Leasehold Reforms

1st June 2021

The recent Queen’s speech emphasised that a key item on the Government’s agenda for this new parliamentary term is to introduce measures to end the practice of ground rents for new leasehold properties as part of an intended Leasehold Reform (Ground Rent) Bill.

This statement follows on from earlier comment made by the housing secretary, Robert Jenrick, earlier this year that the Government were looking to give “Millions of leaseholders… a new right to extend their lease by 990 years” and to “make it easier and cheaper for a leaseholder to buy their homes.”

As part of these new proposals, the Government will look to abolish marriage value, cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. The Government are also aiming to introduce an online calculator, further simplifying the process for leaseholds and ensuring standardisation and fairness for all those looking to enfranchise.

Existing discounts for improvements made by the leaseholder and for the security of tenure will be retained, alongside a separate valuation methodology for low-value properties known as ‘section 9(1)’. Leaseholders will also be able to voluntarily agree to a restriction on the future development of their property to avoid paying ‘development value’.

Under existing legislation, The Leasehold Reform Act 1967 (the 1967 act) gives leasehold tenants of houses the right to buy the freehold. The right to buy the freehold (and any intermediate leasehold interest, for example, the head lease) without the landlord’s agreement is called ‘enfranchisement’.

To be eligible for enfranchisement; a house must be a building that is reasonably considered a house i.e. divided vertically from any adjoining house; granted for a lease term of over 21 years and as the leaseholder, you must have owned the leasehold interest for at least 2 years.

By law, the freehold must be valued as if it was part of an open-market transaction between a willing seller to a willing buyer. The principles of the Leasehold Reform Act legislation are intended not to provide a bargain for the leaseholder but instead to adequately compensate the landlord for the loss of their property; by making sure the leaseholder pays a fair price.

However, it is also important to note that the most typical method by which houses are valued for leasehold enfranchisement purposes; also makes account for the leaseholder’s special interest in acquiring the freehold interest is reflected in the valuation as ‘marriage value’. Marriage value effectively represents the added market value provided to the property through the grant of a longer lease or the transfer of the freehold interest.
Marriage value becomes payable once the leasehold term reaches the threshold of 80 years remaining unexpired on the term.

Since the amount of marriage value payable is dependent upon the difference between the value of the house with its present lease and the value of the house after the leaseholder buys its freehold; there is the possibility of the marriage value being considerably more than the value of the landlord’s interest in the property otherwise.

70 years remaining unexpired is another key time threshold that is important for leaseholder house-owners to bear in mind; since most mortgage lenders will only provide mortgages for leasehold properties with remaining terms in excess of 70 years. A remaining lease term of fewer than 70 years may therefore have implications for leaseholders who are looking to sell their property in the near future.

Whilst the Government’s intentions should hopefully remove many of the risks associated with leasehold property ownership and streamline the enfranchisement process for leaseholders in the future; there has been no substantial legislative change yet.

It is therefore of great importance for leasehold-house owners to understand the implications, particularly upon the value of their home, that can arise from the existing leasehold legislation and to take professional advice at the earliest opportunity for any issues of concern in this respect, since time can be very much of the essence.

If you would like advice on leasehold properties please call us on 0333 920 2220.

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