In January of 2021, the Ministry of Housing, Communities, and Local Government issued a press release pertaining to proposed changes to leasehold laws in the UK. This is being hailed as one of the “biggest reforms to English Property Law for 40 years”, and with the introduction of the legislation, it is set to make UK homeownership fairer and more secure.
In this post, we answer your top 12 questions about the new UK Leaseholder Rights. We’ll talk about what they are, when they will come into force, and more.
What are the current rules on lease extensions?
Under the current rules, you can request to extend a lease at any time. The rules for houses are slightly different from apartments. If you qualify, you can request to extend a lease on a house for 50 years or 90 years if you own a flat.
According to current law, the owner/s of the leasehold house could be entitled to a 50-year extension without having to pay a premium for doing so. However, it is likely that the payable ground rent will increase, and once the lease is extended, a more modern (likely higher) level of ground rent will become payable.
If you own a leasehold flat, the law is slightly different. There is the option to take either a formal or informal route to extend a lease. So long as certain criterion is met, a leaseholder can extend a lease under law via the formal route. Or it is possible to try and informally negotiate the terms of a lease with the freeholder directly.
How will the rules change?
Under current UK law, homeowners have to contend with high ground rents alongside their mortgage payments. Freeholders are legally permitted to raise the amount of ground rent they charge; without actually offering a relative benefit for the additional costs.
These changes mean that a leaseholder choosing to do a lease extension on their home will not have to pay ground rent to the freeholder. In some cases, this has the potential to save leaseholders thousands, if not tens of thousands of pounds.
There are other changes afoot too.
• Leaseholders will now be able to extend their lease, with zero ground rent, up to a maximum term of 990 years. Compared to the current 90-year extension term, this is a sizeable difference. The same will apply to retirement properties, but the commencement of the latter will occur at a later date.
• Existing leaseholders already in possession of a long lease will be permitted to buy-out the ground rent, with no need to extend the lease term.
• A new online calculator will be introduced to help leaseholders understand the cost of purchasing their freehold land vs. extending their lease. The calculator will show the new ‘prescribed’ calculation rates that have been designed to be cheaper, fairer, and more transparent.
• An intent to abolish the highly prohibitive costs associated with marriage value. While this will not actually abolish marriage value, the impact of this change aims to transfer 100% of the marriage value to the leaseholder/s.
When will the changes come into force?
On January 11th, it was announced in Government that there would need to be two pieces of legislation introduced. Imminently, the first bill in the forthcoming session will set ground rents to zero. If all goes to plan, this should happen around Springtime. While an exact date is still unclear, it is stated that these changes will be written into law ‘as soon as possible’.
What is marriage value, and how is it calculated?
Marriage value is a figure that reflects the additional market value of an extended lease. It is the increase in property value following the lease extension completion. At present, this potential profit will be shared equally between the landlord and the leaseholder.
If you apply for a leasehold extension, you will, in effect, be getting issued with a new lease that has an additional number of years added onto the remaining term. Although the terms and conditions will be the same as your old lease, you will only be required to pay something known as a ‘peppercorn’ rent; and this is usually set to zero. This does benefit the leaseholder above the freeholder because they lose their annual rent.
As such, when extending a lease the freeholder is entitled to a share of 50% of the marriage value at the point you get the new lease. Marriage value is only a factor if there are less than 80 years remaining on a lease. If it is above this, then the marriage value will be zero. However, if you have less than 80 years, and marriage value is a consideration, here’s a summary of how it is calculated.
To establish what the marriage value is, you should work out the difference between these two amounts.
The total value of:
• The leaseholder’s interest under any current lease
• Any immediate interests prior to the new lease being granted
• The landlord’s/freeholder’s interest in the property prior to the granting of the new lease
The total value of:
• The leaseholder’s interest under any the new lease
• Any remaining immediate interests once the new lease is granted
• The landlord’s/freeholder’s interest in the property once the new lease is granted
When will the abolition of marriage value come into force?
It is thought that the first phase of these changes will take place in Spring 2021, but this is not likely to include the abolition of marriage value. It could be much closer to the 2024 elections. However, it is important to note that the Government has neither confirmed nor denied this timeframe.
What is the online leasehold calculator, and when will it be available?
There is no firm date as of yet, but the Government has said they hope to do this as soon as possible. Once the springtime changes start to become closer to implementation, it’s likely we will start to see some solid commitments in terms of realistic timeframes.
My ground rent rises significantly throughout the term of the lease. If I extend the lease or purchase the freehold, will I need to pay to move to zero ground rent?
According to the reform’s proposal, a premium will still need to be paid in order to move to zero ground rent. At present, it isn’t particularly clear or easy to find out how much this would be. However, the introduction of the new online calculator will make the process of finding out the cost to do this quick and easy.
Following the implementation of the reforms, ground rent will be capped at 0.1% of the value of the freehold.
What is ‘development value’?
The development value relates to any potential developments that a leaseholder could do after the acquisition of the freehold. For instance, should a leaseholder acquire the freehold of a house that was previously converted into apartments, they could potentially unlock value by converting the apartments back into a single dwelling.
According to the new reforms that are being proposed, a leaseholder will be able to agree to restrict any future developments on their property voluntarily as this will avoid the need to pay anything for the development value.
What are the ‘calculation rates’?
Different rates are used in order to calculate a freehold’s value, or the lease extension will be set by the Government according to a current market value. At present, the rates could be ascertained through valuation surveyors; and in many cases, this leads to disputes that cost further time and money.
Am I able to change my ground rent to zero today?
In accordance with the new reforms that are being proposed, legislation is due to be put forward in the next parliamentary session with a view to setting all future lease ground rents to zero.
If you are already a leaseholder, at present, the only way to amend the ground rent would be by paying a premium and extending your lease via the present-day statutory process – which would reduce ground rent to a peppercorn. The only alternative solution would be the negotiation of an informal lease extension directly with the freeholder/landlord.
I have already begun the statutory process of a lease extension. Will it be best to withdraw and await the new reforms?
There is no straight answer, and what is best for one person would depend on their individual circumstances. Ultimately, there is a wide range of factors that could impact your decision to extend a lease, be that a re-mortgage, an urgent house sale, or something else. You may well have spent money in the process already, and depending on how far along you are, this will give you a better indication of whether or not withdrawing is a better option.
Expert valuation guidance from a property solicitor will be a good course of action to take if you’re in this scenario right now.
I was planning to serve notice on my landlord and begin the statutory process of a lease extension soon; should I wait for the reforms?
Again, this is another question where there is no straight answer without knowing the individual circumstances. There could be other factors pressing a quick decision, so it would be advisable to speak with a legal professional at this point to discuss any individual or compelling circumstances.
As you can appreciate, Springtime isn’t too far away. It is at this point we expect the initial phase of these reforms to go through Parliament and be brought into law. As for the other changes, although these are expected to take a few years, they could be brought into effect (in part) sooner than the estimate of 2024.
If you have any further questions or you’d like to get personal guidance from a legal professional as to what the new leaseholder rights could mean for you, please contact a member of the residential team at Saracens Solicitors on 0203 588 3500.