Leasehold Reform – Good news for leaseholders, not so for freeholders

COMMERCIAL
Share

Robert Jenrick has become a divisive figure in his so far short tenure as Housing Secretary creating a further long expected shake up of leasehold ownership with more to come in the future.

The latest move will certainly be one that does not go down well with freeholders but will certainly be a welcome start for the #fleecehold brigade and their band of previously not so merry leaseholders. In January the Government announced major changes to come in the way leaseholders can extend their leases and the approach to calculating the premium payable. These follow several Law Commission’s reports published in January and July 2020.

What is the current system?

The current provisions allow for 90 year extensions for flats, with ground rent dropping to a peppercorn and houses by 50 years with a ground rent retained.

The basis for calculating the premiums payable under current legislation fall into 3 main sections

  1. “The term” – This is the calculation of a capital sum for the right to receive an income in the future i.e. the ground rent.
  1. “The Reversion” – This is the loss to the freeholder for the right to receive the property back being deferred further number of years.
  1. “The Marriage Value” – This is the change in value for the parties following the extension the benefit of which must be split 50/50.

What are the new proposals?

The proposals will now allow for leaseholders to extend their lease for up to 990 years and, for both houses and flats, the ground rent will drop to a peppercorn.

There are two fundamental changes in the way the premiums will be calculated.

The first is that there will be a cap on the amount of ground rent that may be taken into consideration when calculating the term.  This is a result of onerous ground rent clauses that unassuming tenants signed up to.  Some of the worst include doubling ground rents which soon escalate to unsustainable levels depending on the frequency of their application.

The second is the removal altogether of marriage value.  This is often one of the more contentious and complex points in assessing the premium and can cause costs to increase significantly when parties do not agree.  It often can result in double the premium payable.

This will simplify the process and the Government intends on releasing an online calculator so that it is easy for parties to see how much the lease should be extended for and potentially removes the need for a surveyor!

In essence the amendments will reduce the costs by thousands in many cases but are there wider implications?  The thought in my mind is that these changes to legislation may in fact have an impact on the value of a leasehold property.  As the costs associated with owning a leasehold property reduce, will this form part of the consideration of a prudent purchaser who may now be prepared to offer more?

One further question remains is how will freeholders react as a large asset value is shifted from their portfolios across to their tenants. Whilst the system may be viewed as unfair by many, these freeholders have often purchased the freeholds on the basis that at some stage they will benefit from a lease extension or the tenants buying the freehold. If the legislation was as it plans to become at the time of their purchase would they have paid the same amount, this seems unlikely.

Longer term changes

The Government’s view, and seemingly the rest of the world, is that over the longer term the system needs complete reform away from the leasehold tenure of ownership.  There are few countries in the world that adopt the leasehold system, tending to stem from the former British Empire, with many of these moving away from the system as identified in an aptly titled article by the Guardian in 2017 “Leasehold in England and Wales is last redoubt of a colonial relic“.

The proposals aim for a shift towards Commonhold ownership, a form of joint ownership similar to the arrangement enjoyed by those that have enfranchised.  The system is not one that has been favoured by developers though as they are far less lucrative than the leasehold system currently allowed.  However, it is worthy to note that the banning of new build ground rents is already a matter that is marching its way to royal ascent and therefore the system is perhaps more feasible.  The latest announcement is also banning ground rents for retirement properties.

The Government will be putting together 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 system will allow for more control to flat owners over what they do and how the block is managed and remove the need to extend leases.