Last week's announcement of Leasehold reforms by the Ministry of Housing, Communities and Local Government caused a bit of a stir. This was in part owing to the sensationalist nature of the press release, leaving many wondering whether the law had already changed. The simple answer is no. Nothing has yet been implemented. These reforms must go through Parliament in the usual way and may come into force in 2023. However, there will probably be some backlash over the proposals from freeholders waving potential human rights arguments related to the lowering of premiums. This is because the premium difference could be huge particularly in relation to Prime Central London properties.
Outlined below is the current position relating to leaseholders of flats and what the new changes will mean. The new rules will apply equally to house owners.
The current legislation
Leaseholders who have owned a flat for at least two years have a right to serve a notice under section 42 of the Leasehold Reform Housing and Urban Development Act. This is a right to request a lease extension for an additional 90 years at a peppercorn rent. Where the remaining lease term is less than 80 years on the date the section 42 notice is served, 'marriage value' is payable as part of the premium. This is a controversial issue as it represents the potential uplift in the value of the property as a result of the lease extension. 50% of this is paid to the landlord as part of the premium.
House owners have a right to a 50 year lease extension at a "modern" round rent after two years' ownership. However, this right is rarely exercised with many house owners opting to acquire the freehold instead.
If you are buying a flat which is getting close to the magic 80 years it is a good idea to see if the seller is happy for you to serve a section 42 notice on their behalf and for that notice to be assigned to you, the buyer, upon completion. This will save a leaseholder waiting for two years before being able to exercise the right and risking marriage value kicking in.
Are there any other options?
Many leaseholders enter into voluntary lease extensions with their landlord. This could be for various reasons including not being able to afford the additional 90 years or not qualifying. Voluntary lease extensions can work and often all parties are perfectly happy with the outcome. For example, a leaseholder may be able to agree a shorter extension for a lower figure they are happy with.
However, it is important to highlight the risks. In recent years the ground rent scandal has shown that many voluntary lease extensions have resulted in leaseholders being lumbered with unattractive leases containing onerous ground rent clauses. This is why it is imperative to obtain proper legal advice from an experienced professional before agreeing anything with your landlord. Even if you are subsequently able to obtain a lease extension under the 1993 Act to get rid of the ground rent the premium will be higher as you will need to compensate the landlord for the loss of ground rent.
What's next?
The leasehold reforms are the result of various Law Commission Papers and set out some key changes. These are listed below with some initial reactions:
- The removal of the 90 year right to be replaced with 990 years - On the face of it this sounds positive for leaseholders as the lease of a flat will only need to be extended once. The length of the term might seem a bit arbitrary.
- The removal of marriage value - This will be welcome news for many leaseholders as it will open the door to many leaseholders who will benefit from more affordable premiums. This will deter some ground rent investors as the value of future lease extension premiums will fall. However, this could be outweighed by a greater number of people being able to afford lease extensions under the new regime.
- The removal of ground rent for future properties including retirement homes - This will be fantastic news for leaseholders. It will see a drop in premiums as there will be no need to compensate a landlord for ground rent when exercising the statutory right. It will directly address the major issue concerning retirement properties with appalling ground rent provisions.
- Commonhold 'take two' - A Commonhold Council comprising industry professionals and experts and leaseholders is to be set up to educate and deal with reforms relating to commonhold. This will be welcome and will help provide a better framework to ensure commonhold is more popular this time round.
We will have to wait and see how all of this pans out. The momentum is certainly there as we are operating against a backdrop of much dissatisfaction with the current rules.
Parliament currently has its hands very full with Covid-19 and Brexit and it will be interesting to see where leasehold reform will fit into the tightly packed schedule.
Watch this space.