Tuesday May 28, 2024

Leasehold and Freehold Reform Act 2024: Key Changes and Implications

The Leasehold and Freehold Reform Act 2024 has been introduced with the primary aim of making lease extensions more affordable, especially for those with short leases under 80 years. The legislation abolishes the contentious “marriage value” and caps ground rents in lease extension calculations, aiming to ease financial burdens on leaseholders.

Key Reforms


1. Abolition of Marriage Value

Historically, leaseholders with leases under 80 years had to share the “marriage value”—the increased property value post-lease extension—with freeholders. This legislation eliminates that requirement, allowing leaseholders to retain the full benefit. The move is expected to significantly reduce lease extension costs for properties with short leases. However, this provision is anticipated to face legal challenges from the freeholder sector, potentially delaying its implementation.

Who Benefits? Leaseholders with leases under 80 years stand to gain the most. For example, extending a 79-year lease on a £200,000 flat currently costing between £12,000 and £15,000 may drop to a third or two-thirds of this cost.

Who Loses? Freeholders may see reduced returns. The government might balance this by adjusting the Deferment Rate, which could negatively impact leaseholders with leases over 80 years, who do not benefit from the abolition of marriage value.


2. Capping Ground Rents

The Act caps ground rents at 0.1% of the property’s value when extending leases. For instance, a ground rent of £300 on a £200,000 flat would be reduced to £200. This cap aims to prevent exorbitant ground rent charges, though exceptions may apply if the original lease terms included higher ground rents in exchange for lower premiums.

Who Benefits? Leaseholders with high ground rents exceeding 0.1% of their property’s value.

Who Loses? Leaseholders not facing high ground rents might be disadvantaged if the government lowers the Discount Rate, increasing the cost of buying out ground rents.


3. Standard Valuation Method and Market Rates

The Act allows the government to set specific rates, such as the Deferment Rate, used in lease extension calculations. This change aims to streamline negotiations and reduce costs. If set favorably, these rates could lower lease extension costs. However, a reduction in these rates could increase costs for leaseholders.


4. Longer Lease Extensions

The legislation extends the period for lease extensions from 90 to 990 years. While this seems generous, the actual financial benefit is minimal, as extending already long leases is inexpensive.

Who Benefits? Leaseholders extending their leases will see a benefit, though it’s limited in financial impact.


5. Abolition of the Two-Year Ownership Condition

Leaseholders no longer need to wait two years before extending their lease or buying the freehold, simplifying the process for property transactions.

Who Benefits? Buyers and sellers of properties with short leases.


6. Abolition of Leasehold Houses

New houses can no longer be sold as leasehold, except in specific cases like retirement complexes. This addresses long-standing criticisms of the leasehold system for houses.

Who Benefits? Buyers of new-build houses, who will now own the freehold outright.


7. Sharing Professional Fees

Under the new Act, each party will cover their own legal and valuation costs for lease extensions or freehold purchases. This change reduces the financial burden on leaseholders.

Who Benefits? Leaseholders, who will see a drop in their professional fees.


8. Option to Buy Out Ground Rent Without Extending Lease

Leaseholders with over 150 years remaining can now buy out their ground rent without extending the lease term, though the financial benefit is limited.

Who Benefits? Leaseholders with long leases avoiding unnecessary extensions.

Future Considerations

While the Act marks significant progress, it leaves some rates, such as the Deferment and Capitalisation Rates, to be determined by future legislation. This uncertainty could affect the cost outcomes for leaseholders. Additionally, the freeholder sector is likely to challenge some of the provisions, potentially delaying their implementation.

Implementation Timeline

The Act has received Royal Assent, but its provisions will come into effect as decided by the Secretary of State. Some changes might be implemented by 2025 or 2026, with others possibly delayed until 2028.

Excluded Reforms

The Act does not cap ground rents on existing leases or abolish leasehold entirely, despite previous government discussions on these issues. The prevention of forfeiture also did not make it into the final legislation.

In summary, the Leasehold and Freehold Reform Act 2024 introduces several significant changes aimed at reducing costs for leaseholders, particularly those with short leases and high ground rents. However, the full impact will depend on future rate settings and potential legal challenges from the freeholder sector.