Leasehold Reform in 2024

Linz Darlington | July 2024

The Leasehold and Freehold Reform Act 2024 has now been passed and achieved Royal Assent.

The progress of the Leasehold and Freehold Reform Bill was heavily expedited following the announcement of a snap election. It was the final bill to be passed during "wash up" in late May.

Despite the fact the bill has passed, it isn't in effect - and we don't know when it will be.

In order for these changes to come in to force, further legislation is needed and this might require further public consultation too.

If and when these changes come into effect will very much be dependent on the new Labour Government's priorities.

For any leaseholder considering whether to extend their lease or purchase their freehold now or to wait, they need to be asking three questions.

Question 1: Will the reform make a lease extension cheaper for me?

If your lease is below 80 years, or if you have a ground rent above 0.1% of the value of your property, in most cases it will likely be cheaper. We explain why here.

Question 2: Could the reform make a lease extension more expensive?

If your lease is above 80 years or you have a low ground rent, the reforms could end up making a lease extension more expensive. We explain why here.

Question 3: Can I wait for the reform to take effect?

The new act is not in effect and the guidance from the Government suggests it will be 2025 to 2026. We explain why here.

Please note: Homehold are not advising people whether to extend their leases now or wait - because we don't have definitive answers to the three questions above. However, our thoughts on the options are here.

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This article also covers the other changes which will benefit some leaseholders, including longer lease extensions and not having to wait two years before you can extend.

It looks at a list of changes which have not made it into the new act, including the ban on ground rent for existing leaseholders.

Finally, it considers "What's next for leasehold reform?" - and provides commentary on what the Labour Government might do.

Will the reform make a lease extension cheaper for me?

The Leasehold and Freehold Reform Act 2024 had a key aim to make it cheaper for people to extend their leases.

However, it is predominately designed to help people who have short leases below 80 years, by abolishing marriage value. It also helps people with high ground rents, by capping ground rents in the lease extension calculation - although this doesn't apply for all leases.

This is explained below.

Change 1: 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. We've written an article on why marriage value unfair.

Once the legislation comes into force, marriage value will no longer be shared with your freeholder.

It is worth noting that this decision, while positive for leaseholders, is hideously contentious and it is likely that the freehold sector will challenge this in the courts. They may well argue that their human rights have been infringed. When consulting on options for leasehold reform, the Law Commission sought the opinion of Catherine Callaghan KC to ascertain whether abolishing marriage value would infringe freeholder rights. Her response (see para [98]) was that this was "finely balanced".

More recently, Stephen Jourdan KC, took a more opinionated position in a Falcon Chambers Podcast about the extent to which landlords will successfully challenge this provision: "There is no doubt in my mind that landlords will claim compensation in the Strasbourg Court… in my view providing the cases are properly prepared and presented then they are likely to succeed”

Who could benefit?

Anyone 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.

With the new legislation it might reduce the price to between a third and two-thirds of this cost, depending on some other factors.

Who could lose out?

The Conservative government need to try and balance the needs of both leaseholders and freeholders.

They have benefitted leaseholders by removing Marriage Value and reducing lease extension premiums. However we think they might appease freeholders by decreasing the Deferment Rate (see here), which would increase the price that people would pay.

A reduction in the Deferment Rate - to offset marriage value - 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 2: Cap ground rents (but only when extending your lease)

When you do a lease extension your ground rent is currently reduced to a peppercorn, or £0.

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 pad in a lump sum 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 sum total of the ground rent payments over the next 80 years would be £24,000, but because you get a discount the cost of "buying out" the ground rent as part of a lease extension with a Discount Rate of 6% would be about £5,000.

The legislation caps ground rent at 0.1% of the value of the property - in most cases*.

So, in the example above the ground rent of £300 would be capped at £200 - i.e. £200,000 x 0.1%.

*The exception to this is that if the freeholder can argue that when they granted the lease in the first place "the premium was lower, and the rent was higher, than each would otherwise have been".

A good example of where this would be the case is if the leaseholder previously did a informal lease extension with a ground rent, and this was priced lower than a statutory lease extension without a ground rent would have been. Clearly this is an argument the freeholder will be seeking to evidence in every case they can, and it will be hard to argue against.

Who could benefit?

