Thirsk Winton LLP

Government’s proposals for leasehold reform

What are the proposals?

I recommend reading the full statement by the Ministry of Housing, Communities & Local Government but to focus on the parts relating to lease extensions, I have taken various quotes from the statement and added my thoughts:

  • The proposed new length of a lease extension.  The government, confusingly, have expressed this in three different ways in their statement:

      Jason Winton, Partner
      jason@thirskwinton.co.uk

    1. At the very top of the statement it says “a new right to extend their lease by 990 years”
    2. Just below this it says “to extend their lease by a maximum term of 990 years”.  The addition of the words “maximum term” just add confusion. Do they mean the maximum amount you can add is 990 years?  Or do they mean the maximum term at the end of the process will be 990 years?  There are not quite the same.
    3. Later in the article it says “will now be able to extend their lease to  a new standard 990 years”.  This suggests the end result will be a term of 990 years, whatever the starting point was.

Whatever the government intend, they certainly intend to offer a substantially longer lease extension than the current statutory framework, which provides an extra 90 years to be added on to the current term of the lease.

Is this a major advance on what leaseholders currently enjoy?  Will it make the lease extension more expensive (ignoring any other changes which affect the price)?  No, it seems this will not have a great impact in most cases.  Imagine a lease which currently has 90 years remaining.  Under the present system, the end result will be a lease of 180 years with a zero ground rent.  Under the new system, the end result will be a lease of 990 years (or thereabouts – see above) with a zero ground rent.  Which will cost more to achieve?  They will both be about the same actually – the majority of the cost is in that first 90 years of extension.  What about the fact the 990 year lease will be worth more than the 180 year lease?  No again.  The market is almost certainly not sophisticated enough to distinguish between these two lease lengths.

Where the new length may make a difference is with very short leases in very high value areas eg prime central London.  A flat with a 10 year lease would go to 990 years versus 100 years with these reforms and if it is a high value flat, this may have a measurable impact on value.  These are valuation questions, best directed to an enfranchisement surveyor.

  • The ground rent in the new lease. The government has proposed:
    1. Leaseholders “will be given the right to extend their lease by a maximum term of 990 years at zero ground rent”. That’s clear enough, although a zero ground rent is exactly what you get under the current statute.
    2. But, confusingly, they also say “A cap will also be introduced on ground rent payable when a leaseholder chooses to either extend their lease or become the freeholder”.  Where does the cap come in on a lease extension?  The ground rent just became zero.  And what is the relevance of the cap if I, the leaseholder, have just acquired my freehold? I can choose to just ignore the ground rent, I own “both sides of the contract”.

Essentially we appear to see no change here.  Your new extended lease will have a zero ground rent.  This ties in with the other proposals to abolish ground rents for all new leases – the policy going forward is “no ground rents”.

  • The abolition of marriage value and fixing rates.  The government has proposed:
    1. They will be “abolishing prohibitive costs like ‘marriage value’”
    2. They will also “set the calculation rates to ensure this is fairer, cheaper and more transparent”

To be clear, they are proposing to remove the requirement for the leaseholder to pay 50% of the marriage value  to the freeholder, in cases where the existing lease term has crossed the 80 years remaining threshold.  Marriage value is still there, just leaseholders will not have to pay for it!

This of course makes no difference in cases where the existing lease term still has more than 80 years unexpired – there was never a requirement to contribute to marriage value in those circumstances.

The fixing of rates is probably a reference to deferment rate and capitalisation rate – the percentage rates used in lease extension calculations which value the loss to the landlord in delaying getting his flat back by 90 years (now 990 years) and the loss of the ground rent income for that time.  These have been “quasi-fixed” for some time by case law which has been binding on lower tribunals.  Still, it removes some uncertainty as to how the price of the extension should be calculated.

By far the biggest area of debate was in the calculation of the marriage value contribution.  This required agreeing a percentage rate known as “relativity”.  Hours and hours of tribunal time has in recent years been devoted to arguing this figure, a figure which is consigned to the dustbin of valuation history once marriage value ceases to be part of the debate.

