What is leasehold?
Simply put, the main distinction between freehold and leasehold properties is that buying a freehold property gives you ownership over the property and the land it is on indefinitely, whereas, with a leasehold, you have a right to use that property for a fixed term (which is usually up to 999 years).
For a more detailed analysis of the difference between freehold and leasehold ownership, see our earlier article: https://www.prestonredman.co.uk/site/news/what-is-the-difference-between-freehold-and-leasehold-property
Leasehold and Freehold Reform Act
The Leasehold and Freehold Reform Bill became law on 24 May 2024 and is now the Leasehold and Freehold Reform Act. The Act is intended to make the process of obtaining a lease extension or buying a freehold easier and cheaper for leaseholders.
Some of the notable changes that the Act will make are:
- Increasing the standard term for a lease extension from 90 years to 990 years, dramatically reducing the likelihood of a lease having to be extended again in the future;
- Removing the presumption that leaseholders pay their landlord’s legal costs incurred when granting a lease extension or selling a freehold;
- Introducing a right for leaseholders to buy out their ground rent without having to extend their lease at the same time, giving leaseholders greater flexibility depending on their particular circumstances; and
- Removing the requirement that leaseholders must have owned their flat for two years before they can claim a lease extension, opening the statutory rights up to all leaseholders immediately after they are registered as the owner of their flat.
Whilst the Bill has become an Act of Parliament, most of its provisions will not come in to force straight away. At the time of writing, only the final element, the removal of the two-year ownership requirement (which will come into effect on 31 January 2024) has actually come into law.
The remaining changes to the law require the Secretary of State to pass further regulations before they come into effect and the devil will inevitably be in the detail. How quickly the government acts will depend on its other priorities and may of the Act’s provisions are not expected to come in to effect until later in 2025 or even 2026. Many of the Act’s provisions require further consultation which is likely to delay their implementation.
Therefore, for the time being most lease extensions and freehold enfranchisements will continue to be dealt with under the current law. Please contact one of our experts if you would like an overview of that process.
Will the Act make lease extensions cheaper for leaseholders?
First, as above the Act removes the obligation for leaseholders to pay their landlord’s legal fees when obtaining a lease extension or acquiring their freehold. This could represent significant saving for some leaseholders and result in landlords having to incur costs which they don’t currently incur.
The Act is also intended to reduce the premium that leaseholders pay for their lease extension by removing the obligation on leaseholders to pay “marriage value”. Broadly speaking, marriage value is the increase in the value of the flat as a result of the lease extension being granted. It is currently payable where a lease has less than 80 years remaining and therefore when the requirement to pay it is abolished those leases will, in theory, be cheaper to extend.
However, the level of any saving will also be dictated by deferment and capitalisation rates, which valuers use when calculating premiums. These will be set by further regulations and if they go down, then the level of premiums could go up for some leaseholders. We await further detail from the government to set out exactly what the changes will be and there are expected to be legal challenges from landlords which could delay the implementation of the new rules. As such, we so do not expect to see any change to the calculation of premiums for some time yet.
For the time being, we recommend that you seek the advice of a specialist valuer who can advise you on the potential impact for you.
Other changes
The Act also will also make other changes away from the lease extension process. In particular, the Act will:
- Ban the sale of new leasehold houses (subject to certain exceptions).
- Introduce tighter regulation of service charges and grant more rights to the owners of freehold properties to challenge estate service charges.
- Ban the charge of excessive buildings insurance commissions.
- Increase the availability of the right of leaseholders to take over the management of their building, known as the Right to Manage, by increasing the limit on the amount of floorspace in a building that can be used for commercial purposes. This will make the right available to more mixed-use buildings.
These changes are intended to make life easier for leaseholders and reduce scope for landlords and managing agents to charge fees which are viewed as being unfair. Again, we await further regulations to implement these changes but for the time being, please contact one of our experts if you would like advice on how service charges can be challenged or how leaseholders can take greater control over the management of their building.
How can we help?
There are likely to be even more changes to come as the government is constantly under pressure to reform leasehold ownership. There is increasing pressure to introduce a cap on existing ground rents as well as speculation around a move away from leasehold ownership altogether. We wait to see whether any of these proposed changes will ever be introduced but it is safe to say that these are times of change for leasehold owners and their landlords.
Our team of leasehold experts can help you with lease extensions, buying or selling a freehold reversion and disputes between leaseholders and their landlord or managing agent. Please feel free to contact us for an initial discussion of your options and the ways in which we can help you.