Anyone whose ground rent is more than 0.1% of the value of the property, or that will rise to more than 0.1% of the value of the property throughout the term of their lease.

Who could lose out?

Again, the government will need to appease both leaseholders and freeholders.

The government have capped the ground rent at 0.1% of the value of the property, but they could now set the Discount Rate at a lower figure. This would push the price to buy the ground rent back up.

For example, returning to the example 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 nearly as much as before.

Again, this might mean that those people who don't have high ground rent (and don't benefit from the 0.1% cap) might find themselves in a worse position than they currently are in.

Could the reforms make it more expensive for me?

The bad news is that the legislation might not benefit all leaseholders, and for some it could even make lease extensions more expensive.

To our concern, the legislation that has passed does not specify certain rates that are used to determine lease extension and freehold purchase prices. These rates, known as the deferment and capitalisation rates, will be set at a later date by the government through secondary legislation.

In order to ensure they don't fall foul of a legal challenge on human rights grounds, the government have to set these at whatever is determined to be market value.

This creates a nightmare situation where the Leasehold and Freehold Reform Act 2024 has passed, but we don't know whether the cost of lease extensions will go up or down for some leaseholders.

This is explained in detail below.

Change 3: Standard Valuation Method & Market Rates

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 legislation doesn't say what these rates will be, but will allow them to be set by the government, 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 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 money.

If the government sets these in a way which is 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 extending 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.

While the freeholder's argument in the above case has been eroded somewhat by increasing interest rates in recent years, the government does have to ensure that they're reflecting "market value" when setting the rate - because otherwise they could be vulnerable to a legal challenge. While new Labour Government might be expected to be more sympathetic to leaseholders than the outgoing Tory one when setting this rate, the "market value" requirement still applies.

If the Deferment Rate was decreased from 5% to 4%, the cost of extending the lease on a £200,000 flat with 80 years left would go from about £4,000 to about £8,500.

An example of the type of leaseholders who could be affected negatively by a reduced rate are those who own ex-Local Authority flats, many of which currently have leases above 80 years on £10 per year ground rents. They would be disadvantaged by this change, but won't benefit from the abolition of marriage value or capping of ground rent (see above).

When will the changes happen?

Just because the Leasehold and Freehold Reform Act 2024 has achieved Royal Assent doesn't mean it is actually in effect.

The legislation simply states "The other provisions of this Act come into force on such day or days as the Secretary of State may by regulations appoint"

In order for it to be implemented there needs to be additional pieces of legislation.

The Impact Assessment (see para 82) suggests that while some changes will be in place by 2025 or 2026, others wont be until at least 2028. This same message has been given by the Government during the legislative process.

We feel it is so important to make this last point because leaseholders have been waiting for reform since 2017 and it isn't necessarily going to happen straight away.

During the passage of the bill through the legislative process it was evident from comments made in both houses of parliament that the freehold community will litigate on some of the points of this bill - particularly around the abolition of marriage value and the capping of ground rent in the calculation. They will invariably argue that their human rights have been infringed by the legislation, and it is possible we'll need to await the outcome of the legal challenges.

Equally, the bill was rushed through the legislative process at lightening pace and with limited scrutiny. It's likely that once the lawyers and valuers who will actually be working with this legislation have a chance to review the final act, they'll notice issues or bugs that will need to be resolved through litigation or amended through more legislation. An example of the types of issues we might find in a new leasehold reform act can be illustrated by the significant flaws in the Building Safety Act 2022.

What are the other changes in the Leasehold and Freehold Reform Act 2024?

In addition to the changes listed above, the following other amendments were made in the new legislation.

Change 4: Allow an extension of 990 years

Existing legislation (the Leasehold Reform Housing and Urban Development Act 1993) entitles leaseholders of flats to extend their leases by an additional 90 years. If you currently have 85 years on your lease, you will have a very long lease of 175 years after the extension.

The legislation extends this period to 990-year lease extensions. This means if you have 85 years now, you would have 1075 years after the extension.

If the cost of a 990-year extension was the same as a 90-year extension, this seems like a generous concession to leaseholders.

However, this isn't as valuable as it seems. The difference in value between a flat with 175 years left on the lease and 1075 years remaining should be less than £100. That’s not a typo.

