Introduction

The Leasehold Knowledge Partnership failed to intervene in support of the government in a judicial review brought by freeholders. The case challenges key elements of the Leasehold and Freehold Reform Act 2024 (Leasehold and Freehold Reform Act), particularly the removal of marriage value and the cap on ground rent calculations during lease extensions.

Freeholders argue that removing marriage value, a component that previously accounted for half of the uplift in value when extending leases under 80 years, and the 0.1 per cent ground rent cap infringe on their property rights. They also object to being required to pay their own legal and professional fees during lease extensions, rather than passing these costs to leaseholders. After all the transaction is initiated by a leaseholder, increases the value of the leaseholder's property and at the same time arguably decreases the value for the freeholder.

From the perspective of many leaseholders, the judicial review should fail. However, the overall benefit of the reforms is complex. While some leaseholders stand to gain from the changes, others may pay more than under the existing regime.

Who will benefit from the 2025 proposed changes to the Leasehold and Freehold Reform Act

Owners of leases shorter than 80 years could see modest savings, as marriage value is abolished. However, any benefit may be offset by changes in deferment rates, which are used to calculate the property's present value once the lease expires.

Increases in the deferment rate could lower the reversion value, helping leaseholders. However, if it decreases, the cost could rise, especially for leaseholders with medium-length leases.

Following the construction-to-begin-under-1225m-government-contract--'>construction-to-begin-under-1225m-government-contract--'>Grenfell fire, the housing market has been impacted by issues such as poor building quality and safety concerns.

How will property valuations change post Leasehold and Freehold Reform Act

This has created uncertainty in property valuations. Economists argue that these factors suggest a lower long-term growth rate in leasehold property values. If accepted, this could lead to a higher deferment rate, ultimately reducing the premium that leaseholders must pay.

Leasehold and Freehold Reform Act aims to reduce lease extension costs by eliminating marriage value, capping ground rent in calculations, and introducing government-set rates for deferment and capitalisation.
 

Deferment rates post the Leasehold and Freehold Reform Act

These rates are to be reviewed regularly, with the deferment rate reviewed every ten years and the capitalisation rate every five years. The capitalisation rate reflects the value of future ground rent payments. If this rate is reduced, the term value, another part of the lease extension premium, would increase. This would be the case even with the ground rent cap in place. A lower capitalisation rate means future payments are valued more highly, increasing lease extension costs.

If the capitalisation rate is 3.5 per cent, the term value under LAFRA could be higher than the current rules. This is because many leases contain provisions for rising ground rents, and these would retain value under the capped regime. As a result, leaseholders could still be paying significant premiums despite reforms.

The overall outcome of Leasehold and Freehold Reform Act on leaseholders depends on the length of the lease. Leaseholders with very long leases, over 150 years, are more likely to benefit, as the reversion value and capitalisation rate effects are less significant.

Lease extensions to those with short leases get cheaper post Leasehold and Freehold Reform Act

Those with shorter leases benefit from the removal of marriage value, provided changes in deferment rates do not offset the savings.

However, leaseholders with leases between 81 and 150 years may find themselves paying significantly more. These leases are long enough to avoid marriage value but short enough to be affected by deferment rate changes.

This group lacks the benefits of marriage value removal and may face higher premiums if the deferment rate is lowered.

An economic model suggests that if Leasehold and Freehold Reform Act were implemented immediately and all leaseholders extended their leases, they would collectively pay £3.14 billion more than under the current system. This projection assumes that capitalisation and deferment rates remain at current levels.

Who pays legal fees post the Leasehold and Freehold Reform Act

Leasehold and Freehold Reform Act also includes provisions to prevent leaseholders from bearing most of the legal costs of freeholders. These changes are likely to offer financial relief to leaseholders, but they are not factored into the premium-based cost analysis.

The financial impact of Leasehold and Freehold Reform Act will depend on how the government sets and updates the deferment and capitalisation rates. Interest rates and wider economic conditions will also play a role in shaping the long-term cost implications of lease extensions.

FAQs

1. Will the Leasehold and Freehold Reform Act 2024 benefit all leaseholders?

Not necessarily. While leaseholders with very short or very long leases may benefit, those with mid-length leases could see higher extension costs.

2. What is marriage value and why is it important?

Marriage value is the increase in property value when a lease is extended. It applied to leases under 80 years. Its removal under LAFRA benefits those with short leases.

3. How do deferment and capitalisation rates affect lease extension costs?

A higher deferment rate lowers the reversion value, reducing costs for leaseholders. A lower capitalisation rate increases the value of future ground rents, raising extension costs.