- Written by
- David Gibson, Head of Leasehold
The proposed Leasehold Reform Bill of November 2023 introduces several significant provisions aimed at the issues within the leasehold system.
We have set out a Q&A aimed to answer all the most commonly asked queries on the leasehold reform Bill, whether you are a leaseholder, freeholder or third party.
Q. What changes does the bill propose regarding lease extension rights?
The most significant proposals are:
- That leaseholders will not have to wait two years after buying the flat to extend their lease
- That lease extensions will add 990 years to a lease instead of 90 years
- To get rid of “marriage value” which is an additional amount payable by a leaseholder to extend their lease once it has less than 80 years remaining, which would make lease extensions cheaper for those with short leases seeking to extend.
- To set more specific rates for the calculation of lease extensions to make ascertaining the premium payable simpler and cheaper or leaseholders.
- To impose more controls on how much of their legal and other costs a landlord can recover from the tenant for dealing with the lease extension claim.
Q. Should I wait to get my lease extended or should I extend my lease now?
This is possibly the most pressing question for leaseholders at the moment and generally the answer depends on your lease and individual situation.
If your lease term is under 90 years and you will need to sell or re-mortgage in the short term, we would recommend you proceed to extend your lease now. This is because properties with shorter leases cannot only be more difficult to sell, but similarly more difficult to obtain a mortgage over.
If you intend to retain your property and not mortgage it and your lease has over 90 years remaining then it may be worthwhile to see if the legislation brings adjustments to the lease extension process which benefit you.
If your lease is very short (under 80 years) then every year lost form your lease under the current legislation will cause significant uplift sin the costs to extend it. You stand to gain the most from the new legislation if it does entirely abolish marriage value and that it not adjusted or removed by the time the legislation comes into effect, but equally if the legislation is delayed in coming into effect, is altered to allow some element of marriage value to remain due, or never comes into effect due to a change in government or policy, then you stand to lose most by waiting as your lease could reduce by another year, raising the price to extend under the current legislation. The choice for you will need to factor in your own views on how likely it is that the government will deliver the legislation without any changes which make it less worthwhile for you, your intentions for the property, your financial situation and at what stage in 2024 your lease term will reduce by another year. This is worth discussing with a legal adviser, but will not be possible for a lawyer to give you a definite answer whilst the bill is still being discussed and debated.
Q. What if I go to extend my lease and marriage value is abolished in the coming months?
If you extend your lease now and it is under 80 years long you will pay marriage value as part of your premium, increasing the total amount you have to pay. If marriage value is later abolished or reduced by the proposed legislation, there is no current plan to repay the marriage value to anyone who previously extended.
Q. I have a doubling Ground Rent provision within my lease, will this be removed?
The bill seeks to address the issue of onerous ground rents by placing restrictions on their escalation. Five options are currently under consideration as follows:
- Capping all ground rents at a peppercorn (NIL);
- Capping ground rents at a percentage of the property value, which would abolish doubling ground rent clauses;
- Putting in place a maximum financial value which ground rents could not exceed;
- Limiting ground rent in existing leases to the original amount when the lease was granted; and
- Freezing ground rent at current levels.
It is not yet clear which of these will be put in place upon the bill becoming law and how this would impact leaseholders and freeholders. The legislation would come in as an addition to the Leasehold Reform (Ground Rent) Act enacted on 30 June 2022 which restricts annual ground rent on new long leases of houses and flats to the value of a peppercorn per year.
The new bill also proposes to introduce a new type of claim which allows a leaseholder to buy out their ground rent without extending their lease, which would benefit anyone who has a sufficient length of lease but has concerns their rent might make the property difficult to sell or mortgage.
Q. How does the proposed bill impact enfranchisement?
Currently, if over 25% of a building’s internal floorspace is used for non-residential purposes, then it cannot be enfranchised. It is proposed to increase this limit to allow enfranchisement for buildings with non-residential internal floor space of up to 50%.
It also seeks to impose greater controls on a landlord’s ability to recover costs form the tenants who enfranchise, but the extent of this is not yet clear.
The bill proposes to simplify and reduce the amount payable to buy a freehold and to cap the effect of marriage value payable for extending any leases in the building which have under 80 years remaining.
Q. Does this mean the same thing for Right to Manage claims?
The bill proposes to allow buildings with up to 50% non-residential internal floor space to be subject to RTM claims, as well as enfranchisement claims.
Q. How does the bill address issues relating to leasehold houses?
The sale of new leasehold houses is proposed to be banned, so every new house in England and Wales will be freehold (other than in exceptional circumstances). This is not retrospective so if you have a leasehold house already you will not be given the freehold automatically, and may wish to consult a lawyer for a advice on purchasing the freehold of your house.
For further information, please contact David Gibson, Partner and Head of Leasehold at Thackray Williams.
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