Put it this way, if you took a £200,000 flat with 175 years left on the lease and no ground rent and you extended it for a further 900 years (by doing ten back-to-back lease extensions under the current legislation) the sum total of the premiums payable would be less than £100. This is because extending really long leases is very inexpensive.

Could 990-year extensions be more expensive than 90-year extension?

They shouldn't be, but we are concerned that the government could hike up the cost of some lease extensions by reducing the Deferment rate (see here), but then justify the increased cost by arguing that the value of the lease extension is higher than it would have been for a 90-year extension. This simply wouldn’t be true.

If I do / have done a lease extension under the existing legislation can I extend it again under the new legislation?

You probably won't need need to: so long as you've got more than 150 years left on your lease, this is still going to be considered very long and there won't be a meaningful differential in value between your flat and one with a longer lease. 999-year leases already exist and this minor difference in flat prices is also shown by research by Savills.

If you really wanted to, there would be nothing stopping you from doing another lease extension under the new legislation.

Assuming you still have a long lease, the cost of doing another extension should be very minimal, for the reasons mentioned above.

Who could benefit?

If the cost of a 990-year extension is much the same as a 90-year extension, anyone extending the lease would see a benefit – although as mentioned above it is not as much as you might think.

Who could lose out?

If the cost of a 990-year extension is more than a few hundred pounds greater than a 90-year extension, then any leaseholder who is doing one.

Change 5: Abolish the two-year ownership condition

Currently leaseholders have to wait two years before they can extend your lease (or buy the freehold to their house). The exception to this is that you can already start a lease extension and "assign" it to a buyer, so doing this is very uncontentious. It just makes the legal process easier for conveyancers.

This condition has been removed in the legislation.

Who will benefit?

Anyone buying or selling a property with a short lease. It will make it easier to extend.

Who will lose out?

No one.

Change 6: Abolish Leasehold Houses

According to the government's own statistics, the percentage of new houses sold as leasehold has dropped from 15% in 2016 to less than one percent in 2022. On the basis that there is rarely a good reason to sell a house as leasehold, this is good news.

The wording was originally left out of the draft bill, but has now been included in the final version. There are still many cases where new leasehold houses can be sold, including those on retirement complexes.

Who could benefit?

This is an easy win for the government. They've been promising it since 2017 and hardly any houses are sold as leasehold anyway, so it's a bit of a non-promise.

However, it could still benefit anyone buying a new-build house, which could have previously been sold as a leasehold.

Who could lose out?

No one.

Change 6: Share Lease Extension / Freehold Purchase professional fees

Under current legislation, the leaseholder is required to cover the freeholder's legal and valuation costs associated with their lease extension.

In theory this is because the leaseholder is essentially completing a "compulsory purchase" of the freeholder's asset.

To put this in context, our fees for completing all of the legal and valuation work associated with a lease extension for leaseholders are £2,400+VAT, but the freeholder's fees (that the leaseholder also pays) will be this amount or likely a bit more.

The legislation makes it so each side has to pay their own costs - although this is unlikely to apply to claims where the lease extension price is below a certain sum.

It is worth noting that this this is something that it likely to be heavily opposed by the freehold community. In 2019 the Law Commission were concerned that requiring a freeholder to pay their own costs - while at the same time forcing them to extend a lease - could potentially infringe upon their human rights. They instructed a leading KC to write an opinion on this.

She concluded that it in some cases it would be legally sound to require both parties to cover their costs, and in others it might not be.

Who would benefit?

Leaseholders extending leases or purchasing their freeholds - their professional fees could drop considerably.

Who would lose out?

We don't think any leaseholders could lose out from this promise.

Change 7: 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 with 80 years left the is about £4,000. If you've got 150 years left, the cost is about £135. If you have 250 years left, the extension will cost about £1.

The legislation allows those leaseholders who already have long leases simply to buy out the Ground Rent - if they have over 150 years remaining. 

But because the cost of adding years to an already long lease is so low anyway, this inclusion 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 could benefit?

There may be people who save a few hundred pounds (max!) 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 150 years remaining. You pay to remove your ground rent and the associated legal costs of doing so.

If you have a 150 year lease you could save a few hundred pounds by not increasing the length of the lease at the same time.

In about 50 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.

What changes didn't make the cut?

In addition to the many changes that did make the cut, the following did not.

