Thinking of Extending Your Lease?
Why Should you Extend Your Lease and What does the Leasehold and Freehold Reform Act 2024 do for you?
The cost of extending your lease has increased significantly over the last 30 years. The formula used to calculate the “premium” that you have to pay your freeholder to extend your lease is directly linked to the value of the flat. The cost of leasehold ownership was relatively affordable in the 1960’s as the average price of an inner city flat was only 3 times the average yearly wage which meant that extending your lease by 90 years was very affordable, however over the decades the price of the average flat has increased to 10 times the average yearly wage. This means that in many cases extending your lease has become prohibitively expensive.
It has been clear to most that the leasehold system is outdated for 20 years now. Leasehold law detriments people who live in flats, while benefiting large institutional investment companies that have been making huge profits. In short, the rich prosper and the poor get poorer. Reform was needed. So the introduction of the Leasehold and Freehold Reform Act 2024 was long overdue and was presented as a “god send” for the 5 million flat owners in the UK as it promised to reform leasehold tenure and, amongst other things, make it cheaper for flat owners to extend their lease.
So has it delivered?
As a property manager at Sebright Property Management my clients frequently ask me the same questions: Has the law changed yet? Is it cheaper to extend my lease? The short answer to this is “not yet”. The Leasehold and Freehold Reform Act has certainly presented itself as being capable of benefiting Leaseholders by reducing the costs of lease extensions BUT it has not explained how this is done. For this we require secondary legislation which will not likely come into law until late 2025 or even 2026. So no one knows how to calculate the costs of extending your lease under the new legislation.
Let’s start by explaining how the Leasehold and Freehold Reform Act 2024 has changed the lease extension premium calculation and then move onto whether you should wait for the secondary legislation before extending your lease or whether it is worth entering into negotiations with your freeholder now.
Key Components of the New Calculation:
Removal of Marriage Value: Marriage value was a significant cost element in the previous calculation method. It represented the increase in the value of the property once the lease was extended or the freehold was acquired, typically shared 50/50 between the leaseholder and the freeholder. The new reform eliminates this component, which is expected to reduce the cost of extending a lease.
The Length of a Lease Extension: Leaseholders can now extend their leases by 990 years at a peppercorn rent which is a great increase from the previous 90 years.
Simplified Calculation: The exact formula for the new premium calculation is yet to be detailed in the secondary legislation but it is promised to be easier to understand.
Cost Reduction: The removal of marriage value is expected to make lease extensions and enfranchisements (buying the freehold) more affordable for leaseholders, especially those with leases under 80 years, which is when marriage value previously became payable.
Fairness and Transparency: The reforms aim to create a more straightforward and transparent process for leaseholders, reducing the financial and legal complexities historically associated with leasehold extensions.
The detailed formula and other specifics will be clarified in the forthcoming secondary legislation, which will implement these changes fully.
So should you wait for the secondary legislation to extend your lease?
Most Freehold companies recognise that there has been a change in the law and that premiums are going to be affected by the removal of marriage value from the calculations and will be willing to negotiate on the premium but you will not know if what you agreed is fair until the secondary legislation is published. So you will be left making a judgement call. Is it worth negotiating now or leaving the decision until next year, when even more time will have elapsed from the term of your lease. The decision you make maybe one of necessity (you need to sell your flat) but if it is not then see how much of a reduction your Freeholder is prepared to offer and if appears reasonable then it is always better to extend the lease than continuing to wait for what is an undetermined amount of time for the promised secondary legislation.
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