How and when will leaseholder owners benefit from government reforms?
The government has promised for some time to address the unfair and costly lease extension process. Here is what has changed and what this means for leasehold home buyers and those who already own a leasehold property. For those that have already started extending their lease or are thinking of extending, should you pull out or continue?
The lease extension process is set to change to make it easier and cheaper for leaseholders. The Leasehold Reform (Ground Rent) Bill was passed by Parliament on 7th February 2022 and abolishes ground rents for all new properties. It will become law in the coming months.
However, existing leaseholders (around 4.5 million of them in England) will need to wait a couple of years more for the second stage of leasehold reforms to see any benefit. Planned reforms for existing leaseholders will mean they will be able to extend their lease by 990 years (an increase from the current 90 years) and the process will be simplified and transparent. An online calculator will be available to calculate the cost thus removing the need for costly and time-consuming negotiations.
Leasehold reforms – what is changing now?
What is certain is that there will no longer be ground rent charged for new leasehold properties. The new law also means retirement properties will not be allowed to charge ground rent, but they have been given until April 2023 to comply.
While this development is of course welcome for new builds, reforms for existing leaseholders need to quickly follow suit. There is already concern that otherwise a two-tier system will emerge – with newly built leasehold properties with no ground rent seen as more attractive to home buyers while the majority of leasehold properties continue to be penalised under the current system.
What’s next for leaseholders?
Bigger legislative changes planned, will mean that ground rents will be capped at a peppercorn, standard lease extensions will be 990 years and there will be major changes to how the cost of the lease extension is calculated and how the process works.
Proposed leasehold reforms will:
• Simplify the current way we value the cost of extending a lease or buying a freehold
• Abolish marriage value, which is defined as the increase in property value once the lease has been extended
• Introduce a separate valuation method for low-value properties
• Give leaseholders the option to buy out the ground rent without having to extend the lease term
• Give leaseholders of houses as well as flats the right to extend their leases at zero ground rent for a term of 990 years.
Under the current system, extending your lease can be expensive and the amount you pay can be complicated. It depends on factors like the value of the property, the number of years left on the lease and the annual ground rent charge. The amount you pay is open to negotiation and at the moment it’s critical you get sound valuation advice.
But under the new awaited system, it should be cheaper and simpler for you to extend your lease. Previous costs such as ‘marriage value’ will be banned. And a new, standardised method of calculating the cost will lead to the creation of an online calculator. This means leaseholders will be easily able to see how much an extension to their lease will cost and may not have to employ a valuer. It will also show you how much you can buy the freehold for too.
For some leaseholders, these changes could save thousands, to tens of thousands of pounds, according to government.
However, we need to wait until the Queen’s speech to be certain that the leasehold reform bill will be introduced in the 3rd session of parliament. We fear that it could be delayed or watered down by the intense lobbying by freeholders who are set to lose out.
There are also real concerns that freeholders, seeing the end of this gravy train, may pressure leaseholders into agreeing to informal lease extensions now to lock them into paying ground rent for years to come.
The government is also looking to help more leaseholders apply for the Right to Manage or to buy their freehold. Under the current system, non-residential areas in a building such as shops, must not make up more than 25% of the building’s entire floor area. The government is looking to raise the threshold to 50%.
How much could I save under new leasehold reforms?
Once these reforms have been brought in, there will be a cap on the ground rent that is due when you extend your lease and all future ground rent will be set at zero. This will come as a welcome relief to the many homeowners paying ground rent each year as well as being subject to a doubling of ground rent every 10 or 20 years. The cost of a lease extension is set to fall because of the banning of the marriage value as well as the fees involved.
I’m planning to extend my lease now, should I wait?
In light of the planned leasehold reforms, many leaseholders may wish to put off extending their lease. But, it could still be years before legislation comes into force.
There are some circumstances in which you may want to progress with your lease extension:
For example, if you’re thinking of selling your property. Buyers won’t be able to get a mortgage if the lease term is too low.
And if you are planning to stay put and you are below 70 years, you will not be able to find a competitive mortgage deal. Below 60 years and you won’t be able to remortgage.
If you have a lease that is longer than 80 years, the premium you pay for the lease extension may not change that much as you aren’t liable for the marriage value premium which is being abolished.
If your lease is below 80 years, you could save substantial sums of money when the leasehold reforms come in, but this could be a risky strategy. The longer you wait, and if the reforms are not introduced in time, you will need to pay more. Every year below 80 years can cost leaseholders hundreds, if not thousands of pounds.
If you’re considering extending your lease, it’s essential to take good legal advice.
I’m currently buying a leasehold property, what should I do?
While the leasehold reforms aren’t expected for another few months, if you’re buying a leasehold property you may still be able to use the reforms to your advantage. If you are buying a new build, you should insist that your lease is 990 years and that the ground rent should be set to zero. Your conveyancing solicitor should be able to argue that if these are due to be banned, it’s not reasonable for you to buy a property that includes them.
If you are buying an existing leasehold property, you may be able to negotiate on the price as other buyers have been put off buying leasehold. If the property has a long lease, you will get the advantage of a cheaper leasehold extension when the new rules are in place.
I’m in the process of extending my leasehold. Can I put it on hold until the new changes come in?
If you have begun the formal (or statutory) route to extend your lease, then the answer is no. You cannot put a temporary hold on the process. You have a simple choice. Carry on or withdraw.
If you are using the informal or negotiated method, it may very well be possible to agree a temporary delay with your freeholder. But, this is at their discretion, and they can change their mind at any time. If you are in the process of an informal lease extension, you should argue that the marriage value should be taken out of the future calculations now or else wait for the new rules to come in.
Is it still worth buying the freehold?
The new changes certainly make owning a leasehold property more attractive. However, there are still benefits of owning the freehold. For example, if you’re a leaseholder you’ll still need to pay your freeholder’s costs for the maintenance of the building. And you’ll also need to seek permission from the freeholder if you want to undertake any major works on your home.
If you are a leaseholder that is thinking of selling, or in fact currently trying to sell and would like to know more about how this may affect you please get in touch using the contact us form and a senior team member will contact you ASAP.
Credit: Article by Home Owners Alliance.