Leasehold Extension Reform
In the UK, millions of people own a leasehold property. Currently, the systems for extending a leasehold are costly and ambiguous, but this is set to change in the near future. This blog post examines a letter our solicitor received from the Ministry of Housing, Communities and Local Government which sheds some light on the leasehold extension reform.
What is a leasehold property? As a leaseholder, homeowners own the property but not the land on which it is built – which is owned by the freeholder. Ownership of the property is for a defined period, a number of years, decades or centuries, depending on the length of your lease. At the end of the term of the lease, the ownership of the property will revert back to the freeholder.
Leasehold owners are often required to pay ground rent to the freeholder on an annual basis. This ground rent is in addition to service charge (which covers the cost of buildings insurance and maintenance) and landlords set rent review provisions during the term of the lease where the ground rent increases.
A typical example of leasehold ownership is for flats or buildings where the property is shared. These leasehold owners have the right to extend the term of their lease and reduce the ground rent they pay annually and can apply to the freeholder under two different systems (voluntary or statutory). Each of these systems that are expensive and uncertain. Freeholders have exploited their position of strength during lease extensions, but everything is set to change.
The letter below from Sarah Moore at the Ministry of Housing, Communities and Local Government gives some detail on how they envisage the system working when the leasehold reform comes into force in the near future.
The letter states:
“The Government will bring forward legislation in the upcoming session to set ground rents on newly created leases to zero. This will be the first part of seminal two-part legislation to implement reforms in this Parliament.”
“The Government will also reform the process of enfranchisement valuation that leaseholders must follow to calculate the cost of extending their lease or buying their freehold. The Government will abolish marriage value, cap the treatment of ground rents at 0.1% of the freehold value, and prescribe rates for the calculations at market value. The Government will also introduce an online calculator, further simplifying the process for leaseholders and ensuring standardisation and fairness for all those looking to enfranchise. These changes to the enfranchisement valuation process will result in substantial savings for some leaseholders, particularly those with less than 80 years left on their lease. These reforms to enfranchisement valuation also ensure that sufficient compensation is paid to landlords to reflect their legitimate property interests.”
“Through these reforms, the length of a statutory lease extension will increase to 990 years, from 90 years (for flats) and 50 years (for houses). Leaseholders will be able to extend their lease with zero ground rent on payment of a premium. Leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying ‘development value’.”
“The Government will respond to the Law Commission’s remaining recommendations on enfranchisement, commonhold and right to manage in due course. The Government will also ban the sale of new leasehold houses, give freehold homeowners’ equivalent rights to challenge unfair charges, and close loopholes to prevent unfair evictions.”
“The Government will translate these measures into law as soon as possible, starting with legislation to set ground rents on newly created leases to zero in the upcoming session. This will be the first part of major two-part legislation to implement leasehold and commonhold reforms in this Parliament.”
Therefore, any flat owners currently considering extending the term of their lease may want to wait until the law is changed before proceeding as the advice coming from the Ministry of Housing, Communities and Local Government states that these changes will result in substantial savings.
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Ben Smith is a Senior Solicitor in the Residential Conveyancing Department. Ben works in the Lymington office and helps clients with property sales and purchases. Ben can be contacted by email: email@example.com