Leasehold law changes: how will the property market react?
The government has proposed the reform of leasehold laws, with new rules possibly arriving within two years. We analyse whether the prospect of the new rules will have an impact on the property market from today.
What are the key proposals?
There are three major proposed changes, further details of which are on the government website.
First, ground rents for new leases would be reduced to zero, which will effectively abolish the system. This will allow leaseholders to buy a freehold more cheaply. The cost of buying a freehold for long leases is normally a multiple of the ground rent.
It also removes the prospect of escalating clauses in leases tied to the value of the property, which can lead to ground rents doubling or tripling over time.
Leaseholders will also be given the right to extend their lease by a maximum of 990 years at zero ground rent, up from 90 years for flats and 50 years for houses.
It would affect all future leases and leave current arrangements unchanged.
Second, the right to charge a so-called “marriage value” when buying a freehold property would end. The “marriage value”, which applies to properties where the lease has less than 80 years to run, is charged on the basis that holding the leasehold and freehold together is more valuable.
It would be positive news for owners of flats on shorter leases, primarily in central London, as buying the freehold would become cheaper and more straightforward. It would have a negative impact on large landowners, who would lose this part of their income.
Third, under the proposed changes, development rights would also be placed in the hands of the leaseholder. Currently, if leaseholders wish to buy the freehold of their block and the freeholder either has planning permission to add extra floors, or gets permission via Permitted Development Rights, the leaseholder has to ‘buy’ those rights. In effect, pay for the loss of profit the freeholder would make. The proposal is that leaseholders can either block the freeholders plans or, if they wish to develop, do so themselves, provided that they compensate the freeholder at the time.
How could the proposals affect behaviour in the property market ahead of their implementation?
“Although the government appears serious about passing the legislation, an element of uncertainty remains about the devil in the detail because the changes could be two years away,” said Jeremy Dharmasena, head of leasehold reform and litigation at Knight Frank.
“However, today’s news will give tenants more encouragement that the law will change, which could have a more immediate impact on conversations and negotiations.”
Stuart Bailey, head of prime sales in London at Knight Frank, agrees. “If I was a buyer in prime central London today
I’d be more open-minded about seeing properties with shorter leases.”
Others may want to see how the situation plays out, said Jeremy. “How you act will also depend on what you think will happen to prices. Some buyers and leaseholders may wait in the belief that buying a freehold will become cheaper, but strong price growth over the next few years would lessen any financial benefit.”
Any simplification of the buying process in prime central London would be good news for buyers, said Alastair Nicholson at Knight Frank’s Knightsbridge office.
“More clarity and simplicity will lead to more liquidity. Buying a prime central London property with a sub-100 year lease can be a complex process to understand, especially from overseas, and this will make it easier. It could also make it easier for banks to lend because some have tended to struggle with rising ground rents.”
Any impact from the ground rent changes for buyers of new-build properties will be limited, said Raul Cimesa, head of new homes sales at Knight Frank. “With the majority of leases in the new-build sector being over 125 years, and indeed a large proportion of those over 250 years, the impact will at present be limited. For buyers, taking the ground rent out of the calculation will improve fixed annual outgoings. In the case of investors this will improve their overall yields and for owner-occupiers it will provide a bit of an annual saving.”
“Developers haven’t included ground rents in land value calculations for two or three years so it will have no impact on land values,” added James Barton, a partner in Knight Frank’s City & East team.
“The rule changes would ultimately mean a cut in the supply of new ground rents, which could result in ground rent yields tightening slightly,” said Guy Stebbings, from Knight Frank’s residential capital markets team.
“However, the wave of institutional capital investing in the private rented sector will be unaffected as they grant assured shorthold tenancies rather than long leaseholds with ground rents.”