Everything You Need to Know About Leasehold Reform

You may have heard of new leasehold reform laws, read about the leasehold and freehold reform bill on the news or want to buy a house or flat and wonder how it will affect you. In this guide, we will explain exactly what leasehold and freehold is, and what the Leasehold Reform Act 2024 means for you as a homeowner, renter or future property owner.

What Is Leasehold?

Leasehold is an old system, dating back centuries when wealthy landowners wanted to sell parts of their property, like cottages. You’ve probably seen leasehold properties near castles or villages where large estates are owned by entities like the Duchy. This system has been especially common in flats and apartments in England and Wales.

In a leasehold arrangement, a freeholder (the landowner) grants a lease to a buyer for a fee. The freeholder owns the land and building, while the buyer owns a leasehold interest, typically an apartment. If you buy a leasehold property today, you’ll either get a newly created lease or an existing one. In the past, these leases lasted 99 to 125 years.

What is Leasehold Reform?

Leasehold reform is important and is meant to improve conditions for leaseholders. Historically, leaseholds allowed wealthy landowners to sell parts of their property, like cottages on their estates, on long leases. Today, leasehold arrangements involve a freeholder, who owns the land and building, granting a lease to a leaseholder, who owns an apartment within that building. The leasehold reform is meant to keep up with modern times and new laws and ways of owning and selling property.

Why Leasehold Reform is Necessary

Leasehold arrangements can lead to complicated and sometimes unfair situations for leaseholders specifically. Issues such as ground rent, marriage value, and short leases make it challenging for leaseholders to manage and maintain their properties.

Overview of Current Leasehold Issues

When it comes to ground rent and leasehold reform, leaseholders pay ground rent to freeholders, which can increase over time.

Marriage value has also complicated things for leaseholders. Marriage value is the increased value a property gains over time. For example, if someone bought a property 30 years ago with a 99-year lease, the lease would now have 69 years remaining, making it hard to mortgage. To extend the lease, the leaseholder must negotiate with the freeholder, who can demand up to 50% of the property’s added value as a condition for the extension.

Another issue affecting leaseholders is short-term leases. Properties with short leases that are less than 80 years are currently difficult to mortgage and sell. Let’s now look at how the Leasehold Reform Act changes things.
 

Key Changes in Leasehold Reform 2024

Changes to Ground Rent in Leasehold Agreements 

The changes to the leasehold bill mean that ground rent cannot be charged on new residential long-term leases (those over 21 years), setting ground rent to zero, or a peppercorn (a peppercorn refers to what was charged centuries ago but basically means zero monetary value). While it doesn’t apply retroactively, it does cover new residential leases. The act is better for leaseholders, as freeholders will have to pay penalties if they don’t comply.

The Act also removes ground rent on informally extended leases, preventing freeholders from increasing ground rent for the remaining lease period and ensuring no ground rent is charged once the new lease term starts. This reform aims to provide better protection and clarity for leaseholders, making property ownership more straightforward and affordable.

Lease Extensions and Freehold Purchase

The new law (which is expected to be enacted soon) mandates that new leases be granted for 990 years. This means you’ll never need to ask for an extension again. Previously, short leases were hard to mortgage, but with the new law, extending leases to 990 years will be standard, eliminating the need for frequent extensions.

The Leasehold Reform Act also addresses the issue of marriage value, which is the added value to a property over time. Under the current system, freeholders can demand up to 50% of this added value when a lease is extended. The new act aims to remove this, benefiting leaseholders. If leases eventually become freehold or commonhold, leaseholders will no longer need extensions and will retain the full value of their property.

Simplifying the Leasehold Process

The Leasehold Reform Act has been made law, but it still needs to be enacted by the new government, which will most likely happen quite soon. Let’s round up what the leasehold reform bill means going ahead.

Rights on Private Estates: Homeowners will get more information about charges and can challenge their reasonableness.

Cheaper Lease Extensions: Extending or buying a lease might be less expensive, especially for leases under 80 years, due to the abolition of marriage value.

Longer Lease Extensions: New standard lease terms will be 990 years, eliminating the need for frequent extensions.

Service Charge Transparency: Standardised billing for service charges, including detailed year-end reports, will be required.

Building Management: It’s now easier for leaseholders to manage their buildings and appoint their managing agents, with increased commercial space limits.

Enfranchisement Costs: Leaseholders won’t have to cover freeholder costs when claiming enfranchisement.

Redress Schemes: All freeholders must join redress schemes, allowing leaseholders to challenge poor practices.

Buying/Selling Process: Quicker and easier transactions with set maximum times and fees.

The Impact of Leasehold Reform on Homeowners

So how will this affect you if you are a homeowner, or plan to own one?

The leasehold reform will end the rule that leaseholders have to cover their freeholders’ legal costs when challenging poor practices. This rule currently discourages leaseholders from questioning their service charges.

It will stop freeholders and managing agents from making huge, hidden commissions from the building’s insurance. Instead, they’ll have to charge fair and transparent handling fees.

It will ban the sale of new leasehold houses, so most new homes in England and Wales will be freehold right from the start, except in rare cases.

It will also remove the rule that leaseholders need to have owned their property for 2 years before they can extend their lease or buy their freehold.

Finally, leaseholders will also have a new legal right to buy out their ground rent without having to extend their lease at the same time.

What are the legal frameworks and requirements for Title Splitting?

Steps to Take for Leasehold Property Owners

First, review your lease and make sure that you understand the terms and conditions.

Then, reach out to us for Title Split training and for navigating through leasehold reforms during the Title Split process.

The Future of Leasehold and Freehold

The new changes are much needed from the old feudal system. With the new Labour Party, this may also mean that in the future, leaseholds may become freeholds, which means you will never have to ask for a lease extension again and you will own the value of the increase yourself. To find out more, please read our blog here

How Does The Leasehold Reform Act Affect My Lease?

• If your lease is under 80 years or you have a ground rent which is high now, it might be cheaper in the future. The reforms aim to help those with short leases and high ground rents by removing marriage value and capping ground rents, but this cap might not apply in all cases.
• If your lease is over 80 years or has a low ground rent, it might end up costing more. Until now, we don’t yet know for sure until the new rates are set.
• If your lease length is 80 to 82 years, it’s probably best to extend now. The reforms might not be in place before your lease drops below 80 years, which means higher costs.
• If your lease length is above 82 years, The reforms might make it cheaper, but they could also make it more expensive. If you’re well above 80 years, you could wait and see what happens.

The reform is good news for all leaseholders, and we are excited to see what the future holds – get in touch with us at Title Split to stay up to date, get advice and help manage any leasehold or freehold issues.

Unlock the Full Potential of Your Property

By working with us, you can achieve a 25-35% capital uplift and a 60% increase in cash flow, even in the current market. Ready to take the next step? Join our free 45-minute title split webinar to learn how you can maximise your property’s value through expert guidance and proven strategies. Sign up now and start your journey toward greater financial success!