Plans are afoot for millions of leaseholders in England to be given the right to extend their leases by 990 years while paying £0 ground rent, the Housing Secretary Robert Jenrick has announced in a move described as being one of ‘the biggest reforms to English property law for 40 years’.
The Government says the planned reforms – which are based on recommendations made by the Law Commission – are set to save leaseholders £1,000s if not £10,000s.
What’s Going to Change?
These latest changes (once brought into law) would mean both house and flat leaseholders will be able to extend their lease to last for 990 years with a ground rent of £zero.
A cap will also be introduced on ground rent payable when a leaseholder chooses to either extend their lease or become the freeholder. Furthermore, an online calculator will be introduced to make it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease.
The government also plans to abolish ‘marriage value’ charges. Marriage value is the additional market value of a property when it has a longer lease. As the freeholder grants any lease extensions, any increase in the property value (from a lease extension) currently has to be shared equally between the freeholder and leaseholder. So, at the moment, leaseholders are under pressure to extend their lease before it falls below 80 years in length when they become liable to pay ‘marriage value’ on top of the costs of the lease extension as this can be costly with properties having shorter lease terms being harder to sell.
The Government is also proposing further measures to protect the elderly and retirees that will not only restrict ground rents to zero for new leases but also for leasehold properties built specifically for older people, so purchasers of these homes have the same rights as other homeowners.
Leaseholders will also be able to voluntarily agree to a restriction on the future development of their property to avoid paying ‘development value’, which is a premium usually placed on property leasehold or freehold values if the property in question has the potential to go up in value, for example by adding another floor, like a penthouse.
Housing Secretary Rt Hon Robert Jenrick MP said: “Across the country, people are struggling to realise the dream of owning their own home but find the reality of being a leaseholder far too bureaucratic, burdensome and expensive.
We want to reinforce the security that homeownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners.”
The Current Leasehold Rules
Under the current rules, leaseholders have to pay annual ground rents to the freeholder (or landlord) who owns the building that is being leased. Leaseholders may also have to pay maintenance fees, annual service charges and their share of the building’s insurance (if required under the lease agreement) as well as paying for any mortgage they might have taken out to purchase the lease on the property. Furthermore, as leaseholders don’t own the property outright, they often have to obtain permission from the freeholders to carry out major works.
The freeholder is usually responsible for the upkeep of the land the property sits on and the structure of the building (such as the roof and external walls) and sometimes the shared parts of the building such as lifts, stairways and communal gardens – and these costs can add up. So, they would argue that their current fees and ground rents are reasonable.
Ground rents are generally fixed for a certain number of years when the lease is purchased, meaning freeholders are then free to increase the ground rent following the fixed-rate period and this can lead to unexpected cost increases for the leaseholders. Higher ground rents can also make the lease less attractive to potential buyers if the leaseholder wants to sell up.
Leaseholders of flats currently have a lot more certainty than leaseholders of houses, as they can extend their lease at a zero ‘peppercorn’ ground rent as often as they like, but usually only for a period of 90 years while homeowner leaseholders have to pay ground rent and faced higher charges when trying to renew their leases, which can only be extended for 50 years, and only once. So, these proposed new changes will make a huge difference to leaseholders of houses.
Further Proposed Changes – Commonhold Ownership
The government also says it plans to introduce the commonhold ownership model, which is widely used around the world and allows homeowners to own their property on a freehold basis, giving them greater control over the costs of homeownership. Blocks are jointly owned and managed, meaning when someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too.
What Does All This Mean for Freeholders?
Of course, if all of the proposals come into force, property freeholders such as private landlords, housing associations, local authorities and developers could lose £millions.
In fact, investors who own shares in ground rent income funds have already seen falls in their share values on the back of this news.
Despite this fact, there doesn’t appear to be too much public response from freeholders since the announcement last week, but they are expected to fight many of these proposed changes. Steve Jones, Director of Valuation at Leasehold Valuers (part of the Leasehold Group) explains:
“We are concerned that the government’s commitment or ability to abolish “prohibitive costs like ‘marriage value’”, i.e., the additional amount paid to a freeholder when a lease falls below 80 years, is not explained in any detail. However, this will represent losses of billions of pounds worth of income for freeholders – and they are unlikely to give this up without a fight.”
“With the considerable loss of ground rent income for freeholders, it is only to be expected that they will somehow seek to claw back income from their investment portfolios in other ways, perhaps by influencing the algorithms agreed in the proposed online calculator, which is very likely to see deferment and capitalisation rates manipulated towards the favour of freeholders. This could have dire and unpredictable consequences for leaseholders and may even see the costs of lease extensions rise in future in some cases,” Jones added.
When Will These Proposed Changes Come into Force?
The Government says legislation to set future ground rents to zero will be brought forward in the upcoming session of Parliament. The timing for any further changes such as the introduction of Commonhold Ownership has not yet been set.
Are you a freeholder who will be affected by these proposed changes? Alternatively, do these changes make leasehold properties a more attractive property investment proposition? What are your thoughts?