What affect will the leasehold reform changes have?

The Government has now announced proposed changes to lease extensions which will be welcomed by all leaseholders.

The main changes will be:

The Term of the Lease Extension
Under current regulations, a lease of a house can be extended by up to 50 years and a lease of a flat can be extended for up to 90 years in addition to the existing term. Under the proposed reform, all leaseholders would be able to obtain a lease extension for 990 years.

Ground Rent
Leaseholders looking to extend the lease of a flat can extend their lease with the ground rent set at a peppercorn. But this is not an option for leaseholders of houses who must still pay a ground rent. The new regime proposes to set all ground rent at zero upon extending the lease.

The Commonhold Council
The government will look to form a Commonhold Council to “prepare homeowners and the market for the widespread take-up of commonhold”.
According to the government’s announcement, commonhold will allow homes to be owned on a freehold basis, and blocks of flats will be jointly owned and managed giving greater control to homeowners.

Marriage Value
Marriage value applies once a lease has less than 80 years left to run and can make a lease extension considerably more expensive. The government plans to remove marriage value from lease extension valuations meaning that leaseholders will no longer be in a rush to extend their lease for fear of the premium becoming more expensive.

Whilst these changes will be welcomed by leaseholders, it is not clear when the changes will be effected at law. The announcement states that legislation to set future ground rents at zero will be brought forward in the upcoming session of parliament and further legislation will be introduced in the future to bring about the rest of the proposed changes.

Our view is that this announcement offers no new news than that which has been in the pipe line for some time.

We will watch with interest about what conclusions the Commonhold Council will reach but for the minute observe that Commonhold, in terms of management, bears a strong similarity with a freehold company controlled by the tenants post enfranchisement. Our view is that when the government says, “blocks are jointly owned and managed, meaning when someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too”, they’ve perhaps not witnessed first-hand the awful disputes that leaseholders can have with each other over the decisions made by a jointly owned freehold company.

What does the leasehold reform announcement mean?

This announcement poses more questions than it resolves and our questions surround the following: –

• The announcement says “ Millions of leaseholders will be given the right to extend their lease by a maximum term of 990 years at zero ground rent” but we’d query a) whether the 990 year lease rather than the 90 years plus the residue makes any difference to the market value of the property and b) whether the tenants would pay more for that 990 year lease than they would have for a 90 year extension under the old regime (setting marriage value aside, of course).
• What does the Government mean when it says: “A cap will also be introduced on ground rent payable when a leaseholder chooses to either extend their lease or become the freeholder” A cap on ground rent is already a feature of lease extensions under the Leasehold Reform Urban and Housing Development Act 1993. Is this to mean that upon enfranchisement/commonhold, whatever is decided that the ground rents will all reset to zero?
• The statement that “Leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying ‘development value’ is interesting but what would happen in the future if the new freeholder changed their mind and sought a release of that restrictive covenant? Would the premium payable for that release be regulated? Given that the outgoing freeholder wouldn’t own any land so there would be no land with the benefit of the covenant, it would have to be contractual and a restriction placed on the register of the freehold title to ensure that each new freeholder entered into a similar covenant. So, the outgoing freeholder would have continued involvement and may, without a proprietary interest in the land, be hard to get hold of in the future.
• More information is needed about this separate “valuation methodology for low-value properties known as ‘section 9(1)”.
• Can leaseholders rely on this becoming law? Surely the fact remains that many are under pressure now to extend under the old regime to satisfy buyers and lenders? Presumably lenders won’t accept a lease with a low term on the basis that the Government intends to bring in new law at an unidentified point in the future and the borrower might act upon that law.

We watch with interest.

If you would like to discuss enfranchisement or lease extensions, please contact the Leasehold Property Team: brose@meaby.co.uk or ncleightonhills@meaby.co.uk or call 0207 703 5034.