LEASEHOLD FLATS
What are the current rules on lease extensions?
Currently if you are a leaseholder of a flat, and have been for more than two years, you have a right given to you by law to extend the lease by an additional 90 years with the ground rent, becoming a peppercorn (that is, nil). You can expect to pay a premium to your freeholder to extend the lease, made up of an amount to cover the ground rent that will no longer be paid (the ‘term’) and to take account of the longer period before the freeholder can expect to regain the property (the ‘reversion’). If your lease term is below 80 years, then an additional premium called marriage value is added to the cost of extending the lease.
How will the rules change?
Flat leaseholders will be able to extend their lease by a new standard 990 years with a ground rent at zero. Marriage value will be removed from the premium calculation.
The calculation rates will be set and an online calculator will be available to make it simpler for leaseholders to find out how much it will cost to buy the freehold or extend the lease.
The formula used to work out the cost to leaseholders for buying the freehold or extending the lease includes a discount for any improvements the leaseholder has made and a discount where leaseholders have the right to remain in the property on an assured tenancy after the lease expires. These existing discounts will be retained, alongside a separate valuation methodology for low-value properties known as ‘section 9(1)’ for houses.
When will the changes come into force?
Legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero. Government will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course.
Will the changes impact homeowners in Scotland, Wales, and Northern Ireland?
These changes will only affect leaseholders in England.
When will the abolition of marriage value come into force?
Legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero. This is the first part of seminal two-part reforming legislation in this Parliament (i.e. by May 2024). Government will bring forward a response to the remaining Law Commission recommendations, including marriage value, in due course.
What will the online calculator do, and when will it be online?
The online calculator will make it easier for leaseholders to find out how much it will cost to buy the freehold or extend the lease. There is currently no date set for the launch of the calculator.
My ground rent rises a great deal during the term of the lease, if I buy the freehold/extend my lease, will I have to pay to move to zero ground rent?
Yes, under the proposed reforms a premium will still be payable. The online calculator that will be introduced will make it easier to find out how much this will be.
The reforms will cap ground rent to 0.1% of the freehold value for the purposes of calculating the premium.
What are the ‘calculation rates’?
Calculation rates (‘Years Purchase’ and ‘Present Value’ rates etc) used to calculate the value of the freehold or the extended lease will be set by Government at a market value. Currently these rates are determined by valuation surveyors, and often the subject of extensive argument in the First tier Tribunal (Property Chamber).
How is marriage value calculated?
“Marriage value”: the additional value that is gained when the landlord’s and leaseholder’s separate interests are “married” into single ownership. It is the difference between:
(1) the value of the freehold in single ownership; and
(2) the value of both (a) the freehold interest and (b) the leasehold interest in separate ownership.
The value of (1) is often more than (2).
The law stipulates that where the lease has more than 80 years left to run, there is no marriage value.
Looking at an example, a current calculation could be:
| leaseholder’s present interest | = £150,000 |
| plus landlord’s present interest | = £6,600 |
| = £156,600 |
| leaseholder’s new interest | = £165,000 |
| plus landlord’s new interest | = £74 |
| = £165,074 |
The marriage value is therefore £165,074 minus £156,600 = £8,474
Taking the 50:50 split between the landlord and the leaseholder, the leaseholder would have to pay half this figure – £4,237 – as marriage value. It is this payment that the Government plans to end.
What is ‘development value’?
It refers to the value of any potential development leaseholder(s) may do following acquisition of the freehold. For example, leaseholders acquiring the freehold of a house converted into flats may be able to unlock value by converting the property back into a single house.
Under the proposed reforms leaseholders will be able to voluntarily agree to a restriction on future development of their property to avoid paying ‘development value’.
Can I change my ground rent to zero right now?
Under the proposed reforms, legislation will be brought forward in the upcoming session of Parliament, to set ground rents on future leases to zero.
For current leaseholders, the only way to change your ground rent would be to extend your lease (on payment of a premium) using the current statutory process which would reduce your ground rent to a peppercorn or alternatively look to negotiate an informal lease extension with your landlord.
I have already started going through the statutory process of a lease extension. Should I withdraw and wait for the reforms?
This would depend upon your individual circumstances, as there may be a number of factors influencing your decision to extend the lease, such as a pressing house sale or remortgage. You will also need to take into consideration the costs that have already been run up so far and whether or not it would be worth withdrawing at this point as further costs will be payable at a later date. It is advisable to take valuation advice on this point. It would also depend upon how far into the process you are.
It is advisable to speak with your solicitor regarding your individual situation if it is at an advanced stage.
I was planning to serve notice on my landlord and start the statutory process of a lease extension in the near future. Should I wait for the reforms?
This would depend upon your individual circumstances, as there may be a number of factors influencing your decision to extend the lease, such as a pressing house sale or remortgage. It is advisable to contact LEASE to speak with one of our advisers regarding your individual situation.
LEASEHOLD HOUSES
What are the current rules on lease extensions?
Currently if you have been a leaseholder of a house for more than two years, you may have a statutory right to a 50 year lease extension.
There is no premium to pay, but a “modern ground rent” will be introduced, which would start after the term date and would be subject to review after 25 years. This ground rent can be onerous and expensive. Once you have been granted an extension, you cannot apply for another 1967 Act extension. However, in order to qualify:
- the lease must be at a low rent (as defined within section 4(1) of the Act)
- the property must fall within a certain rateable value or other financial limits
- There is also an ownership qualification, as the tenant needs to have owned the lease for at least 2 years.
How will the rules change?
Leaseholders of houses will be able to extend their lease by a new 990 year term with a ground rent at zero. Marriage value will be removed from the premium calculation.
The calculation rates will be set and an online calculator will be available to make it simpler for leaseholders to find out how much it will cost to buy the freehold or extend the lease.
The formula used to work out the cost to leaseholders for buying the freehold or extending the lease includes a discount for any improvements the leaseholder has made and a discount where leaseholders have the right to remain in the property on an ‘assured tenancy’ after the lease expires. These existing discounts will be retained, alongside a separate valuation methodology for low-value properties known as ‘section 9(1)’.
When will the changes come into force?
Legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero. This is the first part of seminal two-part reforming legislation planned in this Parliament (i.e. by May 2024). Government will bring forward a response to the remaining Law Commission recommendations in due course.
What is a ‘low value house’ and section 9(1) ?
The lease must have a “low rent”; this refers to the ground rent payable. For pre-1990 leases the ground rent must be less than two-thirds of the rateable value of the property, as set on 31/3/1990. In post-1990 leases, the ground rent must be below £1,000 per year in Greater London and below £250 elsewhere.
Section 9(1) is a valuation method applied to leasehold houses that will be retained under the proposed reforms.
COMMONHOLD
What is commonhold?
Commonhold is an alternative to the long leasehold system. It allows you to own the freehold of individual flats, houses and non-residential units in a building or on an estate. Unlike leasehold, there is no limit on how long you can own the property for.
The rest of the building or estate which forms the commonhold is owned and managed jointly by the flat owners (referred to as unit-holders) through a commonhold association.
When will the commonhold council be established?
The government 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.
Government will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course.
Will I be able to create a commonhold of my flat now ?
Yes you can. Information on setting up, registering and managing a commonhold can be found in this advice guide.
