The reforms were proposed with the primary focus of adding a lot more legal and financial flexibility to leasehold homeowners by increasing the statutory lease extension term for flats from 90 years to an additional 990 years at a peppercorn ground rent across all properties.
But what does this really mean for homeowners?
Historically, getting a long-term mortgage for homes with leases under 60 years has been tricky. The shorter the lease terms, the harder it becomes. But the new extension term of 990 years provides leasehold-homeowners with confidence that they will be able to sell their property when the time comes and do so for a true and fair price.
The abolishment of Marriage Value will also allow homeowners to extend their lease at a potentially lower premium than they can now. The Marriage Value is the difference between the value of a property with its existing lease and the value of the property with a short lease. If the lease term falls below 80 years and the leaseholder wants to extend it, the Marriage Value has to be shared equally between them and the freeholder. This value increases exponentially the shorter the remaining term so removing this is especially poignant for shorter leaseholders who may currently be paying tens of thousands of pounds in Marriage Value to extend their lease.
The legislation reform will also empower owners of retirement leases, allowing those affected to negotiate new favourable lease terms with peace of mind knowing that annual ground rent fees will not be due. Although the proposed changes to leasehold reforms have been pending for some time, including retirement leasehold property this time around came as quite a surprise as other ministers had previously indicated that these properties would be exempt from the reforms.
While ground rents for new retirement properties will now be reduced to zero with purchasers given the same rights as other homeowners, given the level of communal space required in these developments, developers may now have to recoup the costs of these by hiking up management fees or looking for alternative income streams.
Similarly, leaseholders in blocks of flats can now band together more easily to form a commonhold and take control of their building. Forming a commonhold is an alternative to the long leasehold system, allowing the owners to take the freehold of individual flats, houses and other units of multi-occupancy developments. Many new developers are now even offering 999-year leases with lower ground rents illustrating a further positive consequence of these reforms for new homeowners. Bear in mind, that without any ground rent income, it may well prove challenging to collect service changes and manage the upkeep of the building.
While these reforms remain at the ‘proposed’ stage, there is still much uncertainty around the what and the when. In the long term, the proposed changes are a positive and much-welcomed move for current leasehold-homeowners. This is arguably the biggest shake-up to English property law in over 40 years and change is long overdue.
However, in the short-term, many homeowners who would be extending their leases may now be waiting until the reforms come into play, potentially slowing down home sales for these properties and impacting the property market. Then there is the impact on the freeholder – if they can no longer collect ground rents, the asset they purchased with the intention of making a return is essentially null and void. Where will their income now come from?
There is no denying it, this is a difficult situation and until the change in legislation is officially passed, homeowners and freeholders must simply wait to see what happens.
