Leasehold Reform

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Ashley Connell

Edited by Ashley Connell

Leasehold Enfranchisement Solicitor at Hetts

Leasehold Reform 2024 and its Impact on Lease Extensions

Updated 25th May 2024

On 24th May 2024, the House of Lords surprised the all of us with the sudden passing of the long awaited Leasehold and Freehold Reform Act 2024. The swiftness of the bill passing was a result of Rishi Sunak's call for a general election earlier in the same week.

Although the bill has been passed, it has not yet come into effect, and the implementation date remains uncertain. The government has stated that secondary legislation through 'statutory instruments' will be required to actually bring any changes to reality. In some sense, this gives the government more time to fine tune the legislation, but at the same time show their commitment to getting the key elements passed, albeit at an unknown date in the future.

See how the new changes could change your lease extension premium with our Comparison calculator

The Leasehold and Freehold Reform Bill 2024

Now that the bill has passed, both leaseholders and freeholders are questioning whether they will see a positive or negative impact on current and future lease extensions.

This depends on individual circumstances, as it is possible that lease extensions could become more expensive. Unfortunately, the bill has been passed in such a way that future legislation, through the implementation of statutory instruments, will actually dictate the specific changes made. This means leaseholders will have to wait longer for any certainty. Please note that the following is not legal advice, as it is currently impossible to provide definitive guidance due to the significant uncertainty that remains.

Expect a lot of litigation, with a class action law suit against the government from freeholders. There is a possibility this litigation could slow down down the implementation of the legislation substantially.

Less Than 80 Years Remaining on the Lease

The general consensus is that you should wait due to the potential removal of the marriage value, which is more than likely. In many (not all) cases, removing the marriage value could more than half the premmium.

More Than 80 Years Remaining on the Lease

The consensus is that you should extend urgently, as the government is likely considering a reduction in the deferment rate, which could result in a higher premium for leaseholders.

Your ground rent exceeds 0.1% of the value of your flat

Possibly wait. It's likely ground rent will be capped at 0.1% of the flat value. For example, if you pay £300pa ground rent on a £150,000 flat, then the premium calculations will presume that the grond rent would be £150pa, making it cheaper.

Primary Leasehold Reform Changes

  • Removal of Marriage Value: This proposed change is likely to be a game-changer for leaseholders with less than 80 years remaiing on their lease. By eliminating the marriage value, the cost of extending these leases could be significantly reduced. This reduction could ease the financial burden on leaseholders, making the extension process more accessible and equitable.
  • Capping Ground Rent Compensation: Setting the ground rent compensation cap at 0.1% of the flat's value could substantially lower the costs for leaseholders. This cap aims to balance the interests of leaseholders and freeholders, providing a more fair and predictable framework for calculating ground rent dues.

    For leaseholders who pay a ground rent of less than £200 per annum, the potential benefits from these reforms may be limited. In cases where the ground rent exceeds 0.1% of the flat's value—for instance, more than £200 per annum on a flat valued at £200,000, or in scenarios where the ground rent is structured to double or is linked to the Retail Price Index (RPI)—the compensation owed to the freeholder for eliminating the ground rent will be calculated under the assumption that the ground rent would not have surpassed £200 per annum at any future point. This stipulation is designed to protect the financial interests of leaseholders by placing a cap on the projected ground rent valuation. The cap will presume that there is no future increase in the value of the property - therefore fixed at 0.1% of today's value.

See a more in depth article on Capping ground rents for lease extensions.

Secondary Leasehold Reform Changes

  • Extension Term Increase: The proposal to increase the extended term from an additional 90 years to 999 years represents a dramatic shift. This change, however, comes with the caveat of potentially higher premiums and in reality is not a huge benefit for leaseholders due to the law of diminishing returns. Most flats probably won't even exist in excess of another 200 years.
  • Buy-Out the Ground Rent An interesting aspect of the bill is the allowance for leaseholders to 'buy out' their ground rent independently of the lease extension process. This separation could offer more options and financial relief to leaseholders, especially for those not immediately interested in extending their leases but keen on settling their ground rent obligations.
  • Abolishing the Two-Year Qualifying Period: The proposed abolition of the two-year waiting period for initiating a lease extension post-purchase introduces significant flexibility for new leaseholders. This change would enable immediate commencement of the extension process, offering a streamlined and less cumbersome experience.

Leasehold Will Not Be Abolished Anytime Soon

Given the complex nature and sheer volume of leasehold agreements already in place, the feasibility of outright abolition seemed fraught with challenges and complexities. The current draft Leasehold and Freehold Reform Bill makes no mention of abolishing leasehold.

In a turn of events, May 2023 brought clarity from reports based on insights from unnamed government sources, as reported by several leading news organisations. These reports indicated a pivot in the government's policy. Instead of abolishing leaseholds, the government appeared to be set on revising and updating the system. This approach was supported by the most recent briefing document on the government's website, which detailed plans for reforming the leasehold system.

Additionally, no concrete plans for the total removal of leaseholds were detailed in either the King's Speech or in the proposed legislation, reaffirming the government's intention to reform rather than abolish the existing leasehold system.

Will Leasehold Reform Really Make Lease Extensions Cheaper?

If you have more than 80 years remaining on the lease - then there is a high chance that lease extensions will become more expensive due to a drop in the deferment rate applied to the valuation calculations.

For those with less than 80 years, the lower the remaining term of the lease, the higher the potential savings if the new law comes into effect.

Here is why lease extensions could become more expensive after the legislation is passed.

When Will the Leasehold and Freehold Reform Act 2024 come into effect?

The government's own statement is that it could be anywhere between 2024 - 2028 before the changes take effect. Royal Assent could be obtained this summer, but that does not actually bring the legislation in - as the final approved bill will include a date for the changes to come into play.

Expert Opinion

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