Leasehold Reform

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As part of the biggest reforms to English property law for 40 years the government has announced plans to bring forward long awaited legislation to enable millions of leasehold homeowners the right to extend their leases to 990 years with zero ground rents and simplifying the process of calculating the premium payable.

Why is extending the lease to 990 years important?

The current rules only allow leaseholders to extend their leases by a maximum of 90 years. However once their lease falls below 80 years, leaseholders must extend their leases to ensure that they are acceptable to mortgage lenders otherwise the leaseholder will be at risk of being trapped in the property with their only options being:

  • to sell at reduced value to opportunistic cash buyers;or
  • letting the lease run down until it expires where the property simply reverts back to the freeholder leaving the leaseholder homeless.

As such, a leaseholder will be significantly better placed by holding a 990 year lease.

What is the significance of Zero Ground Rent?

Leasehold property owners were generally charged just a small ground rent, which many freeholders did not collect.  However the mechanism has been exploited with ground rents often doubling every ground rent review date leaving some leaseholders with crippling ground rents, indeed some properties will attract ground rents of around £10,000 a year by 2060.

Ground rent provisions of this nature are now deemed to be unacceptable to lenders and leaseholders have had to negotiate with their landlord to vary their leases to remove or alter such provisions so as to be acceptable to lenders and therefore marketable. This frequently involves paying a premium to their landlord and covering the landlord’s costs. It also causes unnecessary stress and delay for the leaseholder as historic ground rent issues are often only identified at a time when the leaseholder is looking to sell or re-mortgage their property.

The new legislation is fantastic news for leaseholders and will mean that leaseholders that choose to extend their lease on their home will no longer pay any ground rent to their landlord resulting in significant cost savings and avoiding unnecessary headaches.

Calculation of the premium payable to the Freeholder

Under the current rules when a leaseholder either extends their lease or together with fellow tenants acquire the freehold titles there is a complex valuation process to ascertain what premium should be payable by the leaseholder. This process includes calculating the increase in the value of the flat arising from the grant of the new lease (or in the case of acquiring the freehold title the ability for the leaseholder to grant themselves a long lease at nil value.) – this is called the “marriage value”. Such costs can run into tens of thousands of pounds for a flat.

Under the reforms, this complex valuation process will be scrapped and replaced with a new formula set by the government that according to the Housing Minister, Robert Jenrick, will be fairer, simpler and lower than what is currently charged.

Further details

The government is yet to publish what the new valuation process will be and the new legislation to pass these reforms has not yet been passed so it may be some time before leaseholders can take advantage of these new rules.

If you would like advice on how to deal with your lease then please do contact our residential property team and we would be only too happy to help.

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