Leaseholders were celebrating earlier this month when the government announced a raft of measures aimed at banishing ‘unfair’ aspects of owning leasehold flats and houses.
The antiquated anomalies the reforms are trying to abolish include the exorbitant cost of lease extensions and ‘scandalous’ ground rents, which have historically been the hidden costs of owning a leasehold flat or house.
But while the announcement will undoubtedly save homeowners money, it has left those on shorter leases with a difficult dilemma – renew now or wait for the reforms to be brought into law.
The reason for the quandary is that leases cost substantially more to renew when there is less than 80 years remaining.
But, if homeowners delay and wait for the reforms to be brought – to get the benefits including a much cheaper premium and extended lease time – and then the reforms never happen, they could be left with a bill of tens of thousands of pounds.
What are the reforms?
Under the current ‘medieval’ leasehold laws most homeowners have to pay a ground rent charge, which is a fixed amount paid to the freeholder who owns the land the property is built on. This varies according to the lease.
In addition, there is a time limit on the life of any lease, known as the term, which is usually between 99 and 125 years. If that time runs out, then the property reverts to the ownership of the freeholder. Since 1993 leaseholders have had a legal right to extend their leases, but at a cost.
As the term gets shorter the more expensive it becomes to extend, with the turning point in any lease being the 80-year mark.
When there is less than 80 years left on a lease ‘marriage value’ comes into play when calculating how much extending a lease will cost.
Marriage value is the increase in value of the property following the completion of the lease that needs to be taken into account.
This can increase the cost of renewing a lease substantially. For example, on average it costs £30,000 more to extend a lease at 70 years than 81 years.
The bad news doesn’t end there, as the cost of renewing goes up by around £2,000 to 5,000 every year that it expires beyond 80 years.
The government is now proposing reforms that will see these onerous and expensive laws consigned to the bin and include:
- All new leases, including retirement properties, are to be granted with no ground rent.
- Both leasehold houses and flats will be able to extend to 990-year leases with no ground rent.
- An online calculator will be introduced to make it simpler for leaseholders to find out how much it will cost them to extend or purchase their freehold.
- “Marriage value” will be abolished – so leases under 80 years will no longer have to pay much more to extend their leases.
Renew now or wait?
Given the reforms surely it would be best to wait until they come in to save the money and get a 990-year lease, right? Well, not necessarily.
There are a whole host of factors to consider when you are approaching the 80-year mark on your lease.
Our advice is still to extend before you go below the 80-year mark as time is still very much of the essence.
Put simply, the longer you wait the more expensive it is likely to be. Once your term is less than 80 years it can be difficult to sell a property or to remortgage.
Lenders start getting jumpy at this point, and while I have seen some offer a mortgage on a term remaining as low as 59 years, most will not.
Once you get past 80 years left you tend not to tick the boxes for the high street lenders and may have to pay more interest.
As a result, if you are thinking of selling you will probably still need to renew before you do as buyers may not want to take the risk of buying a property on a short lease.
If you don’t have immediate plans for the property you could take the risk of waiting for the reforms to come in.
However, the risk is the reforms may never hit the statute book. If marriage value isn’t banished to distant memory and you have delayed it could cost you tens of thousands of pounds more to renew.
Landlords will not be happy about the reforms and there is every chance that this could face a legal challenge in the courts.
If that was the case then it would not come into law until that challenge had been resolved. It’s also possible that landlords and freeholders could manage to persuade the government to keep marriage value, leaving those who waited to renew with a large bill.
Fundamentally you need to weigh up the risk. If you have short-term plans, such as selling the property or remortgaging, you will probably need to bite the bullet and renew.
If the property is your home or you have long term plans for it then you may be able to wait. One option for those nearing 80 years left on their term is to consider starting the process of extending as the clock is stopped when an application to extend is made.
It then usually takes six to 12 months to complete the extension.
Consequently, if you get the process started you could see where the reforms are nearer the time of the lease extension being finalised. This may come with cost consequences but you would pause the clock whilst you wait to see if the reforms come in or not to reduce your risk.
While the reforms are undoubtedly great news for leaseholders they are not set-in stone and waiting for the law to change may be a risky policy. It all depends on whether you want to take the gamble or not.
Amber Larner-Bird is a solicitor at law firm Osbornes Law
The Government knowing there will be a huge shout and scream from the Great Estates and the Insurance industry (who hold increasing large portfolios of indexed linked ground rents) may have been tempted to start off with a very provocative stance in the hope that the dust will settle somewhere in the middle ground. For example: –
The deferment rate used to value the reversion, has for 15 years been 5% – Sportelli. This was set when the long-term risk-free rate was 2.5% and to which a risk premium was added to get to 5%
The government revised its own long-term risk-free rate, the Ogden Rate used in personal injury claims from 2.5% to MINUS 0.7% in 2017 although it was later revised to minus 0.25% . (a reduction of a staggering 3.7%) If only a small part of that drop i.e. 1% of that 3.7% drop was reflected in the deferment rate say lowering it from 5% to 4% marriage value would in effect disappear. Any lower, lessees could end up paying more.
Also, if the deferment rate were set at 4% it would make the calculation easier and goes a long way to achieving what the government is seeking, but lessees would only see a modest reduction in the premium and stop a challenge in the ECHR
I suspect making the landlord bear his own costs (certainly if it were acquired post 1993) would also help make the costs the lessee pay cheaper.
Both interested groups mentioned above will have unlimited funds to fight this.
As you say unless a lessee is very confident that the government’s proposal will go ahead as stated then they should act sooner rather than later, BUT before serving a Section 42/13 Notice see if a deal can be done with the landlord who may be amenable to a lower figure (but realistic offer) than what the Act would currently give him