The Leasehold and Freehold Reform Act 2024 has now become law – but the process is still not complete
Leaseholders of residential flats were given the legal right to extend their leases or purchase their freeholds in 1993 – this legislation was based on similar rights given to leaseholders of houses in 1967.
The 1993 Act and subsequent Acts gave qualifying leaseholders the right to extend their leases by 90 years on top of the current unexpired lease term and any ground rent payable under the current lease is extinguished to a peppercorn (£0 ground rent). A premium is paid to the freeholder for granting the lease extension based on a calculation that takes into account the current length of lease, ground rent (payable now and throughout the entire current term of the lease) and the presumed value of the flat assuming it has an extended lease.
The 1993 and subsequent Acts gave qualifying leaseholders the right to group together and ‘force’ the freeholder to sell them the freehold – known as enfranchisement. A premium is paid to the freeholder for selling the freehold based on a calculation that takes into account the current length of lease, ground rent (payable now and throughout the entire current term of the lease) and the presumed value of the flat assuming it has an extended lease.
Over time the premiums paid to freeholders have risen rapidly and it has become apparent that freeholders have included higher and higher ground rents whenever possible when creating new leases. This has in some cases made some flats and leasehold houses unsellable. High rising ground rents and their associated issues have become a big issue.
Because of this, for several years MP’s and interested parties have been campaigning for the law to change, so that the process of extending a lease or purchasing a freehold can be ‘cheaper and quicker.’ They have campaigned to outlaw high rising ground rents and this led to the leasehold Reform (Ground Rent) Act in June 2022 – which made it illegal to charge ground rent on any new lease or lease extension.
But the campaigners wanted the reforms to go further. The general view has been that freeholder’s have had too much power in these processes over the years and that by using their resources to push forward litigation and both Tribunal and Upper Tribunal decisions, things have swung too far in their favour. A long consultation and a subsequent Law Commission report resulted in proposed changes to leasehold law.
On Friday 24th May 2024, as one of the last acts of the now dissolved parliament, the much awaited ‘Leasehold and Freehold Reform Act 2024’ received Royal Assent and became law.
But this is not the end of the process.
Now we have to wait for the general election and a new Government to be formed. Then and only then, can the newly appointed Secretary of State go through the final procedures for the Act to become operable.
In April 2024, the Department of Levelling up Housing and Communities predicted that after receiving Royal Assent, the next step of the process including ‘drafting and laying the secondary legislation required to bring the reforms into force’, would take some time to implement.
At that time, they anticipated that the ‘majority of the reforms will come into effect in 2025 – 2026.’
However, they did go on to confirm that… ‘With regard to the new enfranchisement valuation scheme, rest assured that we will commence all parts of this as soon as reasonably possible after the Bill receives Royal Assent so that leaseholders extending their lease or acquiring their freehold can benefit from these reforms’.
At this stage there is no indication if the new valuation scheme will be implemented as soon as possible after the new Government is in place. We will have to wait to see what they propose after 5th July 2024.
The leasehold reforms have taken a long time to progress. The Bill only just made it to Royal Assent. Now there is yet more delay and uncertainty.
Once the new Government is in place we will know more about the timing and progress of the final part of this much awaited legislation.
The main proposals in the Leasehold and Freehold Reform Act 2024 that will impact leaseholders are as follows:
- Leaseholders currently have to wait two years after purchasing a property to qualify for a statutory lease extension
Under the new legislation there will be no waiting period
- Qualifying leaseholders are currently entitled to a statutory lease extension of 90 years on top of the current lease length
Under the new legislation they will be entitled to extend by 990 years on top of the current lease length
- Currently 50% of marriage value (A notional profit the leaseholder will make by extending the lease) is paid to the freeholder when extending any lease which has under 80 years unexpired at the date of valuation (the date notice is served)
Under the new legislation marriage value will be abolished
- Currently leaseholders extending their lease or groups of leaseholders purchasing their freehold are obliged to pay the freeholder’s ‘reasonable’ valuation and legal costs at the end of the process
Under the new legislation the intention is that each party will pay their own costs
- In relation to enfranchisement (Leaseholders having the right to buy the freehold) currently where a building is mixed residential and commercial, if the commercial element is less than 25% of the total floor area of the building, the leaseholders can purchase the freehold. If it is above 25% they do not qualify to enfranchise.
Under the new legislation the floor area of the commercial part of the building can be up to 50% of the total floor area and only above that will the leaseholders not qualify to enfranchise
- Under the current legislation if a leaseholder has a long lease but a very high rising ground rent the only way to extinguish the ground rent would be to apply to extend the lease.
Under the new legislation leaseholders will have a right to extinguish the ground rent (and pay suitable compensation to the freeholder) without having to extend their lease. However, in practice I expect that most leaseholders will simply extend the lease in order to get both a £0 ground rent and a very long extended lease.
- Under the current legislation, when calculating the premium (compensation) to be paid to the freeholder, the full ground rent paid now and in the future (throughout the existing lease) is taken into account, no matter how many times it rises and no matter how high it rises to.
Under the new legislation there will be a cap of 0.1 of a percent of the full value of the flat when calculating the compensation relating to the ground rent currently payable.
For instance, if a flat is worth £250,000 the calculations for compensation will only be able to include a ground rent up to £250 per year regardless of the actual ground rent payable, both now and in the future. This could encourage freeholders’ surveyors to argue for higher values during any premium negotiations so they can argue for higher ground rents and a higher premium.
- Under the current legislation anyone wanting to purchase their freehold need at least 50% of the qualifying leaseholders to join together to serve notice on the freeholder and request to enfranchise.
Under the new legislation this 50% requirement will not change
- Under the current legislation leaseholders wish to extend their lease or collectively purchase their freehold must serve the appropriate legal notice on their freeholder to start the statutory process.
Under the new legislation the process will be the same – legal notices will still have to be served (albeit with slightly altered wording)
My advice to leaseholders currently is as follows.
If you can wait for the General Election and the formation of a new Government on the 5th July 2024 then do so.
If you have a lease above 80 years unexpired and pay a low rising or fixed ground rent, and you need to extend your lease as soon as possible – I can carry out a valuation now and then we can decide if it is worth waiting for the new legislation to become law. In such circumstances it is likely that the premium calculated will not be that different under the new and current regimes but obviously the payment of freeholder’s costs under the current legislation will add to the overall cost of extending your lease and the length of lease extension will be 90 years not 990 years.
However, if you need to extend now, if you are being pushed to re-finance or you are needing to sell as soon as possible, I would seriously consider extending the lease now rather than later. Sometimes paying additional costs now could save you money in the long run, especially if you are facing penalties on an onerous mortgage term.
If you have a short lease 80 years or less and/or are paying a high rising ground rent then I would seriously consider waiting for the Election if you are able to do so
Each person’s particular circumstances must be looked at on an individual basis and I would be more than happy to give advice to anyone if required.
The same advice applies to groups of leaseholders thinking of purchasing their freehold.