Many leaseholders are waiting for leasehold reform, with the hope that it will improve their situation in relation to their own lease.
In most cases the hope for new leasehold law is related to the cost of extending their lease or purchasing their freehold – they are hoping that changes to leasehold law will make it cheaper.
However, there are also other potential benefits from a new leasehold reform act – including granting the right to buy the freehold to leaseholders currently unable to do so, the right to extend the lease for a longer period than is currently on offer, and an overall simpler process.
This article considers the latest leasehold reform news as of May 2023 and provides an update on:
- What’s happened in recent history on leasehold reform
- Whether leasehold could be abolished completely
- What changes to leasehold law we could see and for each:
- Who could benefit
- Who could lose out
- When leasehold reform might happen
It concludes by musing on whether it is worth waiting for the leasehold law to change before you extend your lease, or whether it makes more sense to extend under the current regime.
The (recent) history of leasehold reform:
Before we start talking about future changes to leasehold law, it is important to recap on recent history.
The Government has been (seriously) thinking about reforming the leasehold tenure since 2017, when they ran a consultation title “Tackling unfair practices in the leasehold market”.
For the last five years, leasehold reform has felt like it could be just around the corner – but we never seem to get to the destination!
For example, both Labour and the Conservatives pledged commitment to leasehold reform in their manifestos in 2019, and the Law Commission published detailed proposals for reform in 2020.
In addition, in 2019 the Competition and Markets Authority launched an investigation into whether ground rent clauses which doubled frequently breached consumer protection law. Subsequently several large freeholders have agreed to revise ground rent terms in existing leases to prevent them doubling more frequently than every 20 years.
An optimistic point in the leasehold reform journey was in January 2021 when the then Housing Secretary Robert Jenrick promised that the Government would launch two separate pieces of legislation to reform leasehold.
The Government promptly passed the first part. This was the Leasehold Reform (Ground Rent) Act 2022. In brief, this legislation banned ground rents in nearly all new leases.
The second part of the promised legislation will benefit existing leaseholders. A low point came in May 2022, when it was clear that this legislation would not be introduced and passed in the 2022/2023 Parliamentary session.
Will the government abolish leasehold?
The short answer is "No" it won't be abolished - but it might be polished!
On the Sophy Ridge show in late January 2023, Michael Gove, Secretary of State at the Department for Levelling Up, Housing and Communities said that he wanted to “abolish” leasehold.
Whilst very exciting and positive, it was an odd statement. The Government had been setting out proposals to reform leasehold, not scrap it entirely. Equally, there are millions of leasehold contracts that could not (easily) be abolished and replaced.
Reporting on "Government Sources" from the mainstream press in May 2023 confirmed that the Government wouldn't be abolishing leasehold after all. This interpretation is confirmed by the current briefing note on the Government website which outlines the planned reforms of leasehold, not abolition.
However, it is likely to be reformed. Michael Gove commented in the House of Commons on 20 February:
“We hope, in the forthcoming King’s Speech, to introduce legislation to fundamentally reform the system."
While abolition is off the table, reform is not.
What reforms are we likely to see?
A question we asked each week at Homehold is “How will the leasehold reforms benefit me?” and it is a question we simply can’t answer. We don’t know what they will be.
The Law Commission provided several options for reforming leasehold (their report on the options to reduce the price payable alone was 322 pages) but this stopped short of providing definitive recommendations. They said that it was up to Government and Parliament to decide.
The Government never formally responded to the Law Commission’s work, so we do not have a detailed roadmap of the reforms we can expect. The best we have is the bullet points on the current House of Commons briefing note.
This article discusses the main changes proposed in that briefing note and speculates on which leaseholders will benefit and which will not.
Change 1: Prescribed rates for the calculations at market value and an online calculator
When you extend your lease, your valuer and your freeholder’s valuer are likely to spend time arguing about various parts of the calculation, including certain rates or percentages to be used. The proposal is that these rates should be set in stone, rather than negotiated between professionals.
