Update written by Tyrone Grant, Head of Leasehold Enfranchisement Department
As discussed in my recent update, the Leasehold and Freehold Reform Act 2024 (LAFRA 2024) was passed on 24 May 2024 to reform the law regarding lease extensions and freehold acquisitions. You can access this article here.
Reforms
The reforms in LAFRA 2024 include:
- extending the lease term by 990 years;
- removing the requirement for the lessee to pay towards some of the landlord’s costs regarding the lease extension or purchase of the freehold except in limited circumstances;
- removing marriage value from the calculation of the premium (price) for a lease extension or freehold purchase;
- prescribing rates for calculation of the premium and introducing an online calculator;
- removing the minimum ownership period for a lessee to qualify for a statutory lease extension or to claim the freehold of a house;
- giving lessees of qualifying leases the right to reduce the ground rent to a peppercorn (zero in practice) in return for paying a premium; and
- for the qualification of buildings which lessees can make a statutory claim for the freehold of, the maximum non-residential floor area is 50% of the building.
Further proposed reforms
In the King’s Speech on 17 July 2024 and the background briefing notes it was announced that the current Government is committed to implementing the provisions of LAFRA 2024.
Further reforms were also announced, being:
- enacting remaining Law Commission recommendations to bolster lessees’ rights to extend their leases, buy the freehold and take over the building management functions;
- reinvigorating commonhold and restricting the sale of new leasehold flats – the Government is to consult on the best way to achieve this;
- regulating ground rents for existing lessees; and
- ending forfeiture of leases.
New law not yet in force
Although LAFRA 2024 has been passed, the reforms relating to leasehold enfranchisement (including the valuation changes) have not come into force and they will need secondary legislation to bring them in. When the previous Government was in power, the Department for Levelling Up, Housing and Communities had said the valuation changes would be introduced “as soon as reasonably practicable” and that it anticipates that the majority of the reforms will come into effect in 2025-2026. There has since been a change in Government.
More details of the further reforms and the timeframe for introducing these are awaited.
Therefore, it remains to be seen when the changes will come into force and what they will look like finally.
“Old” law in still in force in the meantime
Until LAFRA 2024 and any further new laws come into force, the existing law will continue to apply.
Under the existing law, the following applies:
- the lease term is extended by 90 years;
- the lessee must pay towards some of the landlord’s costs regarding the lease extension or purchase of the freehold;
- a premium (price) is payable to the landlord for the lease extension or freehold purchase and marriage value is included in the calculation of the premium where the unexpired term of the relevant lease is 80 years or less;
- prescribing rates for calculation of the premium and introducing an online calculator;
- the minimum ownership period for a lessee to qualify for a statutory lease extension or to claim the freehold of a house is 2 years; and
- for the qualification of buildings which lessees can make a statutory claim for the freehold of, the maximum non-residential floor area is 25%.
There are statutory formulae which are used for calculating the premium for statutory lease extensions for flats and for calculating the premium for statutory purchases of freeholds of flats and freeholds of houses. One of the elements of the calculation is marriage value, which is applied if the unexpired term of the lease is 80 years or less. Marriage value is the increase in the total property value following a lease extension or collective enfranchisement. Marriage value can be substantial. If the unexpired term of the lease is more than 80 years then no marriage value is payable.
Voluntary lease extensions and freehold acquisitions
In some cases it is possible to extend the term of the lease by negotiation with the landlord. This is outside the statutory framework.
Therefore, for lease extensions the term of the new lease and the other provisions are not prescribed. What is agreed depends on what can be negotiated with the landlord.
As regards the premium for the lease extension or the freehold, the basis of the valuation is also not prescribed, although the formulae used for statutory lease extensions and statutory freehold acquisitions are normally used for valuations in voluntary transactions.
Is it worth waiting for LAFRA 2024 and the proposed further reforms to come into force?
As mentioned above, LAFRA 2024 in not yet in force.
At this stage, it is not clear when the reforms will apply nor, as regards the new valuation regime, what precisely this will be. As mentioned above, the previous Government had said that it anticipates that the majority of the reforms will come into effect in 2025-2026 and there has since been a change in Government.
More details of the proposed further reforms and the timeframe for introducing these are awaited.
As regards the abolition of the payment of marriage value, where the unexpired term of the lease is 80 years or less eliminating marriage value potentially would make the premium payable for lease extensions and freeholds of flats much cheaper than the amount payable under the existing law.
In relation to abolishing the payment of marriage value, even if this does happen, full details of how premiums are to be valued are awaited. Therefore, we do not know precisely what changes will be brought in and therefore how significant any overall reduction of the premium will ultimately be.
Where the unexpired term of the lease is more than 80 years, some valuers have commented that based on the information currently available, the premium payable will be more under the new valuation regime. However, the increase might be offset by the saving made by not having to pay the landlord’s costs, if the costs reforms are introduced. The opinion of a valuer should be obtained in relation to the potential premium payable under the new valuation regime.
Regarding 990 year lease extensions, we are unable to advise whether the flat will be less attractive for having a lease which has been extended by 90 years rather than 990 years. However, we can say that at present the market does not make a distinction between a lease with 990 years left to run and a lease with approximately 140 or more years left to run. The opinion of a valuer should be obtained in relation to this.
If you are seeking to extend the lease of your flat and the unexpired term of the lease is more than 80 years, the position concerning payment of the landlord’s costs would be better for you if the proposed reform were introduced. Otherwise, there does not appear to be much advantage in waiting for the proposed law reforms to be introduced before you proceed.
If you are seeking to purchase the freehold of your flats and the leases of all of the flats in the building have more than 80 years left to run, again the position concerning payment of the landlord’s costs would be better for you if the proposed reform were introduced, but otherwise there does not appear to be any advantage in waiting for the proposed law reforms to be introduced before you proceed.
If you are seeking to extend the lease of your flat or purchase the freehold of the flats in the building and the unexpired term of the lease of your flat (or, for a freehold purchase, the lease of each participating flat) is 80 years or less, then if you are not in a hurry to extend your lease or buy the freehold you could consider waiting to see if the changes are brought in and if they benefit you. But there is no guarantee that the valuation changes will benefit you. In the meantime, the premium payable under the existing law might increase as the lease becomes shorter if property values increase or remain the same, so there is a risk that waiting could mean a higher premium being paid if the valuation law reforms are not brought into force or if overall the new valuation methods do not favour lessees.
If the lease has 80 years or less to run, you are recommended to consult a specialist valuer to find out how much the marriage value is and how much the premium might increase by over the next couple of years under the current law. This should assist you in deciding whether it is worthwhile waiting to see if the law reforms come into force before proceeding with the lease extension claim or freehold purchase.
A statutory lease extension or collective enfranchisement claim can take around 6 to 12 months to conclude and the valuation is calculated from the date the notice of claim is given to the landlord. Therefore, you could commence the process and decide whether or not to continue once more information (if any) is available. If you withdraw from the process then you would have to pay some of the landlord’s reasonable valuation costs and some of the landlord’s reasonable legal costs and (unless this reform comes into force) also wait 12 months from the date of withdrawal before you can start again.
If you have any queries please do not hesitate to email me or contact the team on 020 8858 6971.