally, with proposals to create a fairer and more transparent process for calculating the cost of lease extensions, the process may become more streamlined, quicker and less time-consuming than under the current system. Any cost savings, as with the Stamp Duty Holiday would allow those involved in a property transaction to direct the savings elsewhere, whether into the property and home-improvement sector, or the economy more generally.
The Government have expressed their commitment to reforming the current system, however there is no timeframe for when these reforms may come into effect. With the ongoing financial distress being caused by Covid-19 and Brexit, any timeframe for reform should be viewed with an element of caution.
If you believe you could be affected by these reforms, or have any further questions on this matter, Butcher & Barlow are on hand to offer advice and support. Please do not hesitate to get in touch with your local branch, or, if you prefer, you can get in touch with Zoe directly at firstname.lastname@example.org.