Leaseholders in England and Wales could face significant changes if new legislation is announced as promised next week.
The Minister of State (Housing and Planning), Rachel Maclean, has confirmed that plans to phase out leasehold will form part of the King’s Speech on 7 November.
The proposed law is expected to prevent any new houses being built as leaseholds, other than in exceptional circumstances, although new flats will continue to be leasehold.
Reform: Leaseholders in England and Wales could face significant changes if new legislation is announced as promised next week
Ministers are also seeking to cap all ground rents on new lease agreements to a ‘peppercorn’ rate, as well as change the standard lease extension from 90 years to 990 years.
The Government may also remove the requirement for someone to have lived in a property for two years before they can negotiate a lease extension, and also do away with marriage value, which impacts leaseholders who wish to extend a lease when it has fewer than 80 years remaining.
Many of the changes only apply to new leaseholds, however, and there are concerns that those who have already purchased leasehold homes will be stuck with assets that are even more difficult to sell.
Mark Chick, director of The Association of Leasehold Enfranchisement Practitioners (ALEP) welcomed the news, but questioned how such an array of complex changes could be achieved by the next general election.
He said: ‘Although the Leasehold Reform (Ground Rent) Act 2022 introduced legislation to ban ground rents on new leases, there are a number of other unresolved Government pledges still to be met.
‘These include the promise to ban the creation of new leasehold houses. The Government has also committed to abolish marriage value.
‘We fully support the Government’s aim of making the process cheaper and easier for leaseholders. But we question how this will be achieved and whether such complex legislation will realistically gain Royal Assent before the next general election.’
We take a closer look at exactly what could be included as part of the leasehold reforms and what the implications could be.
Mark Chick, director of The Association of Leasehold Enfranchisement Practitioners, questions whether such complex legislation will gain Royal Assent before the next election
All new houses to be sold as freehold
There are around 4.98 million leasehold homes in England and Wales, of which 70 per cent are flats and 30 per cent are houses, according to Government figures.
The proportion of new-build houses sold as leasehold rose from 7 per cent in 1995 to a peak of 15 per cent in 2016. The proportion has subsequently fallen, and was less than 1 per cent in December 2022.
The proposed laws would essentially put an end to houses being sold as leasehold.
What are leasehold and freehold properties?
In the UK, homes are bought either freehold or leasehold. When you buy a property freehold it means that you own the property and the land it is built on indefinitely. This is the most common way of buying a house in the UK.
However, with a leasehold purchase you only own the property for a set period, but not the land it is built on. The landowner remains as the freeholder. This arrangement is most common with flats, but you can get houses on a leasehold basis.
The lease you buy is often long – usually between 99 and 999 years. Banks will usually lend mortgages as long as the lease has 75 years remaining, but once the lease goes below around 70 years it can be harder to sell or remortgage the property.
Freeholders may also impose restrictions on what leasehold owners can do to the property.
Leaseholders pay ground rent for the land, plus service charges to help cover the freeholder’s responsibility for shared areas such as corridors or a garden.
However, it’s worth pointing out that it is unlikely to be introduced retrospectively to cover leasehold houses already built, nor will it apply to new leasehold flats and maisonettes.
Henrietta Hammonds, a partner at Beckett & Kay chartered surveyors and a member of ALEP, suggests it may make some houses more expensive to buy.
Hammonds says: ‘This was first announced a long time ago, and the numbers of houses being sold as leasehold has dropped considerably.
‘Having ground rent on a leasehold house was a way for housebuilders to keep an element of value which could then be sold onwards.
‘That won’t be possible any more. Theoretically, someone will pay more for a freehold house so the financial position should be neutral, although in practice it is better for house buyers as all the costs are known upfront rather than needing to buy the freehold separately in the future for an unpredictable sum.
‘The announcement does not suggest the change is retrospective, so those already living in leasehold houses will not be affected.’
Cap existing ground rent to a ‘peppercorn’ level
Leaseholders do not technically own the ground their property is built on, and as such many leases include a ground rent to be paid to the freeholder each year.
Homes that are sold as leasehold with a ‘peppercorn rent’ effectively means they have a very low rent that isn’t demanded or paid.
However, most leaseholds are subject to a far higher ground rent. According to Tayntons Solicitors the average ground rent is between £200 and £500 per annum.
The Leasehold Reform (Ground Rent) Act banned ground rent being charged on new leases on homes purchased after 30 June 2022. However, it doesn’t apply to existing leases.
It is possible the upcoming bill may include scope for all existing leaseholders to potentially benefit as well.
Implementation could prove complicated, but ultimately this could be good news for leaseholders who have found themselves trapped in homes with increasing ground rents – some with ground rents that double every 10 years and others that increase in line with the Retail Price Index, currently 8.9 per cent.
In the hundreds: The average ground rent is between £200 and £500 per annum, according to Tayntons Solicitors
‘This would be an extraordinary intervention into privately negotiated lease contracts,’ adds Hammonds.
‘It means that any leaseholder currently paying a ground rent would no longer have to do so.
‘The devil will be in the detail, though. “Ground rent” has not been defined, so we don’t know exactly what will be included or excluded.
Chick believes that while many leaseholders will benefit, there may be some unintended issues that arise from these changes.
He says: ‘If it means a reduction to zero then that is a big shift in the values that freeholders receive. Pension funds and many other investors have banked on this income.
‘Long term stable income is hard to find and there may be knock on effects into the bond market where large scale investors will have to find alternative sources of this.
