The Government has promised to make it cheaper and easier for people to extend their leases and has introduced its Leasehold and Freehold Reform Bill (the "Bill") to Parliament.
Given these proposals, leaseholders may be considering whether to wait to extend their lease. Landlords may consequently see leaseholders delaying extensions to take advantage of the proposed changes in the law. This will depend on a number of factors.
Why will lease extensions be cheaper under proposed reforms?
When a leaseholder extends their lease, they have to pay a "Premium" to their landlord, by way of compensation for the devaluing of their asset. The current Premium calculation contains three components: Reversion, Capitalisation and Marriage Value.
Under the Bill, the calculation will only include capitalisation of the ground rent, and the value of the Reversion to the vacant possession value of the property on a virtual freehold basis that would otherwise accrue to the landlord.
“Marriage Value” compensates the landlord for the added value a lease extension gives to a flat-owner from what is termed the windfall gain, or profit, that the tenant makes.
This only contributes to a Premium if the lease has less than 80 years left to run. A lease with an unexpired term of less than 80 years is considered a "short lease".
To extend a short lease,, the leaseholder currently needs to pay 50% of the profit made from extending the lease to the landlord. This calculation is based on how much the flat is worth with a short lease, in comparison to what it would be worth with an extended lease. The difference is further widened by a discount being applied to the short lease value based on the artificial assumption that without the right to buy a lease extension, the short lease would be worth less.
Marriage Value accounts for a significant but varying proportion of the Premium under the current regime. It tends to be a lesser proportion where the lease is very short or relatively long, but has more effect in the middle years, say 20 to 60 years unexpired. The Leasehold Reform Bill aims to remove Marriage Value from the calculation of the Premium, which will be likely to have the added benefit of removing the artificial assumption of the value of the short lease from the process. This would simplify the process and make it much more transparent.
What factors might leaseholders consider?
1. Will the Bill be passed, at all, or in its current format?
Despite a number of encouraging statements from the Government, passing this piece of legislation is unlikely to be a swift process. The Bill must pass through the Houses of Parliament and is going to be subject to scrutiny and possible amendment. There may be a Human Rights challenge by landlords on the grounds this could amount to them not being adequately compensated for what is effectively a compulsory purchase of their rights. It is possible the Bill could be rejected by Parliament. It may be that the end product looks quite different from the current proposals and perhaps a "half way house" of some kind is concluded, whereby it is cheaper for leaseholders to extend, but not as much as was hoped.
There is due to be a general election in 2024, and Michael Gove has said he believes the legislation can be "on the statute book" by then. The writer is not personally optimistic that this is achievable. Even if a Bill is passed, it may come into force in phases, which will take further time.
What happens if the Conservative Government does not get the Bill passed by the general election in 2024, and then does not win that election? Although the opposition has indicated its desire to increase the rights afforded to leaseholders, there is doubt as to whether they will pick up the Conservative's Bill, and the opposition do not appear to have much in the way of realistic proposals for what leaseholder reform should look like.
2. Time is ticking
If a leaseholder has a short lease, then with every passing day, the Marriage Value aspect of the Premium will be increasing. Delaying the extension of the lease to see if the Bill is enshrined into law could be a risky business.
If a leaseholder has a high value property on a short lease, it is probable that due to the difference in value between the extended and un-extended lease of the flat, the Marriage Value element is going to be higher when compared to a lower value property. This means the stakes are higher, because if the Bill is passed, it is likely to give the leaseholder a considerable saving, but if it is not, delay will have caused the Marriage Value element to increase even more, inflating the Premium to be paid.
Conclusions
Before making any firm decisions, it would be advisable for leaseholders to speak to a valuation surveyor about the potential change in the leasehold extension premium if the valuation aspects of the Bill become law. At the time of writing, the percentages used in the Bill have yet to be specified, so it may be a little while before advice can be obtained from a valuation surveyor.
If leaseholders can afford to wait, then it could potentially work in their favour. However, for the reasons discussed in this article, waiting could be a risky business. Leaseholders ultimately need to consider their own life plans, circumstances, attitude to risk and balance those with the potential to save money. Landlords will need to wait and see whether their leaseholders choose to put extensions on hold in the hope of making savings under future legislation.
