In this guest piece, Charles Brown, content writer of LDN Properties, discusses the potential impact of the latest reform on leasehold, and what it could mean for property investments going forward.
Owners of leasehold properties should be aware that the UK government recently enacted some important reforms that will affect the future of the housing market for such homes, although the changes are just the beginning and there are more revisions planned.
The reforms are included in legislation known as the Leasehold Reform (Ground Rent) Act 2022, which received Royal Assent -- meaning the Queens’ formal approval, the final necessary step to become law -- on February 8. The government will now write regulations to implement the reform law, and it plans to have these rules in place by mid-August at the latest.
The primary change included in the law is to place a limit on the ground rent that freehold owners can charge owners of leasehold properties, if the lease is longer than 21 years. But to truly understand the impact of this reform, some background explanation is necessary.
What prompted the change to the leasehold market?
Leasehold properties are different from freehold homes, which the owner possesses the building and the land on which it’s located without any time limit or other restrictions. With a leasehold home, the owner signs a lease agreement with the freeholder that gives them ownership of the house or flat -- but not the freehold property -- for a set amount of time.
To live in the property, leaseholders usually pay freeholders a ground rent that they pay annually, along with potentially some other fees, for example, to fund the upkeep of the property.
Unfortunately, as the home buying experts LDN Properties have identified, there are some potential problems with the current leasehold market. One recent issue that has led to calls for reform is the fact that some new houses are being sold as leasehold instead of freehold, and that some ground rent charges are too high for new leases.
In December 2017, the government announced that it would try to tackle these problems, enlisting the help of the independent Law Commission to analyse the situation and provide reports with recommendations for changes to how leaseholds are operated.
Responding to those reports, the government then in January 2021 floated a series of leasehold reforms that included the limit on ground rents, among other long-sought changes.
What reforms are happening now?
The Leasehold Reform (Ground Rent) Act 2022 that received Royal Assent last month is a somewhat straightforward piece of legislation in that it focuses on limiting ground rents for long leases -- which are leases that last longer than 21 years -- to a “peppercorn” each year, with a few exemptions.
A peppercorn charge is a small value that the freeholder will be able to make the leaseholder pay, and this reform should help target property situations with exorbitant ground rents. Freeholders will also be unable to make their leaseholders pay for administrative costs, another important change that should help to address some of the inequity in the leasehold market.
Once the law has been implemented through the rules that the government is currently writing, it will apply to most leasehold residential properties with a number of exceptions.
Owners of leasehold properties will have to look for the government to succeed with its push for further reforms to the market that could provide even more benefits for owners.
What leasehold market reforms might happen later?
The push to get the leasehold peppercorn ground rent limit in place is just the beginning of the reform process that the government has outlined. There are various other changes that it would like to see implemented that could be to the advantage of millions of people who own leasehold properties but might be facing short leases and other problems with their homes.
Even if the still-pending reforms don’t become law in the near future, another government might try again with them in later years, so it’s useful for homeowners to fully understand them.
Some of the key changes that are still under consideration are:
Removing the current marriage value
Currently, leaseholders and freeholders equally split the increase in the value of a property once a lease is successfully extended, but the reform that the government has planned relieve the leaseholder from any such liability for an increase
Changing the enfranchisement valuation
This would change the valuation that’s used to calculate the anticipated cost if the existing leaseholder decides to extend their lease or buy the freehold of a home
Allowing for lease extensions up to 990 years
By law, most leasehold agreements can only be extended up to 50 years for a house or up to 90 years for a flat, but this change would bump that up to 990 years
Creating lease pauses for property redevelopment
This change would give the freehold owner of a home the right to pause an existing leasehold agreement in its last year in order to redevelop the property, or within the last five years of every 90-year extension to an existing lease
What does this for the future of property investments?
Whether or not the government succeeds with winning Parliament’s approval of the remaining reforms, and then getting Royal Assent, remains an open question. But property investors should keep a close eye on the changes already enacted, and those still pending.
The various changes still in the works could significantly reduce the freehold property owners’ income, because it lowers or removes the charges that leaseholders must pay. That’s important for freehold investors when trying to accurately plan their financial futures.
Generally, property market experts like the professionals with LDN Properties have said that leaseholders are expected to primarily benefit from the current and planned reforms, rather than freeholders. If you’re a leaseholder, that’s great news that could benefit your budget. If you’re a freeholder ground rent investor, it might require you to reassess your future goals with the assets that you own.
*Charles Brown is the content writer of property investment firm LDN Properties