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Leasehold Reforms: A Welcome Update?

Louise Drew, partner and head of building communities at Shakespeare Martineau, comments

The proposed lengthening of leases to 990 years, as well as the removal of ground rent, is undoubtedly a positive step forward for leaseholders who have felt cheated by the system in recent years. However, it is not such welcome news for landlords, with lease extension payments and ground rents acting as a form of compensation when their unencumbered freehold land is not returned when expected. Although the current system is outdated in some respects, forcing freeholders to lose out on compensation, when a lease extension is granted, is not necessarily the change it needs.

Leasehold was initially created in 1925 as a way for landowners to make money off land that they were not using. Piece by piece, the land would be leased out to those who needed it. Ultimately, the landowner would take back the land at the end of the lease term, allowing them to lease it out again to another tenant.

Nowadays, being a freeholder isn’t just for the landed gentry, but the core structure remains. The freeholder owns the land, leasing out the properties on it to those looking for a home. The common example of this is with blocks of flats. Leaseholders enter into a contractual relationship with the freeholder, who operates, manages and maintains the building. Each leaseholder contributes a service charge, as well as a ground rent, to pay for these services. The original intention was that once the lease term expired, the property is returned to the freeholder, and the cycle starts again.

However, in recent years, a number of issues have arisen surrounding the leasehold system. Whilst the usual starting lease term has increased from 99 years to 125 years, this is still a relatively short period. Once the lease has 80 years or less remaining, high street lenders often become unwilling to lend. This leads to the need to extend the lease in order for the leaseholder to secure a mortgage. A statutory valuation is carried out to assess the ‘marriage value’ payable to the landlord, which acts as a form of compensation to the freeholder because they will not receive the asset back to sell again. Leaseholders often end up paying a considerable amount of money to extend the lease, and for those with less communicative landlords, this can come as a nasty shock.

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