Leasehold Reform 2024 and its Impact on Lease Extensions

Updated 22 November 2024 - The government have now introduced the Leasehold and Commonhold Reform Bill taking reforms to even further consultation and delays.

The House of Lords surprised 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 shows their commitment to getting the key elements passed, albeit at an unknown date in the future.

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

The Leasehold and Freehold Reform Act 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 lawsuit against the government from freeholders. There is a possibility this litigation could slow 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 halve the premium. See here why we think Marriage Value is Unfair.

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 £300 per annum ground rent on a £150,000 flat, then the premium calculations will presume that the ground rent would be £150 per annum, 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 remaining on their lease. By eliminating the marriage value, the cost of extending these leases could be significantly reduced, easing the financial burden on leaseholders.
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.

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.

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.
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.
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.

Leasehold Will Not Be Abolished Anytime Soon

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

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.