Leasehold Reform: Should I still be looking to extend my lease?

8 Jan 2021 | Guy Osborn

The first questions to address for most leaseholders are:  What is a lease? And, when and why should you consider extending the lease of your property?

If you purchase a leasehold property you purchase a right to use the property for a fixed period that is stipulated in the lease, this is known as the “Term”. When the Term ends, the ownership of your property reverts to the freeholder. The remaining Term of a lease affects the value of the property: the shorter the lease, the less the property is worth.

As a lease gets shorter it will become more expensive to extend and the key turning point in the Term of a lease is the 80 year point. When the unexpired years remaining on the lease falls below 80 years, marriage value is taken into account which has the effect of making the premium for the lease extension much more expensive. Therefore, where possible, leaseholders should make sure they extend their lease before the remaining years left on their lease falls below 80 years.

Leasehold extensions – wait or hold on?

However, secondly, in the strange times we all now find ourselves in many leaseholders will be asking themselves whether they should still be extending their leases now or waiting?

Many leaseholders have been holding out for the planned reforms to this area of law. The Government are currently considering reform to the lease extension and enfranchisement process and the Law Commission were due to finalise their recommendations in spring 2020. However, with the current COVID-19 pandemic it seems likely that this Law Commission report will be delayed and that in turn the Governments urgent priorities will see leasehold reform also delayed for an uncertain period of time.

Those that were waiting for leasehold reform are likely to be waiting for this reform indefinitely and they should be mindful of the unexpired term of their leases to make sure the key 80 year point is not missed.

COVID-19 also means there are some practical elements of the lease extension process that need consideration during the current pandemic. For example, valuations would normally be carried out to advise a leaseholder of the likely premium payable for the lease extension which would normally involve a valuer having access to the property.  Often accessing a property is not possible due to social distancing measures, however, valuers may be able to carry out desktop valuations to allow lease extensions to proceed in the usual way. Solicitors are able to draft and send notices for signature from home, etc so despite the different working environment, there is a way to progress with lease extensions as usual.

Government guidance on leasehold extensions

There has been no guidance from the Government that any of the terms of the Leasehold Reform, Housing and Urban Development Act 1993 that applies to lease extensions will be amended during this time. Consequently, our understanding is that there will be no pause on age of a lease or any deadlines under the Act so time is still of the essence for lease extensions.

Overall if you have a lease with 85 years or less remaining our current recommendation would be that you consider extending your lease as soon as possible. Those with 85 years or more may also still want to consider extending their lease in the short term depending on their plans for the property.

UPDATE – JANUARY 2021: Reforming the law on Leasehold Reform: Should I still be looking to extend my lease?

The first question to address for most leaseholders is what a lease is and when and why you should consider extending the lease of your property. If you purchase a leasehold property you purchase a right to use the property for a fixed period that is stipulated in the lease, this is known as the “Term”. When the Term ends, the ownership of your property reverts to the freeholder. The remaining Term of a lease affects the value of the property: the shorter the lease, the less the property is worth.

As the lease gets shorter it will become more expensive to extend the lease and currently, the key turning point in the Term of a lease is the 80-year point. When the unexpired years remaining on the lease falls below 80 years marriage value is taken into account which has the effect of making the premium for the lease extension much more expensive. Therefore where possible leaseholders should make sure they extend their lease before the remaining years left on their lease falls below 80 years.

The possibility of leasehold reform has been around for some time but progress has been slow. But with the Ministry of Housing, Communities and Local Government announcement today we now have a little more clarity on leasehold reform and what it will contain so many leaseholders will be asking themselves whether they should still be extending their leases now or not.

The press release states that that legislation will be brought forward to the upcoming session in Parliament – although they appear to be dealing with the reforms in two parts and the first part seems to be focussing only all new leases being granted with £nil ground rent.

In terms of more wide-ranging reforming – ie “part two” – the press release still doesn’t suggest when this will be and it doesn’t disclose the full details. Importantly what is does suggest will be included is the following:

  • All new leases (including retirement properties) are to be granted with £nil ground rent and further caps on ground rent;
  • Both leasehold houses and flats will be able to extend to 990 year leases with £nil 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 – ie leases under 80 years will no longer have to pay much more to extend their leases;
  • Set calculation rates introduced; and
  • Leaseholders will be able to voluntarily agree to restrict future developments so that they do not have to pay “development value” as part of a collective enfranchisement claim.

Until we have enacted legislation these proposed reforms are not yet applicable and it is unclear whether any of the reform will be or can be retrospective for those that have recently extended or have applications on-going currently.

Overall the decision on when to extend now is still a difficult one for leaseholders. The length of the lease will still continue to decrease and practical reasons (selling, re-mortgaging, etc) still continue whilst we wait for legislation. However, the suggestion of abolishing marriage value and being granted a 990-year lease is in most cases going to be attractive enough to hold off extending for a while.

The decision is, however, going to be much trickier if you have a lease that is about to fall under 80 years remaining and the advice, in this case, is probably to recommend you still consider extending your lease as soon as possible. Those wanting to enfranchise may also still want to consider purchasing their freehold as reforms seem less focussed on this area.

You can read the full article on What Mortgage, here.

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