Leasehold Reforms 2020: Why it is good news for 4.5 million people
Anyone who has owned a leasehold property in the UK will know how frustrating the process of owning a leasehold can be. A leasehold is a form of homeownership where the ultimate owner is the freeholder. When a leaseholder buys a house or a flat, they are only purchasing the right to live in that property for a set amount of time, i.e., 99 years, 125 years etc. They pay the freeholder ground rent which in most cases will double every ten years and service charge for maintenance of common areas and with the leaseholder having very little control over this.
The managing agent appointed by the freeholder charge extortionate amount of fees when it comes to selling your property. Charging up to £500 to provide leasehold information packs known as LPE1 & LPE2 which are essential for the sale of the house or flat, also adding delay to the sale by 6 to 12 weeks. Under the new reforms, the government has capped the fees charged by a managing agent at £200 (plus VAT), and the freeholder must provide this information within 15 days as opposed to 12 weeks under previous law.
Currently, suppose the lease of your house or flat drops below 80 years, a leaseholder will have to pay additional prohibitive costs called "marriage value". In that case, this is a premium charged by the freeholders based on the assumption that the home's value will increase by extending the lease or purchase of the freehold. For example, A maisonette that I sold last year had 69 years on its lease left when I bought it at auction, and this was in the south-east. Because the lease was below 80 years and ground rent at £100 per annum, based on the new increase in the property's value (after substantial refurb), cost of extension of the lease would have been anywhere between £12,000 to £15,000. If the lease had 81 years left it would have cost me about £4,000. The new reforms will make it even cheaper to extend the lease and allow a leaseholder to extend for a longer period.
The government will sensibly do away with the marriage value calculations of extending a lease under the new leasehold reforms. This is excellent news for leaseholders and giving all 4.5 million leaseholders in the UK the right to extend by 999 years with zero ground rent. The government will also create an online calculator which will standardise the cost of a lease extension. The government will also create a commonhold council of representatives from leasehold groups, the housing industry and government to promote and prepare for the widespread take-up of commonhold. The parliament is set to approve these new reforms by March 2022
Leasehold Reforms 2020: How much will an average leaseholder save?
The exact costs of extension based on the new reforms is unclear and will be until the new calculator is finalised. However, Andrew Wishart of capital economics suggests that "it is clear that leaseholders will gain most where ground rents are 0.1% of the property value". For instance, looking at a flat worth £250,000 with 125 years left on a 250-year lease with ground rent being £100 a year doubling every ten years. Wishart suggests that the cost of extending the lease to 990 years would currently be £54,000. However, if the ground rents are capped as under the new reforms, then the cost of extending will fall to £4,920.
This will be a staggering saving for any leaseholder and a cost, which in my opinion is unnecessary and makes this form of ownership for an investor or owner unattractive in the long term. The new reforms will be welcome by all 4.5 million leaseholders and make it more attractive for investors who had started to move away from this form of investment in real terms. Of course, we are still unsure what will happen with flat owners stuck in the buildings with combustible cladding following the Grenfell tower fire. This is a scandal of epic proportion, and government must hold developers and freeholders to account. I will be doing a particular article on this and suggesting ways in which a leaseholder can sell their flat if they have been affected by the new cladding restrictions. However, the leasehold reforms should be welcome by all as it is a step in the right direction.