Key question for leaseholders: should I extend my lease or buy the freehold now, or wait for a change in the law?

The Leasehold Reform (Ground Rent) Bill had its first reading in the House of Commons in September and attention has again turned to the whole question of law reform in the complex area of leasehold land ownership. It was following the scandal concerning escalating ground rents and leasehold houses that the Government asked the Law Commission to put forward proposals to reform the law, particularly in regard to residential leasehold properties and enfranchisement rights (that is to say, lease extensions or the acquisition by leaseholders of the freehold to their property).

In response, Law Commission submitted four reports covering:

• Valuation in enfranchisement cases;
• Reinvigorating commonhold law;
• The right to manage
• The Reform of the law of enfranchisement

The proposals amounted to a set of far-reaching changes. Some would require very substantial changes to the current system, including the idea of making commonhold, rather than leasehold, the primary way of owning a flat. Others would simplify (and reduce the cost of) the procedures for leaseholders to claim the relevant rights.

Proposed reforms of the law

The Government has said that it is fully behind major reform of the law and that it proposes to implement the necessary changes in two parts. First, by abolishing ground rents on new leases and then by wider reform in the third session of this Parliament. The question now is, when should we expect progress and how far will the reform go?

The first part of the process has started, in the form of the bill which is currently before Parliament. When enacted, this will prohibit rents in new long residential leases and also impose penalties on landlords who seek to charge rents in breach of this prohibition. Note that this reform will not apply to leases already granted, before the change in the law takes effect.

Existing leaseholders, suffering from onerous ground rents, will not, therefore, benefit from this reform. Some of them may benefit from ‘The Public Pledge for Leaseholders’. This is a scheme encouraging developers to seek to come to fair deals to enable existing leaseholders to reduce or buy out the ground rent (or to buy the freehold of a leasehold house) on fair terms. It is a only voluntary scheme, although the Government is putting pressure on major developers to join.

The second part of the process has many strands: the Law Commission’s report on enfranchisement alone includes more than 100 recommendations for reform. However, the key proposals are the replacement of leasehold with commonhold as the preferred regime for flat-ownership and making the enfranchisement process cheaper and quicker. It is the latter which will be on leaseholder’s minds when deciding whether to act or wait.

Benefits to leaseholders

Some of these issues are complex but among them are proposed changes which, if enacted, would significantly benefit leaseholders. One example is in the area of valuation. At present, the price to be paid to extend a lease (or to buy a freehold) usually requires the leaseholder and the landlord each to employ a specialist valuer. These valuers then negotiate based on a number of technical valuation criteria. If a lease has 80 years or less remaining, a so-called “marriage value” is payable which can add significantly to the price. The Law Commission has proposed a number of options including the abolition of marriage value, capping of the rate used to capitalise future ground rents and moving towards an online calculator to work out a price. In general terms these changes would have the effect of reducing the price payable by leaseholders.

The Government has gone on record as saying that future legislation will include the abolition of marriage value and a cap on the rate at which ground rents are capitalised, set at 0.1%.

Among the other proposed changes is the suggestion that there would be a new term for statutory lease extensions set at 990 years (rather than 90 years plus the years remaining under the current lease).  This would enable leaseholders to buy-out their ground rent without extending their lease and to simplify the process by which enfranchisement claims are made, further restricting the amount of landlord’s costs payable by leaseholders in any such claims.

So, when are these reforms likely to become law?  Beyond the current bill (referred to above), the Government has not yet submitted its detailed response to the Law Commission. It was meant to do so within 6 months, but more than a year has now passed since the majority of those reports were published.

As ever, there is pressure on legislative time in Parliament, added to which, the pandemic (and the associated emergency legislation) has had to be accommodated. The question remains, will new leasehold reform legislation come before this Parliament (or, if not, be picked up again in the next)?  We must wait and see.

Certainly, there is an appetite for reform, and it seems likely that there will be changes to benefit leaseholders. But it also seems likely that these changes are still a few years away from coming to fruition; when they arrive, they may represent a compromise on what has been proposed.

Things leaseholders should consider

The question of whether a leaseholder or group of leaseholders should seek to exercise their rights now will very much depend on the individual circumstances. Someone with a leasehold flat with 90 years left on their lease and with no other pressures to extend it (e.g. no onerous ground rent) may decide to wait and see. Someone else with a lease getting closer to 80 years (where the prospect of marriage value is coming into focus) should look carefully at the pros and cons of waiting and take specialist valuation and legal advice as necessary. Those with leases already under 80 years also need to carefully consider their position under the existing law: the price to extend their lease will continue to increase as the years pass.

In some cases, there may be a compelling reason not to wait. For example, if there is an urgent need to remove a freeholder, to take over the management of a block of flats. The existing “right to manage” has its limitations and does not remove the freeholder entirely.

Leaseholders will eagerly await further progress in this area of law reform which directly affects so many homeowners.  In the meantime, many will want to consider their position under the existing law, as well as keeping an eye on developments in Parliament.

Further information  

For further information about any of the issues raised in this article please contact:

• Christopher Sykes on +44 (0)20 3794 5956 or c.sykes@druces.com