‘If ground rents are reduced to zero on all leases then this is very much a “Robin Hood” scenario and I cannot see the freeholders taking this lying down.
Ground rent is a charge that applies for leasing the land on which the leasehold property sits
He adds: ‘I would anticipate that there could be a human rights challenge on the “appropriation” of value by the state.
‘I expect that the word peppercorn has been misquoted, and in fact they just plan to limit rents to a fraction of capital value. That would have an impact, but one that is less severe.
‘In valuation terms that then begs the question as to whether the limited rent has to be taken into account when valuing the freehold. If so, that is another significant windfall for leaseholders and a big blow for the owners of freeholds.’
Freeholders may also demand that they are compensated by the Government for the income they lose.
Clive Scrivener, a partner at Scrivener Tibbatts Chartered Surveyors and a member of the ALEP adds: ‘If the cap is immediate then significant compensation will need to be payable to the freeholder for their loss of income.
‘This puts into question whether Government could do something similar with other asset classes. Will buy-to-let landlords be next?’
Leases to be extended to 990 years
Another element of the reported Government plans is that leaseholders in flats will be able to extend their lease by a new standard of 990 years, with a ground rent of zero. Previously, the typical extension would be for 90 years.
This would give leaseholders much more security and make their ownership similar to that of someone who owns the freehold or a share of the freehold.
Long term: Leaseholders in flats will now be able to extend their lease by a new standard of 990 years with a ground rent of zero
‘This is a change that is easy to make and is sensible,’ says Hammonds. ‘It will stop the need for multiple lease extensions, therefore avoiding costs.
‘After the first 90-year lease extension, the bulk of the expense is not the premium payable for the lease extension, but for the landlord’s and leaseholder’s costs.
‘If the current legislation is modified, this will apply to flats and not houses.
‘However, previous announcements suggested that lease extensions would also be open to houses so I suppose there is some uncertainty.
‘This change would only be triggered when a leaseholder starts the statutory process of extending their lease.’
Removal of two-year wait to extend a lease
At present, those that buy a leasehold flat have to wait two years before they can legally extend the lease.
However, under the proposed laws this may no longer be the case. A new leaseholder could in theory be able to extend the lease with immediate effect.
This a change that has been called for for a very long time, according to the ALEP.
At present, those that buy a leasehold flat have to wait two years before they can legally extend the lease
Scrivener adds: ‘This is good for those purchasing short-lease flats. However, in many cases this can be worked around already by the current owner serving a Section 42 notice and transferring the benefit on sale.
‘The change would end the potential for abuse by landlords looking to challenge claims on technicalities, with a view to delaying the process and achieving a higher premium.’
End of marriage value
The reforms may also signal the end of marriage value, which impacts leaseholders living in homes with short leases.
Marriage value is the increase in value of a leasehold property as a result of a lease extension.
Put another way, it’s the financial benefit that results from merging part of the freeholder and leaseholder interests, hence the term ‘marriage’.
Under current law, where the unexpired term of the lease exceeds 80 years, no marriage value is payable.
However, when a lease drops below 80 years the marriage value must be split 50:50 with the freeholder.
In practice, this means the leaseholder pays 50 per cent of the marriage value to the freeholder, as part of the premium payable for the lease extension.
Determining the marriage value involves calculating the value of all of the interests (both landlord and tenant) with an extended lease, minus the value of the interests with the current lease.
Scrapping marriage value would apply to all existing leases, but again would only be triggered at the point of lease extension.
Although this isn’t a new announcement, there are so many questions still unanswered, according to Hammonds.
She says: ‘It is anticipated that landlords would mount a challenge, and the dispute could go on for many years.
‘It’s a huge transfer of wealth and the winners are the existing leaseholders. People buying into leaseholds in the future will not win – they will simply pay more for the flat upfront.
‘For existing leases where there are less than 80 years remaining, it will make the lease extension premium lower, so the landlords will lose out.
‘However, it’s important to remember that a “landlord” isn’t necessarily a big, mean organisation.
‘The landlord could be other block residents who have previously enfranchised and, when doing so, paid the former landlord hope of marriage value. They will lose that money.’
Who are the winners and losers from these potential changes?
Clive Scrivener, ALEP partner replies:
Leaseholders can extend their lease for longer and pay no ground rent. However, whether they will have to buy out the existing rent remains to be seen.
Many leaseholders may have a share in the freehold companies so they may lose out too.
Leaseholders of flats with less than 80 years remaining will not pay marriage value. Short lease flats could suddenly be worth more, because the cost to extend the lease will be less.
Freeholders (companies and individuals) may lose out as they will lose an income stream if ground rents are capped at a peppercorn.
HMRC will also lose out. The tax takes from ground rent income and premiums payable from lease extension will reduce significantly.
Local authorities may also be set to lose out, as they are among the largest landlords in the country. They will have a big hole to fill on their balance sheets, which the Government and the taxpayer will have to plug.
Pension funds will also suffer, as many invest in freehold property and take an income from the ground rents leaseholders pay. If existing ground rents are reduced to a peppercorn, the ultimate losers in the future could be pensioners.
Another potential loser is the prospective buyer looking to access the market. First-time buyers can currently opt to buy a ‘cheap’ short lease flat, or a flat with a ‘high’ ground rent, to get a foot on the housing ladder. If you remove these option then this will mean even more aspiring homeowners might be priced out of the market.
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