The proposals for the reform of leaseholds trumpeted by the Government recently are good news for buyers and sellers of leasehold flats, though not for developers nor for professional valuers.
Leasehold tenure is toxic. Whatever the vagaries of government policy in other areas, that much is clear. At a time when Covid and Brexit have put back many other reforms which might have been thought desirable, the Government has signalled that it intends to use precious Parliamentary time to address the alleged iniquities of the leasehold system. What exactly are they going to do? And how should agents and negotiators advise their clients and applicants?
To date, all we have is a press release from the MHLG headed, “Government reforms make it easier and cheaper for leaseholders to buy their homes”, so the aim of the reforms is clear, but detail is scarce. We know that the statutory lease extension for flats will move from being 90 years on top of what is now unexpired to a top-up to 990 years, at of course a nil (peppercorn) rent, and the same right will now be available for houses. Perhaps the reforms will remove the ‘assured tenancy’ trap in some leases with rents over £250pa.
Winners and losers
The first proposals will be debated in the next Parliamentary session and will contain proposals to set new long lease ground rents to zero (note that the comment from the Law Commission in the press release did not confine this to retirement homes), the usual minimum term for a long lease being 21 years. The second part of what the Law Commission described as “seminal two-part reforming legislation in this Parliament” is expected to follow next year and may well contain more of the Law Commission’s recommendations in their 2020 Report, including abolition of the two-year ownership requirement.
The Law Commission’s comment on the proposals highlights both the 990-year extension and the proposed statutory multiplier to limit the element of the premium required to buy out the ground rent. In another blow to professional valuers in this field, it is also proposed to abolish ‘marriage value’ (the sharing of the new value created by the transaction over and above the combined values of the previous interests) in favour of a formula, probably related to the market value of the freehold, which means that arguments over relativity (the current leasehold as a percentage of freehold) will be a thing of the past too.
These reforms should remove some of the worst abuses of the leasehold system.
While almost all flat owners should benefit from these reforms, investor landlords will lose out, notably developers who sell off-plan flats on a leasehold basis with ground rents which usually increase, often double, at intervals during the lease term until they reach quite prohibitive levels. Professional valuers too will bemoan the reduction in the scope for argument on key aspects of the price calculation for lease extensions.
The long-term intention of the Government to abolish residential long leasehold (and it may many take years) is signalled by the intention to establish a Commonhold Council to reinvigorate this ugly duckling of property tenure, available since 2003, but little used.
Commonhold – the new freehold
Commonhold is a special form of freehold tenure of flats, not limited by years, with a commonhold association, which looks remarkably like a tenants’ management company, responsible for the structure and common parts, and funded by what are service charges by any other name. We are one of the very few countries which has leasehold tenure; almost all others have some form of ‘strata title’ system; but whether even what is known as ‘Commonhold 2.0’, whatever form that will take, will overcome the innate conservatism of developers, property investors and above all lenders, who may prefer the leasehold devil they know, is another matter.
These reforms should not only remove some of the worst abuses of the leasehold system, notably penal ground rent escalators in leases, but also make shorter leases, those below 80 years unexpired, much more marketable, being easier and cheaper to extend. The draft Bill once published will show us whether the detail justifies the current excitement. In the meantime, agents, negotiators and professional valuers should advise their clients that change is coming, even if the detail and timing is uncertain.
John Stephenson is a Partner at BDB Pitmans. All views expressed are his own and not those of the firm.