Leasehold – A New Dawn
25th January 2021
It is estimated that there are 4.5 million leasehold homes in England alone. Leasehold lobbyists have been fighting for the reform of our outdated “feudal” leasehold system for many years and this week the shape of that reform has been announced by the Government. The headline grabbing proposals include abolishing ground rents and allowing leases to be extended by 990 years. However, for leasehold practitioners the more revolutionary proposal is the abolition of marriage value which will significantly reduce the cost of extending short leases.
The Government issued a press release on 7th January 2021 entitled “Government Reforms make it easier and cheaper for leaseholders to buy their homes” which describes the measures to be taken as “the biggest reforms to English property law for 40 years, fundamentally making home ownership fairer and more secure”. A bold claim indeed.
The “ground rent scandal” has been one of the triggers for the reform. This is the practice whereby developers sell properties on long leases with rents which double every ten years. These rents can look innocuous to the untrained eye but quickly escalate to unpalatable levels making properties unsellable. It is proposed that there will be a ban on charging any ground rent at all in any new lease whether it be of a house, flat or a retirement property. Under the Leasehold Reform, Housing and Urban Development Act 1993, lease extensions of flats are granted at a peppercorn rent but, in order to purchase the extension, the leaseholder must “buy out” the remaining ground rent. Where there is an onerous ground rent this can have a significant impact on price. To combat this problem it is proposed that the ground rent taken into account when calculating the purchase price will be capped. In the case of houses, rent is still payable after an extension under the Leasehold Reform Act 1967 but again this will be abolished so that new leases are at a nil rent.
Under the current law leases of flats can be extended by 90 years and leases of houses by 50 years. In the case of houses only one extension is permitted so the problem of a short lease can arise again within a lifetime. The changes to be enacted will mean that the leases of both houses and flats will be extended by 990 years which will be long enough to outlive mere mortals and ensure the process does not need to be activated more than once.
In simple terms the price paid for a lease extension is made up of three elements:
- the capitalised ground rent for the remainder of the existing term (“the Term”);
- the difference in the value of the flat/house (a) deferred for the existing term and (b) deferred for the new extended term (“the Reversion”); and
- marriage value.
Each of these elements is calculated by reference to tables of rates – capitalisation rates, deferment rates, relativity – all of which are open to dispute. Disputes cost money and time. It is therefore proposed that the rates should be prescribed thereby eradicating such disputes and enabling leaseholders can use an online calculator to work out how much their lease extension or purchase of the freehold should cost.
Marriage value is only payable, in the case of flats, where the lease has less than 80 years left to run. It assumes that the value of one party holding both the leasehold and freehold interest is greater than when those interests are held by separate parties. The calculation of the “marriage value” is usually the most disputed part of any lease extension claim because the rules are complicated and the sums involved are often substantial. Marriage value is to be abolished altogether which will reduce the price of a lease extension significantly. To illustrate the impact of this decision, the comparison below shows the calculation where the flat worth £250,000 with an unexpired term of 76 years where the ground rent starts at £50 pa but increases over time to £200 pa.
If the lease also contained an “onerous ground rent”, the difference between the two figures would be even larger because the ground rent to be taken into account in calculating the Term would be capped.
Another change which will reduce the cost of collectively enfranchising is a new approach to “development value”. Under the existing rules, a landlord can seek compensation for the loss of its right to develop its retained parts of the estate if the leaseholders exercise their right to collectively enfranchise. It is amazing what developments landlords believe are possible and the profits they will claim they will generate. Instead of paying such compensation as part of the purchase price, the new law will allow leaseholders to agree to a restriction on future development instead. If the leaseholders subsequently decide they want to develop the site, they will have to buy off that restriction. The detail of this proposal has not been fleshed out but presumably it will operate in a similar way to a restrictive covenant.
For some leaseholders, the proposed reforms do not go far enough. They want rid of the leasehold – or “fleecehold” – system altogether and have put their hopes in “Commonhold”. The commonhold model is widely used around the world but despite being introduced in England and Wales by the Commonhold and Leasehold Reform Act 2002 it has never taken off here. The Law Commission proposed extensive reforms to the existing law with the hope of reinvigorating this new form of tenure. The Government has announced that it is establishing a Commonhold Council – a partnership of leasehold groups, industry and government – that will prepare homeowners and the market for the widespread take-up of commonhold.
The Press Release is short and scant on detail but the proposals are truly revolutionary. There is no doubt that these reforms would push the balance of power in favour of the homeowner and hopefully solve many of the problems which have evolved in the leasehold system over its 1000 year history.
First published in the Estate Gazette on the 23rd of January 2021.