The Government’s leasehold reform announcement: how will it affect landlords on lease extension?

Blogs

The Government announced big changes to the procedure for statutory lease extensions. Please see our blog for full details: https://www.meaby.co.uk/leasehold-reform-big-changes-announced/

How will Government’s leasehold reform affect landlords on lease extension?

Firstly, it is not clear whether 990-year premiums will be at a higher premium than those of 90-year extensions under the current rules. Surveyors have reported to us that there is not a great deal of difference in valuation terms between 90 years plus the residue and 990 years but you’d need to check this point with a surveyor. We’d also observe that we doubt that the market value of a flat would be impacted much by 90 years plus the residue and 990 years but this would be a point to check with an estate agent who is better placed to give their opinion on marketability. As far as lenders are concerned, we doubt they care provided that the lease term is as per their requirements and 90 years plus the residue is likely to satisfy them. The only difference to you if your tenant acquires a lease extension under 90 years plus the residue is the impact on the value of the reversion given that another lease extension is much further off.

Secondly, the cap on the ground rent (“a peppercorn”) is already the position now so there has been no change in this regard.

The Government has said: “An online calculator will be introduced to make it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease”. Surveyors are sceptical as to whether that calculator could be sufficiently sophisticated enough to undertake the calculation that surveyors currently calculate under the current legislation, the Leasehold Reform, Urban and Housing Development Act 1993. As part of the current method of calculation, the market value of the flat is calculated and we cannot see how a calculator could opine on that. But who knows? The Government’s announcement is a basic bullet point list of its intention and very little information is given. Perhaps market value will have no bearing on the calculation.

There will also be other reasons for a surveyor needing to carry out a survey other than to calculate the premium:-
• A lease extension brings the old lease to an end and grants a new lease. On this basis Landlords often want to inspect to ascertain ongoing breaches, trespass and dilapidations. Forfeiture is the most usual tool for Landlords to enforce tenant breach of covenants and once the old lease has come to an end the chance for enforcement for historic breaches may be lost. A landlord has responsibilities to other tenants in the building and so this enforcement should be seen as a necessity rather than an action of a Machiavellian landlord. One example that we can think of is where a tenant has carried out unauthorised alterations that might jeopardise the structural integrity of the building.
• A solicitor sitting at his or her desk drafting the lease extension documents cannot know the lay of the land. Has the tenant trespassed outside of its demise and is the lease extension an opportunity for this to be regulated? Is the current lease plan defective and a new lease plan required? Is the right of way insufficient and needs to be rectified.

Will Government’s leasehold reforms be retrospective?

Many of our clients have asked whether this will be retrospective. We simply do not know. Therefore, if you have an ongoing lease extension claim you are safest to assume that the terms will be as per the current law.

Leaseholders who have already begun the process of a lease extension may have already incurred significant costs such as surveyors and legal fees. The expenditure already incurred will be a consideration as to whether to discontinue the claim and progress under a new regime. The press release refers to making this process cheaper but we have no detail on this. Tenants who abandon the process now will have to pay their own and the Landlord’s costs now under the old regime. We do not know what the future costs may be.

Finally, will it be cheaper for tenants if they wait? Possibly, yes. The calculation of the premium for a freehold interest subject to leases with a term of 80 years or less left to run is more expensive. We shan’t explain why here as it is detailed and complicated. If the lease has a term of less than 80 years then it may be cheaper for the tenants to wait for the new rules. However, we cannot say how much cheaper it would be, when the new rules will come in and what those new rules will look like.

If you’re already in the middle of the lease extension process the question will be ultimately up to your tenants to withdraw their existing claim.

Any current process will probably be finalised before any new law receives royal asset. There may be pressing reasons for them extending now, for example solving a problem that makes it difficult for them to sell or refinance their flat.

Whether your negotiating position has been weakened by this announcement will be a question for the circumstances including but not limited to: a) whether the tenant will want to incur costs again in the future and have to pay costs now, b) whether there is a pressing need to extend the lease now such as the need to sell or refinance and c) whether marriage value applies at all.

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