02/08/2024
We are being constantly asked what should I do now the law has changed for Leasehold and Freehold?
Our answer has to be that the law has not yet changed but the Government says that it will, and we can always believe politicians.
One of the major changes for lessees is the removal of marriage value and an example of the likely saving would be:
A flat with a long lease value of £500,000, originally a 99-year term but now with an unexpired term of 70 years and a ground rent of £100 increasing in increments of £50 at 33-year intervals thus the present ground rent is £100 p.a. for the next four years when it rises to £150 p.a. and then to £200 p.a. after a further 33 years.
Under the law as it is at present a lease extension for this property should cost £46,112 but if the new legislation takes effect the removal of marriage value should reduce this to £19,800.
There is, however, one big question mark. The legislation gives the Government the power to set deferment and yield rates which until now have been determined by market forces and case law and the deferment rate is the one which could have a serious effect. It is the rate at which the landlord’s reversion is discounted, the reversion being the right to possession of the property at the end of the term. For some years the Tribunal has determined the appropriate rate for flats to be 5%, following the Sportelli case, with very few exceptions, but there has been in recent years pressure for the rate to be reduced, the argument being where can you safely invest long term with a guaranteed return of 5% when bank bonds etc pay 4% at most? The recent rate change by the Bank of England reinforces this argument. The lower the rate the higher the present value of the reversion, e.g. at 5% the reversion in the above example has a present value of £16,600 but at 4% it is £32,436, nearly double.
Should along with abolishing marriage value to legislation fix the deferment rate at 4% the lease extension in this example will cost £34,187, still less than the present cost but the precise saving will vary according to lease length, value etc. and should the unexpired term be greater than 80 years there is, under present law, no marriage value payable therefore the cost can only go up and I can see no benefit in waiting.
There is also the question of costs. The law currently provides that the lessee must pay the landlord’s legal and valuation costs but it is proposed in the new legislation that each party shall bear its own costs except in cases where the premium payable is less than the landlord’s total costs which will normally only be in cases where the lease is very long and no marriage value would be payable.
It seems, therefore, that lessees with an unexpired term of a little more than eighty years should not delay as the changes will be of little or no benefit to them and if there is any further delay in their introduction, or the Government decides not to proceed with them after all it could create major problems as marriage value might still be payable.
We have also been asked about the changes to the rights of lessees to collective enfranchisement in mixed use buildings. At present the lessees have no right if the commercial element is more than 25% of the building but the proposed legislation will change that to 50% but it has not happened yet. If and when this does happen we will contact existing clients who have expressed an interest in the past and are lessees of such buildings and set the process in motion should they so wish.
