Lease extensions and collective enfranchisement – are the recent proposals to a change in the law going to affect the market?
The Law Commission published its report on 21 July 2020 on leasehold reform setting out various issues that they considered were necessary to tackle issues and problems that leaseholders currently face. These included changes to the processes of obtaining a lease extension, or collectively buying the freehold (enfranchisement) or the right to manage; making these avenues cheaper and simpler. It also proposed changes to the currently little used commonhold system, to make it more attractive and easier to implement, so that gradually, the need for leaseholds would be diminished or extinguished altogether.
The recommendations obviously made leaseholders wonder if they should wait for these reforms to be enacted, rather than to seek lease extensions or enfranchisement now.
There are a number of considerations to take into account before you decide to wait for something that may never happen, or if it does, it is not as you had hoped.
- Legislation is not quick. It could take years for the recommendations to become law, and the final version may not be what you expected or hoped. There is therefore no guarantee that your lease extension or enfranchisement price will be cheap or cheaper than what it might be today;
- Those who can afford to wait are in no better or worse position. However, if your lease has less than 80 years to run, or is hovering around the 80 year mark, then waiting for possibly another 2 or 3 years will increase your lease extension premium substantially if the reforms do not change the basis of valuation as recommended;
- If you are thinking of selling your flat in the near future, then a longer lease is going to be more marketable than a short one. Many mortgage lenders will not lend on leases with less than a minimum term left to run and so you may find yourself having to agree a substantial discount on your sale price to take into account the length of the lease;
- If you are a freeholder/landlord, you may be worried about your investment and the possible devaluation of your asset if the changes become law. You may therefore wish to offer to sell the freehold now via the “Section 5” procedure under the Landlord and Tenant Act 1987. This will enable you to set the price and the terms offered.
Therefore, it could be a good time for you to extend your lease or buy/sell your freehold. Certainly, if you already have a short lease, it could be very risky to wait even longer for legislation to be enacted.
There has been a recent backlash against onerous ground rents for leasehold houses, particularly in new build schemes in the North West where buyers were not fully aware of what they were buying. That has led to the calls for an overhaul of the leasehold system in its entirety and the Law Commission’s report. Whilst granting leases for houses is not a particularly good idea where there are no shared or common facilities or areas, the leasehold system has worked for centuries, albeit with flaws and problems (like any other system). That said, demonising one system entirely to fix one particular problem is not necessarily the best way forward. It remains to be seen as to whether commonhold will be become popular, unless it becomes mandatory. In blocks of flats with numerous or large shared facilities and areas, it is optimistic to think that every owner is going to agree with each other and get involved with management of the building. Sometimes, a third party landlord who ensures the smooth running of the building and recovery of the service charges is the best way to deal with things.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. For advice, get in touch with your usual Greenwoods GRM contact or scroll down to complete our enquiry form.