Thursfields gives cautious welcome to government’s leasehold reform proposals

Homebuyers need to see more details if they are to be convinced the government’s proposed leasehold reforms will make it easier and cheaper to buy their homes, according to Midlands law firm Thursfields Solicitors.

Darren Cox, an associate in the firm’s residential conveyancing team, said leasehold had had a bad press but can be a perfectly legitimate way of owning a property.

“Where there have been problems, they have been caused by some developers allegedly misusing leasehold, coupled with increasing ground rents, which have made leasehold an expensive option for homeowners.”

The government is proposing to give millions of leaseholders a new right to extend their lease by 990 years – at zero ground rent, often the main bone of contention, according to Mr Cox.

He said: “As the law stands at present, a large number of homeowners are paying high ground rents which, combined with a mortgage, can seem like they are paying rent on a property they own.

“If the lease allows, freeholders can increase the amount of ground rent, providing little or no benefit to those hit by the extra charges.”

The changes proposed by the government, in legislation to go before the next session of Parliament, will mean that any leaseholder, who wants to extend the lease on their home, will no longer have to pay any ground rent to the  freeholder.  At present, the option of nil ground rent on a lease extension is only available to the leaseholder of a flat.

Mr Cox said: “It is estimated that there are 4.5 million leaseholders in the UK. It is important to home buyers to confirm up front what the costs are involved in a leasehold, otherwise it can come as a shock when they look at the cost of extending the lease.

“On the face of it, these proposed reforms look to improve the deal for leaseholders. However, the devil will be in the detail, and full details of how the system will work have not yet been published.”

At present, leaseholders of flats can usually only extend their lease for 90 years and can face high charges, and house owners, who are covered by different rules, can also face barriers when they want to extend their lease.

The proposed changes will mean that both house and flat leaseholders will be able to extend their lease to a new standard 990 years with a ground rent at zero.

An online calculator is to be introduced so that all leaseholders can easily see what it will cost them to buy their freehold or extend their lease.

The government will also abolish the so-called “marriage value” in freehold purchases.

Mr Cox explained: “When the freehold is purchased, the combining of the leasehold increases the value of the property, so people would pay more for a freehold property than a leasehold one.

“The extra amount is referred to as the ‘marriage value’.

“Marriage value can be a significant sum.  At present, the rules are complex but broadly if a leaseholder with 80 years or less left to run on their lease buys the freehold, the value of the property with the freehold will be more than without it.  This difference in value is called ‘marriage value’ and 50% of the marriage value is payable by the leaseholder.

“Marriage value also applies to lease extensions – if the difference in value of the property before and after the lease extension is, say, £10,000, then the leaseholder would have to pay £5,000.

 “The abolition of ‘marriage value’ in itself will make the process of purchasing a freehold, or extending a lease, simpler to understand and to transact,” he said.  “Whether the abolition of marriage value will be accepted by freeholders without a fight remains to be seen, said Mr Cox, “as the new rules will mean a reduction in value of what has always been an asset pool for freeholders.”

The government will also establish a Commonhold Council, made up of a partnership of leasehold groups, industry and government, intended to prepare homeowners and the market for a widespread take-up of commonhold.

Mr Cox said: “Commonhold is an alternative to the long leasehold system. It allows the homeowner to own the freehold of a flat or house in a building. Unlike leasehold, there is no limit on how long the property can be owned.

“Commonhold has been in existence since 2004, but the take up has been low.  Further take up of this system, by new build developers, will also lead to a diminishing proportion of leaseholds as more developments are established under commonhold, and more leaseholders gradually buy their freeholds.”

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