An example of one of the rates is the Deferment Rate. This is explained as follows:
When your lease ends your freeholder (or their descendants) will receive your valuable flat back – this is called reversion. When you extend the lease, they will forgo this benefit for another 90 years and you must compensate them for this.
Imagine you own a flat worth £200,000 with 80 years left on the lease. If you put £4,000 in the bank today at a 5% interest rate and left it there for 80 years, it would grow to be about £200,000.
For this reason, it is considered that £200,000 in 80 years is worth the same as £4,000 today. £4,000 is what you would pay now to compensate your freeholder for the additional years on your lease and the loss to them of the flat in the future.
The higher the rate, the lower the amount you would have to deposit in the bank today for it to be worth £200,000 in 80 years’ time.
Due to a tribunal decision in 2007 known as Sportelli, the figure of 5% is nearly always used for flats – and this 5% rate is the Deferment Rate.
Another example is the rate used to value future income from ground rent, which is called the Capitalisation or Discount Rate. This is explained in this article.
Who could benefit?
In the first instance it seems like everyone could benefit by setting the rates – because it will mean there is less negotiation between professionals. This will save time and cost.
The Government has even promised an online calculator, although presumably the value of the property itself will still need to be negotiated between parties.
If the Government was to set the Deferment Rate and the Discount Rate in a way which was favourable to leaseholders compared with the rates commonly agreed between valuers, this would benefit leaseholders too.
For example, if the Deferment Rate was increased from 5% to 6%, the cost of adding 90 years to a lease with 80 years remaining on a £200,000 flat would decrease from about £4,000 to about £2,000.
Who could lose out?
If the rates used in the lease extension calculations are decreased, then it would disadvantage leaseholders.
For example, many freeholders argue that the Deferment Rate (explained above) should be reduced from 5%, because interest rates in recent years have been much lower than they were before the rate was set by Sportelli in 2007. In the most recent Upper Tribunal Case on this matter the tribunal threw the freeholder’s case out largely because lack of evidence – leaving the door open to have the argument again the future. The freeholders' argument has been eroded somewhat by increasing interest rates in very recent history, but this doesn't meant that the Government wouldn't reflect it partially when setting the "market rate".
If the Deferment Rate was decreased from 5% to 4%, the cost of extending the lease by 90 years on a £200,000 flat with 80 years left would go from about £4,000 to about £8,500.
We also anticipate that legislation could be introduced to Parliament stating that the rates will be set at market value, but not specifying at that time what those market rates will be. This is quite likely because often these types of rates are set by Statutory Instruments, rather than primary legislation. This would leave a nightmare scenario where a Leasehold Reform bill has been introduced into Parliament, but many leaseholders won’t know if it will be cheaper to extend under the new regime or more expensive.
Change 2: Abolish Marriage Value
Unsurprisingly, flats with short leases sell for less than flats with long leases.
Whatever a flat with a short lease is worth, it will jump up in value as soon as the lease is extended. This hypothetical profit that the leaseholder makes is called “Marriage Value”. If your lease is below 80 years, you must split the Marriage Value with your freeholder.
Marriage Value is unfair for several reasons and the government have said that they are going to abolish it.
Who could benefit?
Anyone who with a lease below 80 years!
For example, if you have a flat with a 79-year lease which is worth £200,000, you will probably have to pay between £12,000 and £15,000 to extend the lease at the moment.
If Marriage Value was abolished completely, it would probably reduce the price to between a third and two-thirds of this cost, depending on some other factors.
Who could lose out?
Doing our best to keep politics out of it, some people will notice that political parties love to give with one hand and take with the other.
We think that if the leasehold reforms give with one hand by removing Marriage Value and reducing the price that people pay for their lease extensions. We then think they might take with the other hand by decreasing the Deferment Rate (see previous section), which would increase the price that people would pay.
This would particularly disadvantage people who have leases above 80 years. They don’t pay Marriage Value, so won’t benefit from it being abolished. They will, however, be disadvantaged by any reduction in the Deferment Rate.
