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Reforms to Leasehold  Enfranchisement – the tide is changing

A leasehold interest is considered a “wasting asset”: its value will almost always reduce over time and will eventually revert to the landlord. Until now, an individual’s right to a lease of their flat, has been governed in the main by the Leasehold Reform Housing and Urban Development  Act 1993. A leaseholder has been compelled over the passing of time to request a longer lease in order to increase/preserve value in the flat. The 1993 Act offers  a term equal to the unexpired term of the existing lease plus a further 90 years, at a premium to be determined usually between the landlords and tenants valuers based on both negotiation and valuation principles prescribed by law, and  at a peppercorn (nil) rent, otherwise on the same terms as the existing lease subject to certain exceptions.

But with the advent of the long-awaited Law Commission Report issued last year, all this was set to change. The impetus behind the reform was the sense that the current system was “unfair”, “uncertain”, “too expensive” and “complicated”. It is made all the more significant when one considers that it is estimated that “there are over 4.2 million leasehold properties in England alone, comprising 18% of all housing stock. Indeed,  other estimates, suggest that there are far more leasehold owners than these statistics suggest.

Earlier in the year, housing minister  Robert Jenrick’s  made an announcement bringing the reforms back into sharp focus. In the wake of this  many leaseholders and landlords alike will have been left wondering how to respond to or deal  with their leasehold assets, whether on the landlord or tenant side of the coin.

Leaseholders may think they should hold off extending their lease until the law reform comes into before parliament and gets enacted in legislation. The important point to note however is that not only is the precise timescale for the proposed reforms uncertain, the reforms are also likely not going to affect all leaseholders equally, and therefore a “one size fits all” approach is not appropriate.

The proposals for all residential units are as summarised as follows:

  • Abolish the two year ownership rule, allowing any leaseholder to apply for a lease extension, instead of waiting until they have owned their property for two years when the premium will have likely increased.
  • 990 year extension. The landlord will retain the ability to take back the property on the grounds of re-development in the last 5 years of every 90 year period, subject to certain requirements.
  • New right for leaseholders with very long leases or onerous ground rents to buy out their ground rent or long leases separately rather than having to do both.
  • Marriage value, currently payable on leases less than 80 years, which assumes that the value of one party holding both the leasehold and freehold interest is greater than when those interests are held by separate parties, is likely going to be removed from the premium calculation although this is not yet 100% certain.

Broadly speaking, this places  leaseholders into three following camps:

  1. Leaseholders who may not necessarily be impacted in a huge way by the reform and may consider carrying on as normal for the time being in making new claims and progressing with existing ones;
  2. Leaseholders who see some clear benefit in holding off for a while at least until things become clearer with regard to this new regime that’s being proposed;
  3. Leaseholders who fall in between camps 1 and 2

Which camp any given leaseholders fall into varies depending on the precise length of lease, value of property, level of ground rent and personal circumstances. For example, if you have a  lease of over 80 years and ground rents are not massively onerous, there may not in fact be a huge material benefit save for fees savings, when considering the fact that the premium is getting greater over time it will take to get the reforms through. Equally, in a lease under 30 years the reversionary value has the most impact in determining the premium due and therefore it is unlikely that the abolition of marriage value will have a huge impact when balanced against the rate of ever increasing reversionary value over the effluxion of time.

What is safe to say is that a leaseholder can only really determine whether or not it is worth extending now or later by engaging specialist valuation advice and legal advice.

If you are a freeholder or leaseholder and would like advise on this issue and the potential impact on you please do not hesitate to contact Gary Green of our Property Department on 020 7625 6003 or email her at g.green@fgdlaw.co.uk