Property transactions are filled with an array of jargon. Understanding some of it is essential before buying or selling a home. This is particularly relevant for first-time buyers who may not have a comprehensive understanding of all the terminology. Leasehold and freehold are words commonly referenced in property, and both parties should have a clear understanding of them, especially after the creation of the Leasehold & Freehold Reform Act 2024.
A leasehold is where a property is owned for a specific number of years, rather than permanently. A landlord owns the building or the land it sits on, with those living in the property paying them a ground rent. In most cases, flats are leasehold and houses are freehold, although houses can also be leasehold properties. A freehold is where the property and land are owned by the same person or management company.
The introduction of the Leasehold & Freehold Reform Act 2024 is seen as a way to provide leaseholders with more protection, potentially cheaper lease renewals and hopefully a smoother route to sale.
What is a leaseholder?
A leaseholder is the person who owns a property for a specific time, but not the land it sits on. In many cases, leases are granted for anything from 99 to 999 years. This still means you own the property when you secure a mortgage on it, but the freeholder owns the land. Because you don’t own the land, you will be obligated to pay a fee to the freeholder for the upkeep of communal areas or for using their land.
These fees are known as ground rent and service charges.
What is ground rent?
Ground rent is an annual fee paid to the freeholder by the leaseholder. Think of it as a fee for occupying the land that the home sits on. From June 30th 2022, ground rent was banned on all new leases and set at a peppercorn rate (Normally £0-£1). For leases created before that date, ground rent would still apply, but upon lease extension, ground rent reduces to peppercorn rates.
What are service charges?
Think of service charges as the costs paid to the freeholder to cover maintenance and upkeep of communal areas. In a block of flats, for example, this could be stairways, shared gardens and lifts. What is covered varies per development. If you are buying a leasehold property, it is always worth checking what the service charges are and what they cover before making an offer.
Is it harder to sell a leasehold property?
It can be. This is because buyers may be perturbed by ground rents or service charges that might apply to the property you are trying to sell. Furthermore, renewing a lease can be costly and gets more expensive the shorter the lease is. On the other hand, a shorter lease can decrease the property value, making it more appealing to buyers. However, lenders aren’t always too keen to lend against a property with a significantly short lease.
The removal of the two-year ownership rule
Previously, a leaseholder had to own their property for at least two years before they were legally entitled to extend their lease or purchase the freehold. This would often cause problems for those trying to sell, especially when the lease was short. Buyers would either have to wait two years before taking action or rely on the seller to start the process themselves. The Leasehold & Freehold Reform Act 2024 removes this two-year ownership requirement, and once the relevant parts of the legislation are in place, a buyer can extend the lease or buy the freehold immediately after purchasing the property. This should help streamline the sales process as buyers will have more confidence in the purchase, as they can deal with lease renewals immediately and not be bound by a two-year wait. It also makes things much easier for the seller as they can refrain from extending the lease on a home they won’t be living in.
For many leaseholders, the Leasehold Reform Act 2024 – which was passed by Parliament and received Royal Assent in May 2024 – means that selling will be much easier, as extending a lease won’t be hindered by quite as much red tape as it was before. This presents new opportunities for a property to sell much quicker and much easier than in the past. However, even though the law has passed, full implementation may still be a few years off. This means that some homeowners may wish to extend their lease now to avoid the implications of “marriage value” that kick in once a lease falls below the 80-year mark.
What will the Leaseholder & Freeholder Reform Act 2024 mean if I am a leaseholder?
The law should provide leaseholders with a greater degree of protection, lower costs, and make the process of selling a house easier, thanks to improved transparency, capped fees and more predictable lease extensions.
Once all aspects of the law have been fully implemented, leaseholders will be able to:
- Extend their lease or buy the freehold for much less than before in many cases. (Some leaseholders may pay more if they have long leases and low ground rents)
- Increase the lease of their house or flat to 990 years rather than the more common 50 years for houses or 90 years for flats.
- Have ground rents reduced to zero on statutory lease extensions.
- Have a much clearer understanding of the service charges that apply to their property.
- Have a more refined and cost-effective process for taking over the management of the building.
- Make the process of buying or selling a leasehold property quicker and easier by setting maximum timeframes and fees for buying & selling information.
- Exercise enfranchisement rights at less cost.
- Challenge how reasonable service charges are and receive more information on them.
It is expected that full implementation will not be possible until sometime this year (2026) or beyond. The entire process must go through several stages, and may take several years depending on secondary legislation and legal challenges.
Sellers should also remain aware that service charges, remaining lease length and management quality all impact the speed of a sale. So whilst a faster sale is hoped for, it is not guaranteed.
If I am a leaseholder, should I extend my lease or wait
If you are a leaseholder looking to sell, it’s important to consider how long is left on your lease. In addition you’ll need to think about how long it may take for the law to be fully implemented. According to the Home Owners Association, the following guidance should be given some thought:
- Lease has 80-82 years remaining: Perhaps best to extend as reforms are unlikely to be in place before the lease falls below the 80-year point where marriage value becomes an issue.
- Lease has more than 82 years remaining: The reforms will make renewing cheaper, but as they may be some way off, you may want to renew now to make your property more appealing. If the lease is significantly more than 80 years, you could leave renewing the lease or renew it once the reforms pass.
- You have a ground rent of more than 0.1% of your property value: Consider waiting. It may be cheaper if the 0.1% cap is introduced as proposed and applies to your property.
- Lease is below 80 years: Wait to renew the lease until reforms are passed, as marriage value will be abolished. It isn’t yet, which means you will lose out.
Will it cost less to renew my lease with the Leasehold & Freehold Reform Act 2024?
It should do. With marriage value being abolished and caps on ground rents, properties with leases of less than 80 years should be cheaper to renew. However, properties with longer leases or those with low ground rents may be more expensive to renew than before.
What is marriage value?
You may have seen us reference this a few times. Marriage Value is calculated as the increase in a property’s value after a lease extension. If you extend a lease that is under 80 years old, you’ll be expected to pay half the marriage value as part of the cost to extend your lease. With the new legislation, this potentially large sum won’t be required, meaning you can extend the lease and sell the property without being significantly out of pocket.
If you live in a leasehold property, you may benefit from these changes, but with them potentially being some years away, selling your house in Epsom now might be a better option. With impartial advice and a wide understanding of the Epsom property market, we help you navigate the complexities of property and make the sale and purchase of property easy and stress-free. Contact our team today to find out more.