Sarah Cowley, Partner in Coodes Solicitors’ Residential Property team, comments on proposed leasehold reform and what it could mean for anyone who wants to extend a property lease.
If you own a property on a leasehold basis, you are probably aware of the stress it can cause. In my recent article, I wrote about the issue of extending your property lease if it is nearing the end of its term.
Put simply, if you own a leasehold property you probably do not own the structure of the building, or the land on which it stands. Therefore, you have the right to occupy the property for the duration of the lease but the freeholder could claim it back when the lease runs out. While this is not such an issue if the lease still has a term of hundreds of years, it can be a real problem when the lease is down to under 80 years.
The cost of extending a lease varies enormously but it can be very expensive. The law surrounding leasehold was changed in Scotland and most other countries have much fairer systems. That is why there are now calls for leasehold reform in England and Wales.
The Mayor of London, Sadiq Khan, is calling for an overhaul of the leasehold system, which affects millions of homebuyers and property owners in the capital. The problem is not limited to London: an estimated four to five million people in England and Wales are leasehold property owners.
The Government wants to make it easier to extend a lease and led a consultation back in 2017 on tackling unfair practices in the leasehold market. It has now commissioned an inquiry from the Housing, Communities and Local Government Parliamentary Select Committee and has also tasked the Law Commission with investigating leasehold reform.
The Law Commission is now analysing the findings of its consultation paper on leasehold reform and is due to publish a report sometime this year. The review includes looking at leaseholders’ rights to purchase the freehold of their home and join other leaseholders in the collective purchase of the freehold of a block of flats. It also examines the process around extending the lease on a house or flat.
While it is not yet clear what the reforms will mean, it looks very likely that change is on its way.
Everyone who owns a leasehold residential property already has the right to extend it and buy the freehold, provided legal criteria are met, but the process can be complicated. One of the reasons for this is that the cost of a lease is a delicate, expertly-assessed balance between the value of its location and the length of time the lease has to run.
The best advice is to look at your own circumstances when deciding next steps. You may be tempted to wait for new legislation before extending your lease and it pay off for you if you do so. However, imminent reforms are not guaranteed and any delay will add to the cost of extending your lease.
If you are in this position, you will need to consider a number of factors. The potential cost of a lease extension starts at thousands of pounds, but this increases rapidly when leases are under 65 years. For each year you delay, you could end up adding an additional one per cent of the value of the property to the cost of extending.
And that is not all. Short leases are valued at less than longer ones, which can deter buyers if you want to move. If you are planning to sell your property, it might therefore make sense to get a lease extension now rather than deal with a falling valuation, which will make your property less attractive to potential buyers.
There is another difficulty with short leases: lenders don’t particularly like them. They are generally of the view that it makes the loan seem riskier, so many have strict criteria as to the length of the term they will agree. For some leaseholders, therefore, it will make sense to extend to secure their mortgage rather than wait to see what the Government intends to change.
I am quietly optimistic that change is coming, though, of course, nothing is certain. If you are one of the many people who are wondering whether to extend your lease now, or wait for reform, it is a case of balancing all the different factors to work out what is the least risky option for you.