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The Housing Secretary has announced major enfranchisement reforms, including leaseholders’ right to extend their lease by a maximum term of 990 years at zero ground rent.

Property / 26 January 2021

The press release, which was published on 7 January 2021, confirmed that ‘this is the first part of seminal two-part reforming legislation in this Parliament’ and that ‘the reforms [will] make it easier and cheaper for leaseholders to buy their homes’. It follows on from reports by the Law Commission, published in January 2020 and its reports on leasehold enfranchisement, right to manage and commonhold, published in July 2020.

The key changes put forward by the Government are:

—  Leaseholders will be given a right to extend their lease by a maximum of 990 years at zero ground rent;

—  a cap on ground rent payable when a leaseholder chooses to either extend their lease or become a freeholder – this could save households thousands of pounds;

—  Removal of prohibitive costs such as ‘marriage value’ and introduction of new calculation rates in an attempt to make the valuation ‘fairer, cheaper and more transparent’.

—  Leaseholders will avoid paying development fee if they voluntarily agree to a restriction on the future development of their property.

The impact of these reforms on the leasehold sector remains to be seen as the details are as yet unknown. However, we discuss the key factors of the reforms below and what we know so far.

Enfranchisement
Practitioners are aware of the pitfalls and problems of current legislation in relation to enfranchisement and have been calling for reform to simplify the process of extending the lease or acquiring a freehold. For example, in order to commence a claim to extend a lease, a qualifying leaseholder is required to have owned a property for two years, whilst no such qualifying criteria are required for collective enfranchisement. The Law Commission recommended abolishing the two-year ownership requirement enabling leaseholders to enfranchise immediately.

However, the press release makes no mention of this and provides no information or guidance on what qualifying criteria these new measures will put in place.

Extending lease by 990 years and marriage value
The Housing Secretary, Robert Jenrick MP, confirmed that there will be an extension by an additional 990 years at zero ground rent – but does this make a real difference to a lender on an already extended 90-year lease of a flat under the existing legislation?

The right to a 990-year lease will apply to both flats and houses. Under current legislation, leases of houses can only be extended once and by 50 years (with a ground rent), and leases for flats can be extended often but only for a term of 90 years each time (at a peppercorn ground rent).

It is clear that under the new measures, future ground rents will be set to zero – but how soon will this take effect? Will it apply retrospectively to those with onerous ground rents?

In addition, the new measures will look to remove the benefit of ‘marriage value’ as part of the valuation exercise and introduce new calculation rates to ensure this is ‘fairer, cheaper and more transparent’. An online calculator has been promised which would make it ‘simpler for leaseholders to find out how much it will cost them to buy their freehold and extend their lease’. This has always been an exercise undertaken by highly experienced valuers with often lengthy negotiations between the parties on the premium. It would be interesting to see how an online calculator will work given that not all leaseholds are the same and neither are their values.

Commonhold Council
A Commonhold Council will be established. It will be ‘a partnership of leasehold groups, industry and government – that will prepare the homeowners and the market for the widespread take-up of commonhold’. Commonhold enables flats to be owned on a freehold basis and owners to participate in the ownership and management of shared spaces. This way owners’ interests can last forever.

However, despite being introduced in 2004 as a way of enabling the freehold ownership of flats, fewer than 20 commonhold developments have been established in England and Wales since. Unlike practices in other countries across the world, flats continue to be owned on a leasehold basis.

There will need to be a clear advantage to favour Commonhold over the current regime for the new measures to be successful. We await to see further clarification of the role of the Council and the draft legislation.

Comments
While this announcement is undoubtedly a big step in the direction of major reforms, it is impossible to fully understand the impact on the leasehold sector as a whole and how it will affect ongoing claims. The Association of Leasehold Enfranchisement Practitioners (ALEP), has released its own statement and calls for ‘further clarity regarding the timescale of these changes, when the first draft of legislation will be released and more detail on what these changes will actually look like in practice.’

The question arises whether leaseholders should extend their lease now (or continue with current claims) or whether they should hold off and wait for the new measures to take effect. Without this detail and without any clear timeline, the reforms may take years to be implemented and by that time property prices may increase, thus possibly resulting in an increase in premiums as well.

Our Property Disputes team has a wealth of experience in advising on enfranchisement matters as well as handling lease extension applications. If you require advice about whether or not you should extend your lease, please do get in touch.  

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