30 March 2021

New Legislations for Leasehold Reforms- Good News for the Leaseholders

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On the 7th January 2021, Housing Secretary Robert Jenrick announced that leasehold reform will begin to be tackled in upcoming legislation. This will be the first part of a two-part reforming legislation scheme that is being put in place by this Parliament[1].

The main points of the proposed legislation that being focused on are:

  1. Leaseholders are being given the right to extend their lease by up to 990 years at zero ground rent
  2. Limiting the use of adding ‘marriage value’ to properties
  3. Applying this legislation to retirement properties to ensure that the elderly are protected by this new legislation as well.

Current Legislation:

The main difference between a freeholder and a leaseholder is that a freeholder owns both the property and the land a property stands on, whilst leaseholders only own the property.

Under the current law, many people face high ground rents that are combined with a mortgage, which can make it feel like they are paying rent on a property they own as well as be an extremely costly venture. Freeholders of the property can also increase the amount of ground rent needing to be paid, with “little or no benefit” to leaseholders[2] who have to now deal with these extra charges on top of the already expensive cost of living/owning a leasehold property. Moreover, this increase can also lead to further increased costs when buying or selling the property in the future.

Leaseholders of flats can extend their lease at a zero ‘peppercorn’ ground rent, but usually, this is only for a term of 90 years and sometimes leaseholders face high charges to even do this. A peppercorn rent is a very small or non-existent rent that basically defeats the idea of paying rent to the freeholder since the amount is soo minuscule. Leasehold house owners, which face slightly different rules, can also face barriers when they look to extend their leases. For example, instead of a 90-year extension with ‘peppercorn’ ground rent, leaseholders of houses can only extend their lease once for 50 years with ground rent.

Lease extension if 990 years:

The announcement made on the 7th of January means that both house and flat leaseholders will now be able to extend their lease to 990 years with a ground rent of zero. In other words, this allows any leaseholder who chooses to extend their lease on their home will no longer pay any ground rent to the freeholder, enabling those who dream of fully owning their home to do so without any additional and unfair expenses. For many leaseholders, these changes could save them from thousands to tens of thousands of pounds.

A cap will also be introduced on ground rent payable when a leaseholder chooses to either extend their lease or become the freeholder. 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.

Marriage Value:

The proposed legislation wants to abolish using marriage value in a leasehold extension transaction. To first understand why this is happening, we need to talk about what marriage value is. Currently, Marriage Value is if you extend a lease that has less than 80 years left in its term, there is an additional fee to be paid to the landlord called a Marriage Fee/Value. When a Lease is extended, it adds value to the property. Under the 1993 Leasehold Reform Act, the Marriage Fee/Value is made up of the landlord being entitled to half (50%) of the increase in the value of the property when a lease has less than 80 years left in the term and it is extended.  The particular reason for this circumstance being so-called is because the increase of the value of the property comes in conjunction with a longer Lease (i.e. when Married together) and exceeds the combined value of the separate entities. When you extend a lease with a remaining term of 80 years or more, no marriage fee is payable[3].

Today’s announcement will remove marriage value from the premium calculation and prevent the freeholder from benefitting from 50% of the monies made from the increase of the value of your property and set the calculation rates to ensure they are fairer, cheaper and more transparent.

Further measures will be introduced to protect the elderly:

Restricting ground rents to zero for new leases will also now apply to retirement leasehold properties (homes built specifically for older people), so purchasers of these homes have the same rights as other homeowners and are protected from uncertain practices.

In recognition of the previous announcement of the ground rent exemption for retirement properties in June 2019, and wishing to mitigate the potential impact on these developers, commencement of this provision will be deferred and come into force for retirement properties 12 months after Royal Assent.

Further Information:

This is currently only being implemented in England ad, not Wales as the Welsh Government is yet to decide whether they want to adopt this legislation or not.

The formula used to work out the cost to leaseholders for buying the freehold or extending the lease includes a discount for any improvements the leaseholder has made and a discount where leaseholders have the right to remain in the property on an assured tenancy after the lease expires. These existing discounts will be retained, alongside a separate valuation methodology for low-value properties known as ‘section 9(1)’.

The government is also now establishing a Commonhold Council – a partnership of leasehold groups, industry and government – that will prepare homeowners and the market for the widespread take-up of commonhold. The commonhold model is widely used around the world and allows homeowners to own their property on a freehold basis, giving them greater control over the costs of homeownership. 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

Developments:

Leaseholders will also be able to voluntarily agree to a restriction on the future development of their property to avoid paying ‘development value’.

Under the proposed changes, development rights would also be placed in the hands of the leaseholder. Currently, if leaseholders wish to buy the freehold of their block and the freeholder either has planning permission to add extra floors or gets permission via Permitted Development Rights, the leaseholder has to ‘buy those rights. In effect, pay for the loss of profit the freeholder would make. The proposal is that leaseholders can either block the freeholder’s plans or, if they wish to develop, do so themselves, provided that they compensate the freeholder at the time.

[1] https://commonslibrary.parliament.uk/leasehold-reform-in-england-and-wales/

[2] https://www.ftadviser.com/mortgages/2021/01/07/govt-scraps-ground-rent-for-millions-of-leaseholders/

[3] http://leaseextension-uk.info/marriage-value.html

Disclaimer:

The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Connaught Law and authors accept no responsibility for loss that may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Connaught Law. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Connaught Law.

About the Author

Nauman Javid
Nauman Javid has established himself as a solicitor representing high net worth individuals and families. Clients have chosen him to handle their private and commercial interests, knowing that he understands the passion that drives them.

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