The government has been working on reforms to residential long leasehold ownership for many years, with the most recent reforms coming into force on June 30, 2022.
Eleanor Longworth, a leasehold dispute resolution specialist at Woodcocks Haworth and Nuttall Solicitors, outlines the proposed reforms and offers guidance to flat owners who are considering whether to purchase the freehold.
What is a lease extension?
A lease extension is a means of adding time to the unexpired period of your lease. A leaseholder can enter into an agreement with their landlord in order to achieve this. A new lease is then granted.
A premium is payable to the landlord for the extension. Valuation is a specialist area and valuers are often instructed to calculate the estimated premium. The key take away however, is that when the lease period remaining is less than 80 years the landlord is entitled to add half of a valuation concept known as ‘marriage value’ to the calculation of the price. This will substantially increase the cost of making an extension.
Lease extensions are, therefore, particularly useful to leaseholders who have a relatively short term left on their leases. It can become increasingly difficult to sell a property, as the lease reduces in length. Often mortgage providers are unwilling to lend if the unexpired term falls below 75 years. It depends upon the lender.
A lease extension can be negotiated informally, or a leaseholder can force the landlord to grant a lease extension, by serving a notice under the Leasehold Reform Housing and Urban Development Act 1993.
What is collective enfranchisement?
Leaseholders with long leases of residential flats, have the statutory right to purchase the freehold of their building, from the landlord, if they qualify, under the Leasehold Reform Housing & Urban Development Act 1993. This is termed collective enfranchisement.
The benefits can be:
- Lease extensions: when the freehold is acquired, new leases of 999 years, at a peppercorn ground rent, are commonly granted. This can make it significantly more appealing to buyers;
- You have control over who is appointed to manage the property, services and avoid excessive service charges
Read our previous blog post to find out more about how to purchase the freehold of a flat.
What are the proposed leasehold reforms?
The completed constituency casework that covers leasehold reform in England and Wales was published on June 24, 2022. It outlines the government’s commitment to reform leasehold tenure to make buying or extending lease agreements “easier, faster, fairer and cheaper”.
The Leasehold Reform (Ground Rent) Act 2022 which came into force on June 30, 2022, fulfils the commitment to “set future ground rents to zero”.
These provisions apply only to new lease agreements, making it an offence to grant new leases, from that date, pursuant to which ground rent of anything greater than “a peppercorn” is payable. It will assist those who buy new leasehold properties.
The casework outlines that further legislation will:
- Reform the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold.
- Abolish marriage value.
- Cap the treatment of ground rents at 0.1 per cent of the freehold value and prescribe rates for the calculations at market value. An online calculator will simplify and standardise the process of enfranchisement.
- Keep existing discounts for improvements made by leaseholders and security of tenure.
- Retain the separate valuation methodology for low-value properties known as “section 9(1)”.
- Give leaseholders of flats, apartments and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”.
- Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue, “subject to existing safeguards and compensation”.
- Enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.
No additional detail on timing has been provided other than reference to implementing leasehold and commonhold reform “in this Parliament”. This suggests legislation will be introduced during the 2023-24 parliamentary session.
Should I wait for leasehold reforms before exercising my right to a lease extension or collective enfranchisement?
As it stands, it is not yet known when the reforms will be implemented and if ultimately all the proposals will make their way into the legislation. The current legislation remains in force.
A drawback to leasehold ownership is that the value of your property can decrease over time. The concept of marriage value remains a key consideration.
If your lease is close to the 80-year mark, the only way to currently avoid paying marriage value (or a marriage value equivalent) is to act quickly.
Even if you have in excess of 80 years, if you wait for the proposed reforms, your premium may become more expensive than if you were to extend your lease now.
The financial considerations aside, you may simply be in a position where the relationship with your landlord has broken down, you want to avoid what excessive charges, or ensure that your development is properly maintained. These may be further reasons for you to consider your options now, as opposed to waiting.
The road to collective enfranchisement and lease extension is complex, but it is achievable and both rights commonly exercised. It is vital to seek the expert advice of a leasehold dispute resolution specialist to guide you through this process and ensure your interests are protected.
WHN’s specialist team will be on hand to guide you through the whole process. We can provide support and guidance to set up the purchasing company, draft the participation agreement and serve notice of your intention to purchase. This also includes the transactional process of conveying the freehold to the nominee purchaser and completing the enfranchisement process.
For further advice on acquiring a freehold, or any other leasehold dispute resolution matter, please call Eleanor Longworth on 0161 761 4611 or email Eleanor at eleanor.longworth@whnsolicitors.co.uk
