Is new Leasehold Reform Act be good for the landlords and buyers?

Why might the new Leasehold Reform Act be good for the landlords and buyers?

• What is a leasehold property? 

Around 5 million homeowners in the UK own leasehold properties. A leasehold property means it gives you the right to live in a property for an established agreed period of  time. *The freeholder (or the landlord) owns the property while you will have to pay ground rent on an annual basis to the freeholder(s). A freehold property means you have outright ownership. Normally freehold property value is higher than leasehold property. There are mainly three types of leases which usually last between 99, 125 and 999 years. The land on which a leasehold property is built is owned by another party (the freeholder). 

• Why is the government coming up with a new Leasehold Reform Act in 2022?

As per the current UK law system, freeholders are able to raise rates on leasehold properties without having to justify their action. New build development setting up the rates  way more then the comfort zone hence this caused the government to change the laws in this area. A recent study by the Housing, Communities and Local Government Committee reported that certain ground rents had doubled over the course of a decade.

• 99 vs 125 vs 990 years lease?

At this moment, if you are a leaseholder of a flat/house for more than two years, by law you have the right to extend the lease by an additional 90 years with a ground rent. Along with this, you are expected to pay a premium to the freeholder. The marriage value (difference between existing lease and short lease) of the lease will be removed from the premium calculation. As the new Leasehold Reform Act comes into power, property leaseholders will be able to extend their lease by a new standard 990 years with a ground rent of zero, where marriage value will be removed from the premium calculation.

• What is marriage value and how is it calculated?

When the freeholders and leaseholder’s separate interests are “married” into single ownership it is called marriage value. It’s the main difference between;

A. the value of the freehold in single ownership; and

B. the value of both (A) the freehold interest and (B) the leasehold interest in separate ownership.

The value of (A) is often more than (B). The law stipulates that where the lease has more than 80 years left to run, there is no marriage value. The calculation is very simple, where taking the 50:50 split between the freeholder and the leaseholder, the leaseholder would have to pay half of this figure as marriage value.

• What is the landlord's calculation on the lease? 

Let’s say I am a BLT landlord, planning to buy a leasehold property. The remaining lease is 99 years and the property price is £400,000 so what is my per annum lease cost?

Simple formula: Property cost / remaining lease

£400,000/ 99 = £4040 per annum or £336.7 per month plus ground rent. 

Let’s look at the same property after the Leasehold Reform Act, the price will be £410,000 with 990 years lease remaining. There is an addition of £10,000 for lease extension, legal fee and no ground rent to pay now. 

What is the cost now?

Same formula applies:  £410,000/990 = £414.14 per annum or £34.5 per month.  

Initially you would have been paid £337 per month after your property purchase but now after the ACT you would need to pay just £35 per month.  

• No ground rent to pay by the leaseholders?

Leasehold Reform (Ground Rent) Act 2022 comes into force on 30th June ‘2022. For retirement properties it will come into effect before 1st April ‘2023. Once this act comes into force, ground rent in most new leases cannot be forced or in other words, no money can be legally charged by the freeholders. This act bans freeholders from charging administration fees. 

If you are a leaseholder and want to reduce your ground rent, the only way to change your ground rent would be to extend your current lease (on payment of a premium) by using the current statutory process, which would reduce your ground rent to a peppercorn. Alternatively you might be able to negotiate an informal lease extension with your freeholder. 

• Can leaseholders save money on lease extension?

As per the new Leasehold Reform Act, new homeowners of leasehold properties will not pay their freeholder ground rent every year. Existing leaseholders who choose an informal lease extension will also be protected by this law. The overall cost of a lease extension won’t drop drastically until the final stage of reform.

• What is the process?

It is a very simple process. You need to know who your freeholder is before you speak to one of the qualified lease extension solicitors, who will guide you through the detailed process. You have to pay a small fee to the solicitor, but it is understandable when you realise that the value of your property may go up.

• I’m currently buying a leasehold property, what should I do?

Buy it quickly, but remember the 990 lease & nil ground rent! The value of the property would go up as soon as the lease goes up. If you are planning or in the process of buying a new build property, you must check the lease status which should be 990 years and £0 fee for the ground rent. In case you don’t see these figures, your conveyancing solicitor should negotiate that it’s not reasonable for you to buy a property that includes ground rent after the Leasehold Reform Act 2022, and you will be at risk of buying a less desirable property in the long run. 

On the other hand, if you are in the process of buying an existing leasehold property, you may be able to negotiate the price in your favour.  If the property has a lease more than 80 years, you will get the advantage of a cheaper leasehold extension once this act comes into force.

• Lease extension experts solicitors?

Please speak to 99home team for a free convancying quote and  more information. 

• Can I get a mortgage on a leasehold property?

Why not?, if you have more than 80 years of lease remaining. If it’s less than 80 years, you need to check with your lender. This is subject to the remaining lease and extension. If you can extend your lease, you are more likely to get a mortgage. In case you want to sell your property, use Estate agents lease extension will attract more buyers.

• What should I look for while buying a leasehold property?

Cost of ground rent if applicable

The length of the lease

Service, maintenance and other fees

Check any restrictions and cost involved for any alterations

• Does this apply on Shared Ownership properties?

This ACT applies on all leasehold properties, if you are Resaling Shared Ownership property or wants to extend your lease, you need to speak to the freeholder or housing associaction.  

If you have any question, please speak to Vijay at 99home

Vijay Vashistha 28 June 2022