The Government has proposed reform of the leasehold laws with the new rules possibly rolled out within two years.
There are three major changes being put forward, details of which can be found on the Government website. First, in a move that would effectively end the system, ground rents for new leases would be reduced to zero. As the cost of buying a freehold for a long lease is typically a multiple of the ground rent, this would enable leaseholders to buy a freehold more cheaply.
Additionally, it would put an end to escalating clauses in leases tied to the value of the property, which can result in ground rents doubling or tripling over time. Leaseholders would also be able to extend their lease up to a maximum of 990 years with no ground rent payable, an increase from 90 years for flats and 50 years for houses.
This would affect all future leases but leave current leases unchanged.
The second change, the need to pay a ‘marriage value‘ when buying a leasehold property would be abolished. This value is the increase in value of the property following the completion of the lease extension, if less than 80 years, and reflects the additional market value of the longer lease.
This change would be good news for owners of flats on shorter leases, especially in central London, as the purchase of the freehold would become cheaper and more straightforward. However, it would impact negatively on investors with large property portfolios who would lose this source of income.
Development rights for leaseholders
The third change involves development rights which would be given to the leaseholder. As things stand, if the leaseholder wishes to buy the freehold of a property for which planning permission to add extra floors has been obtained, or gained through Permitted Development Rights, he must pay for those rights.
In effect, the leaseholder must make good the financial loss which the freeholder would incur. The proposal would entitle the leaseholder to veto the freeholder’s plans or carry out the development themselves, as long as they compensate the freeholder.
Jeremy Dharmasena, head of leasehold reform and litigation at Knight Frank, believes the Government is serious about making the proposals law, although there remains uncertainty as it could take two years for the changes to come into effect. But the news, he feels, should encourage tenants to believe that the law will change.
Mr Dharmasena recommends taking action according to what one thinks will happen to property prices. Some buyers and leaseholders may hold off in the belief that purchasing a freehold will become cheaper. However, strong price growth over the next few years could reduce any financial benefit.
Impact of leasehold reforms ‘limited’
More clarity and simplicity will lead to more liquidity, says Alastair Nicholson of Knight Frank. He gives the example of buying a prime central London property with a lease of fewer than 100 years, which can be a complex process to understand, especially for overseas buyers.
The changes will make the process easier for buyers and, more especially lenders, some of whom have struggled with rising ground rents, he believes.
Raul Cimesa, head of new homes sales at Knight Frank, thinks the impact of the ground rent changes will be limited for buyers of new-build properties. As the majority of leases in the new-build sector are more than 125 years and a significant proportion are over 250 years, the impact currently will be slight.
For buyers and owner-occupiers, he says, not having to pay ground rent will improve fixed annual outgoings and will enhance the overall yields of investors.
James Barton, partner in Knight Frank’s City & East team, comments that the changes will have no impact on land values, as developers haven’t included ground rents in land value calculations for two or three years. The rule changes would result ultimately in a cut in the supply of new ground rents, which could see ground rent yields firming up a little.