Lease extensions and legislation around leaseholds are topics we get asked about a lot at Rocket and so we thought we would take the opportunity to explain to our landlords what leaseholders and freeholders need to be aware of right now.
The Leasehold Reform Act was passed by the previous government on May 24 2024, so the act is officially law, but it is not yet in force.
Before that can happen, the current government need to introduce secondary legislation outlining the details of how the Leasehold Reform Act will work in practice.
The main reforms that have been enacted are that, with immediate effect, new houses will all be freehold properties, so there will be no new leasehold houses built.
The other main reform is that lease extensions will now be 990 years rather than 90 years and this is the area where the new Labour government will have to introduce secondary legislation, as it is not yet clear how the cost of these lease extensions will be calculated.
The current calculations around lease extension costs take into account the cost of the ground rent and a multiplier, as well as the marriage value.
Marriage value is the cost of combining the leasehold and freehold legal interests, which results in a significant uplift in the value of the asset due to having the two interests merged.
In the eyes of the law, it is understood that 50% of the marriage value is held by the leaseholder and 50% is held by the freeholder.
You do not have to pay marriage value if you choose to extend your lease and it has more than 80 years left, but below that, the marriage value gets more expensive the closer the lease is to expiring.
The Labour government have suggested they will be removing marriage value from the calculation, which would make the cost of a lease extension significantly cheaper.
With that being said, it has been reported that a large group of landlords are preparing themselves in this event by employing a legal team to fight this, as it could seriously diminish the value of their freehold interest, which is an issue of wealth distribution and so they could have a case in the European Court of Human Rights.
Removing marriage value could also negatively affect a number of big pension companies, who bought lots of freeholds to collect ground rents for solid income and then they get a little bit extra whenever someone renews a lease and this is built into the asset value of the pension fund.
As such, removing marriage value would immediately reduce the value of these funds, which makes this a complicated situation.
It is likely that the government will not want to get tied into a lengthy legal battle and so they will have to compromise on removing marriage values and make adjustments to the calculation for working out the cost of a lease extension. This means it could still be slightly cheaper to extend a lease after the secondary legislation is introduced, but not as cheap as people might have thought.
As for what this means for our landlords at Rocket who are deciding whether to extend their leases now or to wait for the legislation, our advice is dependent on how long you have left on your lease.
For leaseholders who have just under 80 years left on their lease and so would have to pay marriage value under the current legislation, there is an argument to say, better the devil you know, and act now while you know how much you will have to pay. But ultimately, it’s a judgement call and our suggestion would actually be that it may be worth waiting to see if it becomes a little cheaper after the secondary legislation is introduced.
For leaseholders who have more than 80 years left on their lease, we would advise acting now, as you don’t have to pay marriage value anyway, just the ground rent multiplier, and in the current climate you could probably negotiate with your freeholder for a 990-year lease.
And for leaseholders who are coming to the end of their lease with 10-20 years left, we would also advise acting now, as the closer the lease comes to expiring, the more expensive it will become to extend.
There are also a few other changes in legislation you should be aware of when going to extend your lease. The first of which is that it used to be the case that you had to own the property for two years before applying for a lease extension, but this requirement is removed when the new legislation comes into effect.
As well as this, leaseholders will no longer be responsible for covering the freeholders’ costs during the lease extension process. Freeholders used to be able to recover the costs of solicitors, valuers etc., but they will not be able do this anymore when the new legislation comes into effect.
One of the slightly more niche changes to come out of this legislation is that it used to be the case that if your property was 50% commercial, it was considered a commercial property in the eyes of the law and so you could not apply for lease extensions. That is no longer true and mixed properties will have the right to apply for 990-year lease extensions.
Finally, there are also changes to the way block management companies have to operate that will affect leaseholders, who will have increased rights to ask questions and get information.
Managing agents will not be allowed to charge commission on placing insurance and instead they will only be able to charge a fixed admin fee, which will be specified in the secondary legislation.
Any administration charges that managing agents propose will need to be published, otherwise they won’t be able to charge. For example, when you sell a leasehold flat, the managing agent puts together a pack for the new buyer and previously there was no restriction on how much they could charge and the fees varied hugely.
The new legislation means this fee has to be published, so if they charge too much, it will be public and they won’t be the managing agent for long.
There will be a specific duty around accounts and how quickly they have to be published and managing agents will have to produce an annual report with fixed information for leaseholders.
For Freehold houses where there are common ground areas this will now be dealt with similarly to how leaseholders already operate. Managing agents could previously charge what they liked for gardening, maintaining common roads etc., without any of the protection afforded to leaseholders by legislation, but not anymore. They will now have to go through the normal leaseholder reasonableness process.
Managing agents will also only have 18 months to recover costs, so they can no longer charge leaseholders for works that were done six years previously.
These changes for block management companies are all in aid of transparency, which is good for both parties, as good managing agents already operate in this manner, and leaseholders will now have more powers to challenge difficult managing agents.
Ultimately, the new Leasehold Reform Act and subsequent secondary legislation will introduce significant changes that promise to make lease extensions more accessible and potentially less costly for leaseholders.
At this point, our best advice to our landlords is to stay informed and be prepared to adapt to these changes as they come into effect.
At Rocket, we're here to help navigate these complexities, ensuring you understand your rights and opportunities under the new legislation, maximising the benefits while minimising the risks.
If you’re a landlord and you have any current residential property situations where you would like some further advice, please book a meeting here.
