“If the term of my lease is nearing the 80-year mark, should I wait for the reforms to become law before I extend my lease under the Leasehold Reform, Housing and Urban Development Act 1993?”
This is a question that we are frequently asked and our answer is usually the same; do not wait for the reforms if you are considering a statutory lease extension (and your lease is nearing the 80-year mark).
A lease is a depreciating asset and if the lease term falls below 80 years, it may become difficult and expensive to sell or re-mortgage the leasehold property. To avoid reaching the 80-year mark, there is existing legislation which provides you with a right to extend the lease of your house or flat.
Owners of flats can extend their lease under the Leasehold Reform, Housing and Urban Development Act 1993 (1993 Act). Under the 1993 Act they are entitled to an additional 90 years and a peppercorn ground rent.
Owners of leasehold houses can extend their lease under the Leasehold Reform Act 1967 (1967 Act) and they are entitled to an additional 50 years and the ground rent can be updated to a modern ground rent. A modern ground rent is usually much higher than the existing ground rent.
There are therefore discrepancies between the rights granted to leaseholders of flats, and leaseholders of houses under the current legislation and this is one of the areas that the future reforms seek to address.
In 2018 and 2020 the Government issued a series of consultation papers which resulted in the publication of three reports which contained a number of recommendations on how to improve the position of leaseholders in England and Wales.
The proposed amendments to the statutory lease extension process are as follows:
- Uniform legislation for houses and flats for all qualifying leaseholders – this means that there will be one act which governs lease extensions of both houses and flats. Currently, the legislation is more favourable to leaseholders who own flats so this will ensure that the statutory lease extension process is equivalent for all leaseholders.
- An extension of 990 years – the obvious benefit of this proposal is that you will be entitled to an extra 900 years if you own a leasehold flat and an additional 940 years if you own a leasehold house. However, most of the value in an extended lease is in the first additional 90 years and therefore, the additional 900 years will not necessarily increase the value of your property.
- Removal of marriage value (for flats only) – marriage value is an additional sum due to landlords when a leaseholder extends their lease when the lease in question has a remaining term of less than 80 years. It can drastically increase the price that leaseholders have to pay to their landlord for a lease extension.
It is not clear whether marriage value will be abolished or replaced by a different calculation or a calculation which starts from a different threshold. For example, marriage value may be payable when a lease term falls below 70 years rather than the current 80 years.
A complete removal of marriage value could well be met with Human Rights Act challenges from landlords on the basis of a breach to their human rights to the peaceful enjoyment of their property (as there will be an increased delay in the return of the property to the landlord without sufficient compensation). It is therefore likely that you will still be liable to pay for a marriage value equivalent.
The Leasehold Reform (Ground Rent) Act 2022
The Leasehold Reform (Ground Rent) Act 2022 (Act) was granted Royal Assent on 8 February 2022. The main objective of the Act is to restrict ground rents on newly created long leases (leases granted for more than 21 years). Therefore, if you were to proceed with a voluntary lease extension, you would be entitled to a peppercorn ground rent for the extended term of the lease; the ground rent may stay the same for the remaining term of the original lease.
The Act does not apply to statutory lease extensions but the Government has committed to future legislation which will allow existing leaseholders to extend their lease for 990 years with a ground rent of zero (as mentioned above).
The Act will be brought into force at different stages with only a few sections coming into force on Royal Assent (sections 2, 9 and 20 to 26). The main provision on the ground rent restriction will be introduced first and the date of which will be specified by the Secretary of State in regulations.
There is not a specific date where the Act will be fully commenced but Lord Greenhalgh made a commitment on 20 July 2021 that the Bill would be fully commenced within six months of Royal Assent. The 2022 Act has not been fully commenced because time is needed to prepare the regulations.
There are still a lot of unanswered questions in relation to the proposed reforms for statutory lease extensions however, if your lease of your flat is close to the 80 year mark, the only way to guarantee that you will not have to pay marriage value (or a marriage value equivalent) is if you extend your lease as soon as possible (under the current legislation). Leaseholders whose leases are close to this threshold should not delay and should take action now.
A lease will still be a depreciating asset irrespective of new legislation being passed. Each year that you allow to pass without extending your lease increases the premium payable to your landlord. So if you wait for the reforms, it is likely that your premium will be more expensive than if you were to extend your lease now.
If you would like to discuss extending your lease further, you can contact us on 01603 232 300. Please ask to speak to a member of the Enfranchisement Team and they will be happy to assist.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2022.