How will the upcoming residential leasehold reform impact me? A summary for developers, investors and owners.

At the start of 2021, the UK Government confirmed the details of legislation being brought forward to reform residential leasehold property. In particular, it is aimed at the level of ground rents for new leases and the cost of lease extensions.

Ground rent is a periodic amount payable by leaseholders, which creates an income for landlords of residential property that can be sold as an investment.

The changes are certainly going to benefit long leaseholders of residential property. It will also determine how developers set up leases for new developments/conversions and in all probability reduce the value of ground rent freehold investments.   

The headline points are:

• Leaseholders of residential property will be able to extend their lease by 990 years at a peppercorn (zero) ground rent. The current position is that a leaseholder can apply for an extra 90 years for a flat and 50 years for a house.
• Development rights at the end of the original lease term to be retained.
• The principle of “marriage value” (the difference in the value of the property before and after the lease extension) is to be abolished. This is especially important for any lease that has under 80 years remaining on the term as it can make the premium for extending the lease more expensive.
• Cap the treatment of ground rents at 0.1% and prescribe rates for the determination of market value. An online calculator will simplify and standardise the process and effectively remove the need to go to a tribunal.
• Owners of retirement properties to be given similar rights.
• Changes to the valuation method for the purchase of the freehold in a building by the leaseholders known as collective enfranchisement that can reduce the purchase price.
• A commitment to cap future ground rents at a peppercorn (zero) for all leases on new developments or conversions.

Timings

The timing is not yet certain as to when all the above changes will become effective, but we do know it will be a two-stage process.

The first part being the Leasehold Reform (Ground Rent) Bill was introduced to Parliament on 12 May 2021 and deals with restrictions on ground rents only. It does indicate that an agreement for lease that has already exchanged by a developer before the Act comes into force is not caught and so the ground rent under those leases will not be subject to the cap at a peppercorn. However, some developers are acting now and removing ground rents from new leasehold developments.  

It is not currently the intention to restrict the level of ground rents for existing leases but the changes to the calculations for a lease extension at a peppercorn ground rent address this point in the medium to long term. It remains to be seen if and indeed how landlords and investors will be compensated for a loss in marriage value and the new treatment of ground rents at 0.1%.

If you are a long leaseholder of a house or flat and were considering making an application to extend your lease then now would seem to be the time to wait and see unless this is required as part of a sale of the property or remortgage – lenders have minimum required lease terms. The only risk of waiting is that the changes in law are delayed or significantly amended and so the cost of a lease extension increases over time, particularly when the terms gets close to or below 80 years.

For further advice on the above please contact Paul Harrison or another member of the Feldon Dunsmore team.

Auhor: Paul Harrison 

11 June 2021