New lease extension rights for leaseholders

Millions of leaseholders in England will be given the right to extend their leases by a maximum term of 990 years at zero ground rent, the Housing Secretary Robert Jenrick announced on 7 January 2021.

Under current rules, leaseholders?of houses?can only extend their lease once for 50 years with a ground rent. This compares to leaseholders of flats who can extend as often as they wish at a zero ‘peppercorn’ ground rent?for 90 years.?The changes mean both house and flat leaseholders will now be able to extend their lease to?a new standard?990 years with a ground rent at zero.

This is the first decisive step towards the implementation of the Law Commission’s recommendations and is the biggest reforms to?English property law for 40 years, fundamentally making home ownership fairer and more secure. These reforms will apply, at this stage, to England only as the Welsh government has not yet announced its response to the Law Commission’s report.

Many people in England own their homes on a leasehold basis and are required under the terms of their lease to pay an annual ground rent to the freeholder of the property.

In many cases these annual ground rent sums are set at a low or 'peppercorn' rate but sometimes, particularly in some newer developments, these ground rents are set to double every 10 years, making some homes unsellable. 

The government will introduce:

1. a cap on ground rent payable when a leaseholder chooses to either extend their lease or become the freeholder; 
2. an?online calculator to?make it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease; and
3. further measures to protect the elderly by making these reforms equally applicable to retirement leasehold properties.

In addition the government will abolish prohibitive costs like ‘marriage value’ and set the calculation rates to ensure this is fairer, cheaper and more transparent.

What is ‘Marriage Value’?

The marriage value is calculated as the difference between what the property is worth in its current state with a lease of less than 80 years, and what the value would be with the new lease. The freeholder or landlord is entitled to 50% share of the marriage value under the terms of the 1993 Act. Any lease with more than 80 years remaining can be extended without paying any marriage value at all. This is why it was important for leaseholders to extend the lease before the remaining term dropped below 80 years these reforms will remove this concern for many leaseholders.

What are implications of the proposed legislative changes?

The implications of the new proposed legislation will mean that any leaseholder who chooses to extend their lease on their home will no longer pay any ground rent to the freeholder, enabling them to fully own their home without any additional, unnecessary and unfair expenses. 

In addition the abolition of calculating ‘marriage value’ on lease extensions will heavily impact many leaseholders wanting a lease extension on a lease currently with less than 80 years to run.

In Reading, for instance, a leaseholder wanting to extend their lease with approximately 50 years left to run on a £210,000 flat would pay a premium of approximately £35,000 with £20,000 of that premium relating to the marriage value. 

What should I do if I am currently engaged in the statutory process? 

In many cases it may actually suit some leaseholders to withdraw their current claim, pay wasted costs to date and, as leaseholders must wait 12 months before they are able to make a fresh claim, then exercise their right to a lease extension again 12 months later.

The government announced “[l]egislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero. This is the first part of seminal two-part reforming legislation in this Parliament.”

The Law Commission also proposed the adoption of commonhold ownership as the preferred type of ownership of newbuilds, and the government declared it was setting up a council to “prepare homeowners and the market for [its] widespread take-up”.

Under this model, which is popular in other parts of the world but has been used on fewer than 20 developments in England and Wales, blocks are jointly owned and managed, and flats can be owned on a freehold basis. The government stated “[w]e will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course.