Change 3: Cap treatment of ground rents at 0.1% of the value of the property
When you do a lease extension your ground rent is set to £0 from the date the extension is completed.
You must make a payment to compensate the freeholder for each of the missed ground rent payments. You get a sort of compound discount on future payments because money paid in a lump some upfront is worth more than it being paid out over the term of the lease.
The discount is expressed as a percentage rate. A common rate agreed between valuers (although we think it is too low) is 6%.
Imagine you have a flat worth £200,000 with a ground rent fixed at £300 for the rest of the 80-year lease. The cost of “buying out” this ground rent as part of a lease extension with a Discount Rate of 6% would be about £5,000.
The Government have promised to cap payments at 0.1% of the value of the property. Presumably this would mean that each future payment of £300 would be treated as though it was only £200. This would knock a third off the cost.
This seems to be one of the parts of the legislation that will be most heavily challenged by the freeholder community. They will argue that capping the ground rent at 0.1% interferes with a contract that both parties have entered freely – and essentially infringes on their human rights.
Who could benefit?
Anyone whose ground rent is more than 0.1% of the value of their flat could benefit. It is common that ground rent increases during the term of the lease, and this change might also benefit people where their ground rent is set to increase above 0.1% during the term of their lease.
Who could lose out?
Again, the comment about giving with one hand and taking with the other could be true here.
The Government might cap the ground rent at 0.1% of the value of the property, but set the Discount Rate at a lower figure, pushing the price paid to buy out the ground rent back up.
For example, returning to the scenario above, if they capped the ground rent at 0.1% of the value of the property but set the Discount Rate at 4% rather than 6%, it would put the price back up to nearly as much as before.
Again, this would mean that those people who don’t have high ground rents might find themselves in a worse position than they are now.
Change 4: Buy out the ground rent without having to extend the lease term.
Doing a lease extension if your lease is still long, is much cheaper than if your lease is short. For example, the cost of a lease extension on a £200,000 flat with no ground rent and a 125-year lease is about £500. If there are 80 years left, the cost has risen to about £4,000.
The Government is promising to allow those people who already have long leases simply to buy out the Ground Rent.
But because the cost of adding years to an already long lease is so low anyway, this promise is an odd one. It essentially complicates things by creating two separate statutory schemes, even when there is limited financial benefit to leaseholders to do so.
Who would benefit?
There may be people who save a few hundred pounds by avoiding extending the term at the time as removing their ground rent.
Who could lose out?
Anyone who takes up this option could lose out in the future. For example, imagine your lease currently has 125 years remaining. You pay to remove your ground rent and the associated legal costs of doing so.
You could save a few hundred pounds by not increasing the length of the lease at the same time.
In about 25 years, the lease won’t be considered long anymore. Whoever owns the flat at this stage will have to do a lease extension, paying another premium and another set of legal fees.
Change 5: Allow an extension of 990-years
The existing legislation (the Leasehold Reform Housing and Urban Development Act 1993) allows leaseholders to extend their leases by an additional 90 years. If you currently have 85 years on your lease, you will have 175 years after the extension.
The government are promising to give the right to do 990-year extensions. This means if you have 85 years now, you would have 1075 years after the extension.
Who could benefit?
Anyone extending their lease would benefit and particularly those extending very short leases – but not by as much as you think.
Hypothetically, if a buyer could choose between two identical flats one with 175 and one with 1075 years, they’ll clearly go for the longer lease.
In the real world this is unlikely to happen – there won’t be two identical flats available. Because 175 years is already a very long time other features (garden, kitchen, location) are much more likely to be the tiebreaker.
This is also illustrated by the cost of doing a lease extension on a flat with a 175-year lease. The current cost of extending the lease on a £200,000 flat with no ground rent and 175 years remaining is about £40. That’s not a typo.
Who could lose out?
No one really – but as previously discussed the benefit is less than it might seem.
When will reform happen?
As mentioned before, Michael Gove says that he hopes that a Leasehold Reform Bill will make it into the last parliamentary session of this Government. The last parliamentary session has been pushed back to “Autumn 2023”.
