The Proposed Leasehold Reform Bill

The Leasehold Reform (Ground Rent) Bill 2022 was introduced in the House of Lords on 12 May 2021. The Bill proposes restriction of ground rents on recently crafted long leases of flats and houses to a minimum annual rent. The Act puts an end to ground rents and will apply to most new extended residential leasehold properties in England and Wales.

According to the UK government, The Act aims to make homeownership more transparent and fairer to future leaseholders and benefit millions. The unfair practices that forced some leaseholders to pay heavy and increasing ground rents undid the reputation of the leasehold system. They didn’t get any service for the corresponding value in return.

The Act is expected to plug such gaps and prevent such instances in the future. It will tackle the ambiguity and unfairness for future leaseholders. The Competition and Markets Authority is investigating the accusation of unfair charges in the leasehold sector. They have asked developers and freeholders to remove the doubling of ground rent in properties. The move will benefit existing leaseholders. This first phase of promised leasehold reforms came into effect on 30th June. However, further leasehold reforms are yet to be announced.

Ground Rent Abolishment

Ground rent was abolished from all new leases in England and Wales from 30 June 2022. This ground rent on new leases will never be more than a ‘peppercorn’–or zero. Ground rent was also stopped on unofficial lease extensions from July 2022. Freeholders cannot increase ground rent for the remaining period of a lease. The ground term will become zero from the date the existing term expires and the new term takes effect. The new law also covers retirement properties. However, they have been given time until April 2023 to comply.

What’s Not Included in The Leasehold Reforms?

The new law has welcomed changes. But they favor new leaseholders only. The 4.6 million current leaseholders in England want to know how the government will fulfill its promise of making lease extensions easier and cheaper. As there is no mention of the next phase of reforms, leaseholders will have to wait at least another year for the new reforms to be introduced in Parliament. Some of the critical issues to be addressed in the next phase of reforms are:

The 999-Year Lease

Currently, leaseholders can only extend the existing term by 90 years. Leaseholders were promised they could extend the lease to a 990-year term using a more simplified and transparent process. However, this change is not included in the current Lease Reform (Ground Rent) Bill.

Lease Extension Calculator

The Government has promised the introduction of a statutory calculation. It will provide an estimate of the premium for a lease extension for a property. The government can protect leaseholders from hassling and time-consuming negotiations by fixing the cost of extending a lease. This proposal does not feature in the Leasehold Reform (Ground Rent) Bill. Leaseholders are stuck with the current system in which lease extension is expensive and complicated.

Marriage Value

Marriage value is an issue of high significance for leaseholders, where the lease is less than 80 years. Extending the lease is more expensive as the marriage value becomes part of the calculation. Marriage Value compares to 50 percent of the increase in the property's market value when there is an extension of the lease. Removal of the Marriage value is not included in the Leasehold Reform (Ground Rent) Bill.

The Future Of Leasehold Reforms?

No further leasehold reform is expected to come into force in 2022. The government has promised to deliver the second part of the leasehold reform by 2024. It will help leaseholders control the management of their building. It will also ensure better protection, as they can quickly take corrective actions when repairs or maintenance are needed.

The future leasehold reforms are expected to

· Simplify the valuation process of extending a lease or buying a freehold.

· Abolish marriage value, which can result in an increase in property value on the lease extension.

· Introduce a separate valuation process for low-value properties.

· Provide leaseholders the option to buy out the ground rent without extending the lease term.

· Allow leaseholders to prolong the existing leases at zero ground rent for a period of 990 years.

What Should Those Planning to Extend Their Lease Do

Leaseholders anticipating quick reforms may be tempted to delay lease extensions until the reforms are in place. However, it could take years for the legislation to come into force. However, leaseholders can carry on with the extension in some circumstances.

· Those planning to sell their property can extend the lease as buyers will not get a mortgage if the lease term is low.

· Those below 70 years of age and planning to stay put are unlikely to find a competitive mortgage deal.

· Those below 60 years won’t be able to re-mortgage

· The lease extension premium may not change much for those with a lease longer than 80 years.

What Should Those Planning To BuyLeasehold Property Do?

If you plan to buy a new property, check if your lease is 990 years. The ground rent should be set to zero. If this is not the case, you may be at risk of buying a property with less potential in the long run.

If you are buying an existing leasehold property, negotiate hard, as there will be less competition. If the property has a long lease, you can benefit from a cheaper leasehold extension when the rules are applied.

Is It Still Worth Buying The Freehold?

The new and proposed laws can make owning a leasehold property more profitable. However, you will have to pay the freeholder’s maintenance costs. You will also need permission from the freeholder to undertake any major work on your home.

How Much Savings Are Possible Under New Leasehold Reforms?

Homeowners of new leasehold properties will no longer have to pay ground rent to the freeholder. Existing leaseholders with an informal lease extension are also protected. But experts are of the view that the overall cost of a lease extension will not come down significantly until the second stage of the reform. The banning of marriage values and fee simplification are the two key components that will be seen in the next phase of reforms.

Conclusion

The Government is committed to introducing comprehensive reforms to the leasehold system. The Leasehold Reform (Ground Rent) Bill 2022 is the first part of this process. The government is expected to address the broader issues related to land reforms in the coming sessions. More information on the leasehold reforms proposals can be accessed at the Commons Library briefing on Leasehold and common hold reform.

References:

1. https://commonslibrary.parliament.uk/research-briefings/cbp-8047/

2. https://www.gov.uk/government/publications/the-leasehold-reform-ground-rent-act-user-guidance/leasehold-reform-ground-rent-act-2022-guidance-for-leaseholders-landlords-and-managing-agents

3. https://www.jdsupra.com/legalnews/leasehold-reform-in-the-uk-the-end-of-6830077/

4. https://www.slaterheelis.co.uk/property-category/leasehold-reform-bill-will-it-affect-me/

5. https://hoa.org.uk/2021/01/lease-extension-process/