2024 will always be known in the leasehold world for bringing in the Leasehold and Freehold Reform Act 2024 as the very last act of Parliament before the general election; a long awaited piece of legislation designed to improve the rights of leaseholders and clamp down on the unfairness that has become ingrained in the legal system. However the celebrations were short-lived when it become apparent that the biggest leasehold reforms (removing marriage value and capping landlords costs in the lease extension process) actually needed yet more legislation in order to take effect.
It seems that many of the changes are still quite far away from becoming a reality, and many leaseholders will need to wait for some of the bigger changes to the law that would reduce the premium payable to extend the lease of enfranchise the freehold and reduce the liability for the freeholders legal and valuation costs, which remain payable under the current rules.
Here though, we set out two leasehold reforms that will be moving forward in 2025.
Removal of the two year rule
This was something of a standalone and unexpected announcement. However it is to be welcomed by anyone buying or selling a flat with a short lease, as it will shortly be much easier for a purchaser to extend a lease after buying a flat, without needing to wait two years.
This will mean that a seller no longer has the headache of having a valuation carried out and serving a section 42 notice in between exchange and completion, along with the crucial but often overlooked problem of finding a buyer who is happy with this arrangement. In our experience at Peppercorn Law, with hundreds of lease extensions in Brighton and London, we find that many buyers simply do not want to get involved and it then becomes a race against time for the seller to complete the statutory lease extension process before losing a buyer.
If a freeholder is aware of this, they can in some cases use it as leverage to inflate the premium or hold out for onerous new lease clauses to be included in the deed of variation in exchange for agreeing to complete so that the sale is not lost. In the worst case scenario, a freeholder can claim invalidity of the section 42 notice, simply to be a nuisance and negotiate a higher premium, knowing that several parties are desperate to finalise the process in order to complete on the sale or purchase of the flat.
Consultation on valuation methodology under the Leasehold Reform, Housing and Urban Development Act 1993
The Labour Government has confirmed that it will be launching a consultation into how the various rates and components of the lease extension valuation should be changed in order to make premiums more predictable. The current valuation method is a mixture of applying the decisions made in the Property Tribunal, rather than a codified set of calculations, and this leads of lengthy negotiations whereby both the leaseholder and freeholders valuers scour databases of decided cases, to argue how a case applies to the subject flat.
It is an outdated and unnecessarily adversarial process that is ripe for sensible reform. However given that one of the parties (most likely freehold investors) will inevitably be losing money when the valuation basis changes, we expect this to be a fiercely contested area of leasehold reforms in 2025.
Within the industry, there is an expectation that a Government lease extension calculator will be created and whilst this will be welcomed by many, the details of how this could work still need to be thrashed out. For example:
What will the fixed rates be
Will there be any exceptions for very short lease properties such as those with less than 50 years
Is there a chance that fixing certain rates actually increases some premiums
How will property values be set
We can expect further legislation to set the rates applicable to lease extension valuations in perhaps late 2025 to early 2026, once the consultation has taken its course.
What next for leasehold reform?
Once the two year rule has been abolished and we have a better idea of how the Government intends to fix how lease extensions will be valued, the next big battle grounds will be:
The removal of marriage value
The removal of freeholders legal and valuation costs
990 year lease extensions to replace 90 year extensions
The creation of a new leasehold right to replace the ground rent with a peppercorn on payment of a premium, without extending the lease term
Costs shifting in the Property Tribunal, to allow for leaseholders to recover their legal costs if they win at Tribunal, much in the same way as the County Court works
Clearly there is a lot of work to be done, and the Leasehold and Freehold Reform Act 2024 was just the beginning of a process that looks set to take a number of years
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