What exactly is the Bill and what does it include?
On November 27th, 2023, the Leasehold and Freehold Reform Bill was introduced to Parliament. This was following the King’s speech on November 7th 2023. The Bill aims to promote fairness in the housing market, to:
- Extend the standard lease term for flats and houses from 90 to 990 years.
- Reduce ground rent to £0.
- Eliminate the 2-year ownership requirement for lease extension entitlement.
- Enable Leaseholders in mixed-use buildings with up to 50% non-residential floor space to buy their freehold or assume management.
- Ban the creation of new leasehold houses (although this has already been missed out of the Bill and will instead be added ‘at a later stage’).
The proposed changes also aim to enhance their consumer rights, ensuring faster and more transparent transactions so this is all potentially great news for leaseholders.
What does this mean for the housing market?
Leaseholders and Freeholders may face differing outcomes depending on the final methodologies applied to calculate new extensions.
Freeholders could face potential shortfalls, which may reduce the appeal of ground rent investments and lead to a decline in market values. On the other hand, leaseholders may experience positive effects, such as cost savings on lease extensions, reduced expenses, and potential property value increases. The demand for short-lease properties may also increase if the extension process becomes more affordable and straightforward, expanding their market appeal and potentially boosting their values.
In the broader housing market, the trend toward 990-year leases could create a two-tiered scenario. Properties once deemed to have “long leases” (90+ years) might now be perceived as relatively short, potentially reducing their attractiveness. As a result, there may be pressure on the owners of such properties to extend their leases for competitive reasons, even if it is not strictly necessary.
Understandably, the lack of a clear timeline or understanding of how these changes will unfold may create uncertainty for businesses in this sector, making future planning challenging. However, given that we are currently in the consultancy stage, the true implications of these changes remain uncertain, and their implementation is not guaranteed. At this point, the actual impact will only become clear when and if these changes come into force.
What do these changes mean for lenders?
Currently, most lenders are cautious or refuse to provide loans for leasehold interests with less than 85 years. However, with impending changes, lenders may need to reassess their risk aversion.
If short leasehold extensions become more affordable, these properties could gain appeal and be viewed as less risky assets. The potential removal of marriage value from the premium, which significantly inflates extension costs below 80 years, could further influence this shift. Without marriage value, premiums may increase steadily over the remaining lease term. As a result eliminating the penalty associated with leases below 80 years. The critical juncture for lenders to determine increased risk may hinge on market dynamics once and how these changes take effect.
When would this become law?
Mr. Gove expressed confidence that the bill will become law before the expected 2024 general election. However, it is uncertain whether all reforms will be included in the final bill, and whether it will receive Royal Assent or pass before the election. If the bill is not passed, future governments may not commit to these reforms, leaving leaseholders with short leases in a state of uncertainty.
While some may choose to wait, there is no guarantee of implementation or specific changes. If you are selling a property with a low lease, immediate action may be necessary, especially for leases between 80-82 years or below 80 years. For leases above 82 years, the decision is more complex, with large investors tending to wait and small landlords and homeowners often proceeding with extensions.
Where can I find out more information?
The impact of these changes, if implemented, is still uncertain. Currently, we can only wait and see what happens next. To keep yourself updated with the progress of the Bill, you can visit the Gov.uk website.
If you are a leaseholder, freeholder, or lender and need personalised advice, please contact us for further information.
Written by Siân Edwards, Associate Director, in our Valuations team.