A number of people have been asking us whether they should extend their lease now or wait given the possibility of reform as announced in January this year by the government. A typical scenario might be one as outlined below.
Following on from our recent Leasehold Question time event, we thought it might be helpful to publish this answer here.
If you were unable to attend our Leasehold Question Time, you can view a recording of the session here.
I have a flat with an 82 year lease that I have owned for a number of years. I know that if the lease falls below 80 years then it will cost me much more to extend the lease as the law stands at the moment, because of the ‘marriage value,’ so my question is should I do this now, or should I wait? I have heard that there are going to be changes made to how the cost of a lease extension is worked out.
Mark Chick, Head of the Landlord & Tenant team at Bishop & Sewell says as follows:
It is true that the government is planning to introduce reforms to make it cheaper and easier to extend your lease or purchase the freehold. These were the subject of a report published by the Law Commission in August of last year. However, at the moment, the only legal proposal that is before Parliament is the proposal to ban ground rent new leases.
This bill will not affect the valuation in relation to existing lease claims.
The risk to you is therefore that, as the lease is 82 years, that if you were to wait and the law were not be changed, that you would face a more significant cost because of the factor known as marriage value in the calculation.
Typically the effect of marriage value would be to increase the premium that you are likely to pay by around as much as a half to a third again of the usual cost. This applies only if the lease has less than 80 years on it when the lease extension claim is served.
In January of this year the Ministry of Housing Communities and Local Government (MHCLG) published a press release indicating its intention to implement a number of reforms, including the reforms to the law on valuation. However, on reading into the small print, no definite date has been set for the valuation part and all that the government has indicated that it will do on the wider reforms is to respond to the Law Commission ‘in due course.’
The current thinking is that this is not likely to happen for at least a year and even if and when this does happen, then time has to be found to draft the necessary legislation.
The latest indication of the government’s thinking was given by Robert Jenrick, the Housing Minister, in May of this year when the Ground Rent Bill was introduced in the House of Lords. At this time he was asked about the ‘other reforms’ that had been promised. All that he said as to timing on these was that to draft legislation would take at least a year and that it was not likely that this would happen until the third session of this parliament.
Speaking as a specialist in this area and someone who has commented as part of the Law Commission’s work on this, I think that the suggestion of a year to produce draft legislation is very optimistic. Even if this timetable were achieved we are still then looking at a further 12-24 months to get this through parliament and the term of this parliament ends in May 2024. This would be on top of the time taken to produce a draft bill.
It is of course impossible to give a precise time estimate, but given the likely level of detail needed for more wholesale reform, the most optimistic estimate of the time by which this might become law is 2-3 years on from the time at which a draft bill is prepared. My best guess, is that the earliest this is likely to happen will be around 4 years from now.
Of course, each individual case is different and if you can afford to hold on to the property for the long term you could take the risk that the law will change eventually and at this point perhaps marriage value will not be a factor, but against this you will have the effect of the decreasing lease length which will almost certainly increase the cost, even ignoring marriage value.
If you think that you may want to sell or re-mortgage the property either now, or in the next few years, then it will probably be a lot better to ‘bite the bullet’ now, rather than running the risk that the proposed reforms do not come in, or take a long time to materialise.
In addition if and when any reform comes in, even if this affects marriage value, the other parts of the calculation will be unaffected. So the compensation for ground rent and the remaining lease term will still need to be paid. In many cases (particularly with short leases) these factors outweigh the marriage value and therefore the impact will not be as great as might first be thought. This is why obtaining specialist valuation advice is also a very good idea.
It is almost certain that anyone looking to buy a property with an 82 year lease would be advised to get you to start the lease extension process for them so as to avoid the two year wait and the payment of a much increased premium. This fact alone might also be seen as a benchmark of what to do given that with the lease at under 80 years there will be a negative impact on value and saleability. Even if the law changes this sort of lease length is still likely to be seen as ‘short’ by lenders.
At Bishop & Sewell, we have more than 40 years’ experience in property with a particular focus on Landlord & Tenant. If you are thinking of buying a leasehold property, or if you already own a leasehold property and you have a question about obtaining a consent to alterations that you are planning please call 020 7631 4141 and ask for a member of the Property team, or email email@example.com.
The above is accurate as at 16 July 2021. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.