The word “hope” in Michael Gove’s commitment to reform leasehold is noted, and the Government’s position still isn’t consistent or clear.
In a Lords debate on 2 May, Baroness Scott of Bybrook (The Parliamentary Under-Secretary of State, Department for Levelling Up, Housing & Communities) stated "My Lords, we are committed to making enfranchisement simpler and cheaper for leaseholders. We will abolish marriage value, cap the treatment of ground rents in the enfranchisement calculation and prescribe rates to be used, saving some leaseholders thousands of pounds. An online calculator will also be introduced to make it simpler for leaseholders to find out how much it will cost them to enfranchise. We are due to bring forward further leaseholder reforms later in this Parliament."
The bill will then have a maximum of about a year to get through the legislative process before the next General Election. An election must happen no later than January 2025, but is more likely to be in 2024.
The legislative process is long and windy. In short:
A bill must first be prepared by the Office of Parliamentary Counsel, which will be no mean feat considering how complex leasehold can be. In the 2 May 2023 Lords debate Baroness Scott acknowledged that the bill was not ready "I can tell my noble friend that we are trying to get the Bill here. We have a short period of time, it is a complex Bill and—I am going to be totally honest with noble Lords— it will not get here for pre-legislative scrutiny, but we will get it in shortly."
If a bill is ready, it will be promised in the King’s Speech, which is the State Opening of Parliament.
It then needs to be introduced into either the House of Commons or the House of Lords and debated in both.
In then needs to be agreed by both houses. The more complicated and contentious a bill is, the more time it will take to agree it.
This time frame is technically possible, but it seems a little optimistic on the basis that it took over a year for the first Leasehold Reform Bill to go through - and because it only affected new leases it was a lot simpler and less contentious.
Lord Greenhalgh, a member of the House of Lords who has been very involved in leasehold reform, said in an interview with the Leasehold Knowledge Partnership in April 2023 that he thought that a bill might be introduced for scrutiny but not passed before the next election.
If an election is called before the bill passes, then anything could happen. Labour has expressed their desire to abolish leasehold with an opposition day dedicated to debate on 23 May 2023. However, while both main parties continue to support leasehold reform, the bill won't be automatically carried over into the new session of parliament. Any new Government (Labour or Conservative) will have their own housing agenda and leasehold reform may or may not be the priority.
So it is unlikely we will see a Leasehold Reform Act 2023, but we might see a Leasehold Reform Act 2024 - who knows!
Should I extend my lease?
It is very difficult to advise our clients about whether to extend their leases – we can only lay out everything we know and let them make their own decision.
It is particularly difficult because we don’t know (a) what the changes will be or (b) when they will happen.
We find that large investors sometimes wait but homeowners or small landlords decide to press ahead with their lease extensions because they don’t want to put their lives on hold. Certainly, cracking on has been a good call to date – over the last five years leasehold reform has been illusive but Upper Tribunal decisions have made it more expensive for people to extend. Anyone who has waited has been disappointed so far.
When leasehold reform finally makes it onto the statute books there will be some people who have already extended and will be disappointed they didn’t wait. Equally there will probably be some people who waited and wish they hadn’t. As the saying goes: hindsight is 20/20!
The below gives our two pennies on what you might choose to do, depending on your situation. As always, the choice can only be yours.
Lease is 80 to 82 years – Almost certainly extend. It is highly unlikely that the reforms will be through before your lease drops below the “80-year mark” at which marriage value makes it more expensive under the current legislation and future legislation is unlikely to make it cheaper than it is for you now
Want to move or re-mortgage (and can’t with current lease): Probably extend. Don’t put your life on hold.
Lease is above 82 years – It’s up to you. It might be made cheaper by the reforms, but it might also made more expensive.
Ground rent is more than 0.1% of the value of the property: Consider waiting. It might be made cheaper for you in the future.
Lease below 80 years: Consider waiting. It might be made cheaper for you in the future.
