A distinction without a difference: Why leaseholders should not put off extending their leases

Insights - 20/01/2021

Matthew Hearsum and Rachel Price, our Leasehold Enfranchisement specialists, explore why leaseholders should not put off extending their leases.

On 7 January 2021 the Government announced that it intended to reform the law relating to leases by introducing a new right to claim a lease of 990 years and to get rid of ground rents. The Government also proposes to fix some of the rates, known as “Deferment” rates and “Capitalisation” – which are used to calculate the price to extend a lease, called the “premium”.

The most significant and controversial of the Government’s proposals is the so-called “abolition of marriage value”. Marriage value is a concept that currently forms part of the premium paid for extending a lease under the current law where the lease being extended has fewer than 80 years left. This can add a significant amount of money to the cost of extending a lease, depending on the value of the flat. Whilst at first glance this may appear to be good news for leaseholders, it will almost certainly be challenged by landlords, because this would effectively amount to the Government unilaterally wiping millions of pounds of value from the property market. It will also lead to a flurry of litigation between landlords and leaseholders as landlords try to push the limits of any reduction to maximise their property values.

It is more likely that, whilst the phrase “marriage value” will be retired, the right to receive that part of the premium will continue under another name, perhaps with the calculation slightly modified. Or alternatively, the loss of marriage value may be compensated for with increases in the prescribed capitalisation and deferment rates that the Government also plans to introduce.

The announced “capping” of ground rents is also likely to be controversial. The lease under which the ground rent is payable is a contract between the freeholder and leaseholder. Whilst arguably unfair to leaseholders, particularly in the context of the calculation of lease extension premiums, the Government will be very reluctant to interfere in private contracts that have already been entered into, especially in instances where an enforced cap on ground rents would deny freeholders of potentially significant income streams, wiping millions of pounds off the value of property portfolios. Again, whilst this may not be lamented by leaseholders, or the general public, in reality it will be the subject of rigorous challenge by landlords, both before it makes its way through Parliament and on to the statute books, and then in the Courts for years after it becomes law.

So, whilst the Government announcement will be welcomed by leaseholders, in practice it perhaps raises far more issues than it solves. Whilst the Government has said that it plans to introduce a cap on ground rents in any new leases before May 2024, there is no word on when or if such a cap will be introduced for ground rents in existing leases. There is also no time frame for when the Government intend to introduce legislation for the new right to a 990 year lease or the “abolition of marriage value”. What is clear is that, if and when such legislation is introduced, it will be the subject of lengthy debate in Parliament before it becomes law. If it does then indeed become law, it will inevitably be the subject of rigorous and meticulous challenge by landlords in the Courts, to ensure that they are able to maximise the value of their property holdings.

Leaseholders who will need to extend their lease in the short to medium term, perhaps because they are buying or selling, or because their lease has or will shortly have fewer than 80 years left to run, will not be assisted by these changes, if and when they are introduced. As such, the best advice to those leaseholders is not to delay extending their leases in the hope that the Government might change the law at some point in the future.

Leaseholders who are not in those categories should also consider extending their leases sooner rather than later. As time goes by and remaining years left on the lease become shorter, the premium – however it is calculated – will increase. It is unlikely that any new legislation will be introduced for at least three or four years, and so any possible benefit obtained by waiting for the new legislation may be less than the increase in the premium due to the shorter term of the lease.

If you have any questions about the topic raised above please contact a member of our leasehold enfranchisement team

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.