The recent frenzy in the residential property market brought on by the Government’s Stamp Duty holiday was of particular significance for leaseholders with shorter lease terms. The urgency to sell their leasehold property in order to purchase a new property before the 30 June Stamp Duty holiday deadline led to many leaseholders paying excessive sums to their landlords. Under current rules leaseholders can extend their leases at a zero ‘peppercorn’ ground rent for a term of 90 years (under the statutory route) or for a longer term outside of the 1993 Act (the non statutory route).
For leaseholders needing to extend their lease term during the Stamp Duty holiday rush, they did not have the luxury of time to negotiate the premium payable to their landlords. Usually, the respective surveyors for the leaseholder and landlord would commence negotiations over a period of weeks and months until a premium for the lease extension was agreed. The Stamp Duty holiday curtailed this bargaining process as leaseholders were compelled to accept a higher premium to secure the sale. This demonstrated the inherent unfairness in the lease extension process for many leaseholders in the current market.
For leaseholders whose lease terms are fast approaching 80 years or less the issue of ‘marriage value’ arises. This is an additional fee payable on top of the premium to the landlord on a lease extension. In usual circumstances leaseholders would be prudent to move swiftly and commence extending their lease before their lease term drops below 80 years to avoid the additional punitive costs. However the Government has brought forward radical proposals to reform the entire lease extension process via the Housing Secretary Robert Jenrick’s announcement on 7 January 2021. Millions of leaseholders will be given the right to extend their lease by a maximum term of 990 years at zero ground rent.
The overall aim behind these reforms is make the lease extension process considerably fairer, cheaper and save leaseholders potentially thousands of pounds. The Government is seeking to abolish prohibitive costs including ‘marriage value’ and set the calculation rates for the premiums payable to ensure it is fairer and more transparent. The question for leaseholders is the financial imperative of whether to wait for the Government to introduce these reforms. There is currently no timetable for implementation and all the while lease terms will continue to decrease and lead to increased costs for leaseholders.
Leaseholders will need to take into account their personal circumstances as to whether they risk delaying or proceed immediately. The Government has put them in a difficult position due to the uncertainty on when these reforms will be enacted. On the assumption that it will be several years, the leaseholders with lease terms of 80 years or less would be sensible to move now whilst the value of their property falls. For leaseholders with more generous terms of 95 to 100 years plus remaining and investors it would be an attractive prospect to play the waiting game for these reforms to arrive on the basis that the Government wants to rebalance the odds in favour of the leaseholder and chart a new course in leasehold ownership.
Rory Holland is an associate in the real estate team at Goodman Derrick LLP, the London law firm.