Sweeping leasehold changes – or a fight?

In my previous article I set out some of the changes that the Law Commission has recommended to facilitate the Government’s stated objectives. On 7th January 2021, the Ministry of Housing, Communities and Local Government (MHCLG) issued a statement  setting out the Government’s intention to make it easier and cheaper for leaseholders to exercise their rights to enfranchise (acquire the freehold and extend the lease) of their homes.

This reform is part of a wider Government policy to re-vamp the leasehold property system in England and Wales.

The statement was singularly short on detail. So it’s too soon to predict what effect the announcement will have on leaseholders, whether that be getting the freehold of their house, or extending the lease of their flat or house, through the enfranchisement process. More particularly, the press statement does not make clear when any such changes might become law.

However, the Housing Secretary has announced that leaseholders will first be given the right to extend their lease by a new statutory term of 990 years at a zero-ground rent. Most flat leaseholders already have such a right, but only to extend their lease by 90 years. The new right will, however, now include house leaseholders – who currently only have an unsatisfactory right to extend their lease by 50 years.

But leaseholders who own what have come to be known as “toxic leases”, will be very pleased by the announcement. These leaseholders bought houses with high escalating ground rents.  An oblique reference in the announcement to there being introduced a cap on the ground rent, will potentially save these owners many thousands of pounds by the freehold price being calculated on a notional maximum rent payable, not the actual rent reserved as now.

An online calculator will be introduced, as recommended by the Law Commission, to make it easier to calculate the price payable. The determinants will be fixed by the Government so taking away the controversy that usually arises in the calculation of the price.

Because of the lack of detail, it has sent out a message that there will be wide sweeping advantageous changes for leaseholders. But without further detail as to what those changes are likely to be, and when they will come into force, it’s just not possible to advise either freeholders or leaseholders in detail, what effect the changes will have.

The Housing Secretary did say that savings will be made, and referred to the abolition of marriage value as forming part of the calculation of the price payable. However, marriage value only affects the calculation where the lease has less than 80 years unexpired and so those who have leases in excess of that period, will get no benefit from the change.

As a lease shortens, the price to extend it or buy the freehold increases, so waiting can often be counter-productive. Furthermore, where a lease term is already short and is affecting the saleability of the property, waiting is unlikely to be the best option, especially where the leaseholder wants to move home or re-mortgage.

So, should leaseholders wait and see, or act now? Its very hard to advise without more detail, but for owners of short leasehold properties it may be better to wait, but for those who need to move or re-mortgage, or who have longer than 80 years left on their leases, it may be better to act now.

The statement also confirmed that the Government is to establish a Commonhold Council – a partnership of leasehold groups, industry and government – that will prepare homeowners for the (hoped for) widespread take-up of commonhold tenure.

MHCLG have said that these changes will be enacted in this Parliament. That said, it may take between 2 and 5 years before the new laws become effective. This is because there are not only the Parliamentary procedures to follow, but because it seems likely that once the detailed proposals are published, there will be considerable opposition, especially by institutional investors, many of whom have considerable funds invested in freehold ground rents.

Prepare for a longer than envisaged timetable – and a fight! Watch this space.

Mark H Adcock, Solicitor and former Law Commission lawyer

March 2021

 

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