Lease Extension Reform 2021 - good or bad news?

Will the proposed lease extension changes mean some leaseholders are potentially worse off?

On the morning of 7th January 2021 it was announced by the UK government that changes are planned for leaseholders of both flats and houses. On the face of it, the news sounds promising with the removal of 'marriage value', but this could be bad news for some.

What are the planned changes?

For leaseholders of houses

  • Longer terms - current law allows leaseholders to extend the term on their leasehold houses by a further 50 years on top of the original term. The proposals are that leaseholders will be entitled to increase this to 990 years.

  • Ground rent - current law allows landlords to keep charging a 'modern ground rent' to leaseholders, even after they have extended.

  • Cost - the 'marriage value' element of the calculations will be replaced.

  • For leaseholders of flats

    • Longer terms - current law allows leaseholders to extend the term on their leasehold houses by a further 90 years on top of the original term. The proposals are that leaseholders will be entitled to increase this to 990 years.

    • Ground rent - No changes (current law allows leaseholders to reduce their ground rent to nil, which will remain).

    • Cost - the 'marriage value' element of the calculations will be replaced.

    • When will the leasehold changes take place?

      The proposals have to be debated in parliament, most likely when MPs are able to reconvene post COVID-19. It may take months or even years after this for parliamentary counsel to draft the legislation before it is granted Royal Assent. Lord Greenhalgh has indicated that matters the process that commences debate in parliament may not begin until the end of 2021, meaning that the changes would probably be rolled out towards the end of 2022.

      Will it mean lease extensions will be cheaper or more expensive?

      There appears to be a misconception by the media and public that removal of the marriage value will result in lower premiums. It's likely that this will not be the case.

      The following factors will influence the final outcome:

      • Huge income losses for councils (Tower Hamlets, Islington, Croydon.. etc
      • Enormous tax losses for the UK treasury from income / capital gains derived from marriage value
      • Pressure from large corporate landlords who have contacts within the government

      To recap, 'marriage value' is an element of the compensation payable to the landlord by the leaseholder - but only comes into play when the lease drops below 80 years. As per the graph below.

      Current impact of marriage value

      Hypothetical lease extension costs for flats between £350,000 to £500,000 paying ground rent of £100 per annum:

      When should I extend my lease;

      The issue will remain that landlords will still need to be compensated for the privilege of granting an extended lease. Across the country, landlords hold significant investments in freehold interest, sitting on capital that holds value due to future lease extensions that are yet to be granted. If the method of calculating the landlord's premium changes substantially to a leaseholder's advantage, this will induce serious financial losses on landlords. It is likely that large corporate landlords will put significant pressure on the government to provide a formula that does not put them at a financial disadvantage. If the marriage value element is to disappear, this would likely result in an increase in premium for those leaseholders that have more than 80 years remaining.

      Possible outcomes

      Abolish Marriage Value;
      Lease Reform Marriage Value;

      The bottom line is that there is a high probability landlords will not be disadvantaged, resulting in higher premiums for those leaseholders who have a term of 80 years remaining to compensate the landlord for the lack of marriage value charged on leaseholders who have less than 80 years remaining.

      Other increased costs for leaseholders

      If 990 years are to be given to leaseholders, rather than 90, there is a fair case for landlords to charge a higher premium by way of compensation. Expect landlord's to demand this from the government during debates in parliament. Again, it's highly likely (and fair) that they would be successful in their argument.

      A concern for the UK government is that, if the changes do result in lower premiums for leaseholder, the significant capital losses incurred by landlords (equating to trillions of pounds) could be offset against potential tax revenue - resulting in large scale tax losses for the UK. Due to this, there will be even further significant pressure on MPs from the treasury to compensate landlords for the loss of marriage value.

      Take Islington Borough Council as an example. They sit on freehold capital investments worth billions, invested within the ownership of freeholds across their local authority. Most of the leases remain unextended. Their annual accounts will include an estimated capital investment figure, based upon the future expected income from lease extensions. If the council chose to do so, these investments could be sold to private individuals or corporate bodies. Over the last 75 years, some councils have sold off these freehold investments to release cash, whilst any remaining freeholds retain substantial capital value. It is highly unlikely that the government would allow these investments to be downsized, not only due to fairness to landlords (especially those that have paid considerable sums to buy up freeholds), but also due to massive loss of council revenue at a badly needed time when UK borrowing is at an all time high.

      Should I wait?

      At this stage, it is impossible to know how the changes will play out. No doubt the formula that calculates the landlord's premium will be amended, resulting in advantages for some leaseholders, but disadvantages for others. It is highly likely that some leaseholders will end up paying a higher premium than they do now. There is also a possibility that the changes will never make it through parliament due to pressure from landlords, councils, the treasury and lobbyists of high wealth corporations with large investments in real estate. On this basis, it may be wise for leaseholders to continue with lease extensions as normal, particularly those with 80-90 years remaining.