The recent passing of the Leasehold Reform Act on May 24th marks a significant milestone in property ownership and management in the UK. While the bill has been approved, its effective implementation is anticipated around 2025/2026, according to current government guidance. This delay notwithstanding, the Act introduces several crucial changes aimed at empowering homeowners, particularly leaseholders, and enhancing transparency and fairness in property transactions and management.
Read about the key updates and thoughts from Associate Director, Sian Edwards.
Key Updates
Homeowners stand to gain
Under the Leasehold Reform Act, homeowners stand to gain more rights, power, and protections. Leaseholders, in particular, will find it easier and more affordable to buy their freehold or extend their leases, with the extension period now reaching up to 990 years and marriage value abolished. Notably, the Act removes the requirement for leaseholders to own a property for two years before being eligible to extend their lease, potentially making short lease properties more attractive to homebuyers and sellers.
Restrictions on the sale of new leasehold houses
Moreover, the Act imposes restrictions on the sale of new leasehold houses, except in rare cases, and aims to end excessive commissions on building insurance for freeholders and managing agents. It also seeks to reduce barriers for leaseholders challenging unreasonable charges and managing their properties. Additionally, freehold homeowners on private and mixed-tenure estates will now have equivalent rights of redress and transparency over estate charges.
Uncertainties over premium calculations
However, while the Act brings several positive changes, there remain uncertainties, particularly regarding the premium calculations for lease extensions and collective enfranchisement and how Freeholders will respond. The Act is likely to be highly contested by freeholders, who may challenge it in court and will cause huge uproar in the freehold sector. The exact implications for the individuals involved will become clearer once these calculations are revealed.
Who does it impact?
The Leasehold Reform Act impacts various stakeholders within the housing market:
Leaseholders:
They should know their new rights to extend leases, buy their freehold, and challenge service charges. While we cannot provide definitive numbers as to the new cost of lease extensions/enfranchisements under the Act, it is well documented that the primary aim of this Act is to assist those with short leases—specifically, leases with less than 80 years unexpired—as these extensions are most costly due to the presence of marriage value. The Act intends to reduce the cost of extending these leases by abolishing marriage value, meaning that once leaseholders extend, the marriage value will no longer be shared with the freeholder. However, the Government must carefully balance this by compensating freeholders ‘fairly,’ which could be achieved in several ways. One possibility is that extending leases above 80 years may become more expensive. Therefore, leaseholders with leases under 80 years will most likely benefit from the Act by paying less for extending their lease and therefore decide to hold out for the Act to take effect. However, leaseholders with leases over 80 years may find it more expensive under the Act and therefore want to extend now. Consequently, the exact cost implications remain uncertain until premium calculations are disclosed so at present, we can only speculate.
Freeholders and Managing Agents:
They must adhere to new transparency and billing requirements outlined in the Act. This could mean more funding for training and associated costs.
Homebuyers and Sellers:
They should take note of the ban on new leasehold houses and the removal of the two-year ownership requirement for extending leases or buying the freehold. Short lease properties may become more appealing now new owners can extend at any time and they will potentially be cheaper to extend. This in turn could increase values of short lease properties but the stigma surrounding them will need to be sufficiently offset for this to happen.
Freeholders with Ground Rent Investments:
Their income from lease extensions and collective enfranchisements may be reduced, potentially affecting the value of their investments. If the income of lease extensions is reduced substantially, ground rent investments will become far less attractive. Demand could then fall which in turn could lead to values reducing. This creates a very uncertain sector and is why freeholders are likely to contest if the calculations are not seen as fairly compensating them.
Conclusion
The Leasehold Reform Act represents a significant step towards rebalancing the rights and protections for homeowners, particularly leaseholders, in the UK. While it brings about positive changes aimed at empowering individuals and enhancing fairness in property transactions, there are still uncertainties and challenges ahead, particularly regarding premium calculations, the timing of implementation and the Freeholder sector’s response. All parties must stay informed and prepared for the forthcoming changes in property management and ownership practices.
If you would like to know more please get in touch with the team, email valuations@argroup.co.uk
Written by Siân Edwards, Associate Director.