Cost of lease extensions may be slashed by new law
The Leasehold and Freehold Reform Bill 2023 became law on 24th May 2024 but is not yet in force.
This is the culmination of years of work by two Conservative Governments.
A key point in the history of this legislation was the announcement by Robert Jenrick on 7th January 2021 that the Government planned to make lease extensions cheaper.
There are improvements concerning the transparency of service charges on residential property and a virtual ban on the creation of new leasehold houses but the most dramatic effects on residential property in the North London / Home Counties areas where we operate are:
Marriage value as part of the compensation a freeholder receives is deemed to be zero
This could mean lease extension / collective enfranchisement premiums become significantly cheaper. The impact of this will be more pronounced because of the trend over recent years of tribunals to use relativity graphs (graphs which demonstrate the value of a leasehold interest relative to the freehold value) based on comparable evidence from Prime Central London to determine relativities in suburban areas. PCL relativities have historically been much lower than relativities in non-PCL areas and the lower the relativity the greater the marriage value.
The impact will, however, depend on the 'deferment rate' which is to be set by the Secretary of State and reviewed every 10 years. It has not yet been set.
Since 2006/7 deferment rates for flats have largely been accepted to be 5.0% but if, for example, the Secretary of State decides the deferment rate is to be 3.5% instead of 5.0% it could in some cases entirely counterbalance the 'removal of marriage value' saving.
The amount of ground rent is deemed not to exceed 0.1% of the market value of the flat
If you have a flat worth £500,000 this means the annual ground rent to be valued for calculating the compensation payable to the freeholder will when the new legislation comes into force be limited to £500. This will have the most dramatic effect on the premiums payable where leases have rapidly rising ground rents e.g. those which double every 10 or 15 years.
The effect on the valuation of the ground rent element will depend on the 'capitalisation rate'. Like the deferment rate this will not be a matter of opinion of the valuer but instead will depend on the rate or rates to be set every 10 years by the Secretary of State. The rate / rates have not yet been set.
This is a curious provision because increasing ground rents have historically been used to account for inflation. Prior to the significant inflation in the 1970s it was quite common for ground rents to be fixed for the duration of the term. Leases then started to provide for ground rents to increase (and in some cases double) every 25 or 33 years. It has only been more recently that a few freeholders / developers have sought to (ab)use ground rent provisions to generate more lucrative investments (e.g. ground rents which double every 10 years). The new law removes the ability of ground rents to rise with inflation: it effectively says that if £500 pa is the maximum ground rent which would be fair today it is also the ground rent which would be fair in 75 years' time even though property prices may have increased several times in the intervening period.
Freeholders will - in most cases - have to bear their own costs
Until the new law was passed freeholders were able to recover their reasonable valuation and legal fees from the leaseholder as part of a claim for a lease extension or collective enfranchisement.
Except where the amount of the premium is particularly low, freeholders will once the new law comes into force be responsible for their own costs.
Challenges on Human Rights grounds
It is possible that the new law will be challenged on Human Rights grounds i.e. that it unfairly deprives party of their legal possessions via insufficient compensation. In this context it is important to note that freeholds of residential properties can be owned by charities and in some cases by people who are significantly less wealthy than the leaseholders who own the flats.
Other points
The new law changes the number of years which a statutory lease extension would add to a lease from 90 to 990.
The new law means that leaseholders who live in a mixed commercial / residential block are now able to enfranchise (buy the freehold) even if the commercial element makes up 50% of the total floor area (this was previously 25%).
Leaseholders no longer have to wait to have owned a flat 2 years before being able to extend their lease. This will be of limited impact bearing in mind it had become quite common for a seller to serve a statutory notice and assign the benefit of it to the buyer prior to completion.
What next
We wait for the legislation to come into force. This may take some time. We also wait for the Secretary of State to announce what the deferment and capitalisation rates are before we can assess just how beneficial the new legislation will be for leaseholders.
We provide valuation advice on lease extensions and on collective enfranchisement in and around North London.
Extend Now is part of Gilmartin Ley.