Capping Ground Rent on Existing Leases

The government have launched a 36-question consultation into whether they should cap ground rents on existing leases. It was originally due to run until 21 December 2023, but the deadline was extended to 17 January 2024.

On 27 February 2024, the Housing Minister said "we will say more shortly" on this subject - but there still hasn't been a formal response.

On 24 March 2024 the Sunday Times broke the story that the Government wouldn't be capping ground rent at a peppercorn - presumably because of widespread lobbying by freeholders.

On 20 April 2024 it was widely reported that a £250 cap would be announced by the Government imminently, but that didn't materialise.

A cap for ground rent never made it into the final bill.

Abolition of leasehold

Leasehold won't be abolished in the near future.

The Conservative government initially promised to "Abolish Leasehold", but later U-turned on this.

The Labour party in their manifesto say that they will "finally bring the feudal leasehold system to an
end." However, based on their manifesto, this is likely to be through banning new flats being sold on the tenure, rather than changing all buildings to Commonhold over night.

Prevention of forfeiture

Under current rules, in some circumstances, if a leasehold breaches their lease their flat can be "forfeited" back to their landlord - and they don't get any of the equity back.

While there was extensive support for abolishing this draconian measure, the wording never made it into the bill.

What’s next on leasehold reform?

Now Labour are in power, we can start thinking about what they might do next on Leasehold Reform.

What has Labour promised on Leasehold Reform?

Labour had initially planned to "Abolish Leasehold" within 100 days, but rowed back from this promise.

Even so the promises in their manifesto (see Page 80) on leasehold reform are certainly bolder that that of the outgoing Conservative party.

Labour is promising to do away with the leasehold tenure for new flats and mandate Commonhold tenure instead. They are also promising to implement the Law Commission’s recommendations from 2020, which would offer extensive benefit to leaseholders.

The level of change Labour are promising will almost certainly need new, wholesale legislation. As a result, it is likely to do away with the many different interconnecting acts that we currently work from (from 1967, 1993, 2002, 2022 etc).

Critically, it is also likely to involve canning the Leasehold and Freehold Reform Act 2024 too.

What do we need from Labour?

My view is that we need Labour to promptly enact all of the provisions of the Leasehold and Freehold Reform Act 2024 – before starting on their manifesto promise.

Many leaseholders have been waiting for these changes, and they need the benefit and certainty their commencement would provide.

The problem is that Leasehold and Freehold Reform Act 2024 needs significant additional secondary legislation before it can be of any use.

Working on this secondary legislation for Labour is akin to investing in a new kitchen now, when they plan to knock down the entire house with a few years.

Will Leasehold Reform be a Labour priority?

After 14 years in power, Labour have a full docket of housing priorities which include:

  • Significantly increasing the number of houses being built
  • Reforming compulsory purchase
  • Making significant amendments to the Affordable Homes Programme
  • Reforming Right to Buy
  • Introducing a new “Mortgage Guarantee Scheme” to support first time buyers
  • Overhauling the private rented sector, including abolishing “Section 21” evictions

I am concerned that Labour might deprioritise the commencement of the existing Leasehold and Freehold Reform Act – on the basis that they intend to pursue wholesale reform. And then that wholesale reform will be delayed or will never materialise.

It's impossible to tell whether Leasehold Reform will be at the top of this priority list or not - we'll know more in the King's Speech on 17 July.

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 the full impact of the changes and when they will come into force.

The first thing to talk about is timelines. It's highly unlikely that the additional legislation required to make the act work will be passed and the changes in effect until 2025 at the very earliest - but it could be much later. You then need to budget a year for your lease extension to go through - so if you need this done before late 2025, you should crack on.

Generally, 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 or risk the uncertainty of the new process. 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 comes into effect 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 a toss up. It might be made cheaper by the reforms, but it might also made more expensive by the prescribed market rates.

Ground rent is high: Consider waiting. It might be made cheaper for you in the future by the cap on ground rent.

Lease below 80 years: Consider waiting. It might be made cheaper for you in the future by the abolition of marriage value.

Decided to go ahead with your lease extension?

Start your lease extension today

Article author photo

Linz is the CEO and co-founder of Homehold. He’s always looking at how we can improve our service and better support you through the lease extension process. If you have any questions about your lease he’d be delighted to help.

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