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Leasehold reform proposals could save homeowners £1,000s

Leasehold reform proposals could save homeowners £1,000s

Millions of homeowners looking to extend their lease or purchase their freehold could save £1,000s under new proposals published by the Law Commission, though any changes are likely to be a long way off.

The independent legal body has outlined a number of ideas around lease extension and freehold purchase which it believes could cut the overall cost for leaseholders, as well as simplify the two processes.

Onerous leases, such as those with doubling ground rent clauses attached, have been a source of increasing controversy in recent years. The Law Commission's proposals, published on Thursday, form part of the Government's push to reform the leasehold sector and help free homeowners trapped with punitive leases.

Are you a leaseholder? Read our guides on extending your lease and purchasing your freehold.

Why do I need to extend my lease or buy my freehold?

If you own a leasehold property you have the right to either extend your lease or purchase your property's freehold (or a share of it). Traditionally, it was only flats that were sold as leasehold, but it's applied to more and more houses in recent years.

Extending your lease becomes necessary as it approaches 80 years in length. Under this length you become liable to pay 'marriage value' on top of the costs of the lease extension, and your property can also become much harder to sell. However, extending a lease can take a long time and cost £1,000s as you need to pay the freeholder, and will need legal advice too.

Likewise, purchasing a property's freehold has become more necessary in recent years because of the increasing numbers of properties sold with clauses in them that means the ground rent doubles over a certain period, often 10 years. Increasing ground rent has affected leaseholders' ability to remortgage or sell their property.

Purchasing a property's freehold is one way of doing away with a ground rent clause. However, the process can take months, and, as the price is not defined, it can end up costing homeowners £10,000s.

Leaseholders may also choose to buy their freehold if the freeholder doesn't maintain the building well, or charges exorbitant service charges to do so.

How might the new proposals help leaseholders?

The purpose of the Law Commission's proposals is to simplify the process and cut the overall cost for people extending leases or buying their freehold.

The proposed schemes involved removing marriage value and a similar premium called 'hope value' (which is relevant where the freeholder sells the freehold to a third party – not the leaseholders) from the cost of purchasing a freehold. Both marriage value and hope value are added to leaseholders' costs because of the potential gain they could get from purchasing their freehold. For example, not having to pay future ground rent, or added property value when you come to sell.

According to the Law Commission, these proposals could wipe around £6,000 from the cost of purchasing a freehold.

It gave the example of a £250,000 property, with a 76-year lease, paying ground rent of £50 a year, rising to £200. Under current legislation, purchase of a freehold would cost the homeowner around £16,453, but eliminating marriage value could bring the cost down to £9,155, while doing away with hope value would knock the price down to £10,615 (you'd pay one or the other, never both).

I need to extend my lease soon – when is this happening?

Sadly for leaseholders, the Law Commission's proposals are only that for now. It's now down to the Government to consider the proposals, but there's no timescale as to when this might take place.

If your lease extension or freehold purchase is urgent, you'll need to use the current system. This is a complicated area and you'll need legal advice. See our lease extension guide and freehold purchase guide for more information about what you need to do and how much it could cost.