The marriage value reform is, therefore, in my opinion the big reform here.  For leaseholders with sub 80 year leases, this could shave thousands of pounds off the cost and make it much less likely that a determination from the tribunal will be required in order to settle the price of the extension.  That means there is likelihood of potentially saving thousands more in legal costs.

What is not included in the proposals?

The government statement is thin on detail and we will need to see draft legislation to really get a grip on the full range of reforms.  But so far we have not seen any of these potential areas for reform mentioned:

  1. The “reasonable legal and valuation costs of the freeholder” payable by the leaseholder under Sections 33/60 of the Leasehold Reform, Housing and Urban Development Act 1993.
  2. The requirement to have owned a leasehold property for two years before you can embark on a lease extension (not applicable for collective freehold acquisitions).
  3. Removing/softening many of the trips and traps associated with the 1993 Act, such as automatic deemed withdrawal provisions and time limits in which to complete the new lease.
  4. Removing the split in jurisdiction between the court and the tribunal.  The court deal with validity/enforcement and the tribunal deal with valuation/determination of terms.  A common proposal is to transfer all jurisdiction to the tribunal to simplify matters and reduce costs for all parties.
  5. Clarifying exactly what provisions can be changed by the freeholder when granting the new lease.  Discussions between solicitors on this issue can rage on and on, delaying implementation of the lease extension and increasing costs.

There are plenty more technical issues which could be addressed in the new legislation.  These are less likely to catch the leaseholder’s eye and be of more interest to practitioners.

When will the reforms be enacted?

This is very unclear.  The best hint we have is near the end of the statement where it says:

“Legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero. This is the first part of seminal two-part reforming legislation in this Parliament. We will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course.”

“Upcoming session” seems to suggest the “next” session of Parliament, otherwise they could have said “this session”.  The next sentence says “in this Parliament” – that only means before the next general election.

The conclusion I would draw is that a draft bill will be published in the next few months to set future ground rents to zero.   That’s good, but it still leaves all of the above-mentioned lease extension specific reforms to be enacted some time after that.  I have no inspired estimate of when that may be.

What if I have already extended my lease by 90 years with a zero ground rent?

Nothing will retrospectively alter that.  If you want the super long extension now proposed, you would have to initiate a new lease extension.  But note what I say above about value/the market.  You might find it adds little value.  This is best discussed with a surveyor.

What if I am in the middle of a lease extension right now?

This is a trickier one to judge.  The answer will depend on whether your lease had more than 80 years left on it when the process started.  This is because under the new proposals, the marriage value contribution will be abolished.

So if you had plus 80 years left, no difference – you were not paying marriage value anyway.  You will only get a 90 year extension rather than 990 years but the difference in value is questionable anyway.

If you had less than 80 years to run when you served your Section 42 notice, you were all lined up to pay marriage value.  The price proposal you made in your Section 42 notice included a marriage value element.  Under the reform proposals, you would no longer be paying this.

You could withdraw your current Section 42 notice and wait for the reforms to be enacted. but you might not want to do this for these reasons:

  1. When you withdraw, you become liable to pay the freeholder’s reasonable legal and valuation costs incurred up to that point, as well as your own legal and valuation costs.  This is money wasted which cannot be recovered.  You will pay these costs again when you restart the process in months/years time.
  2. You will then need to sit and wait an indeterminate length of time for the reforms to be enacted.  Any plans you had to sell/mortgage the property will wait on hold.

What if I was planning to start the lease extension process in the near future?

As above, if your lease has more than 80 years left on it right now, not a lot is changing (it seems) apart from the length of the new lease.  Under the present system. you are going to end up with at least 170 years unexpired on the new lease when the process completes which, to most people, is a very long lease length which would achieve full market value if the property is sold.

If your lease is about to dip below 80 years – serve that Section 42 notice now!  You will not pay the marriage value element and the lease length argument is as per the above.

If your lease is already below 80 years you should consider whether you can afford to sit and wait for the reforms to happen.  They could save you thousands of pounds.  In the meantime you may find the short lease makes it hard to sell or mortgage the property but perhaps that will have no impact on you.