Major reform for leaseholds – do you still need to worry about short leases?
- TBA
- Jan 31
- 3 min read
Updated: Mar 13
If you’re looking to buy older apartments in the UK but are hesitant due to concerns over leasehold terms potentially affecting property value, here’s some good news for property buyers.
On 21 November the UK Minister for Housing and Planning, Matthew Pennycook, announced that the government plans to implement the Leasehold and Freehold Reform Act 2024, starting in January 2025.
The first change will eliminate the ‘two-year rule’ for extending lease terms. This is welcome news for first-time buyers and investors interested in UK apartments. Let’s delve into the details.
What is Leasehold Property?
In the UK, many apartments are sold under a leasehold arrangement—a form of ownership where you have the right to occupy and use the property for a set lease period.
Newly built apartments typically come with long leases, ranging from 125 years to 999 years. However, such properties often have a premium price tag. For first-time buyers, second-hand apartments may be a more affordable option. Similarly, investors might find better returns in lower-priced older apartments.
However, lease terms are diminishing assets. If you’re considering buying a second-hand apartment, you may encounter properties with short remaining lease terms, sometimes under 99 years. When the lease term drops below 80 years, the property’s value can significantly decrease.
Additionally, leases under 85 years can make refinancing difficult, as many lenders require a lease to have at least 85 years remaining. Short leases may also deter potential buyers. In such cases, extending the lease is often the solution.
What is a Lease Extension?
A lease extension involves increasing the remaining lease term on a property. UK law allows eligible leaseholders to extend their leases by a statutory period while paying a premium to the freeholder (landlord).
Current Eligibility Criteria for Statutory Lease Extensions:
The property must be a flat.
The original lease term must have been longer than 21 years.
For shared ownership leases, 100% ownership must have been achieved.
The leaseholder must have owned the property for at least two years.
Key Terms of Statutory Lease Extensions:
An additional 90 years is added to the existing lease term.
Ground rent is reduced to a peppercorn (typically £0 or £1).
Minor modifications or corrections may be included.
What’s the New Policy?
Starting in January 2025, the UK government will remove the two-year ownership requirement for lease extensions or purchasing the freehold. This means leaseholders can extend their leases or buy the freehold immediately after purchasing the property.
How to Extend a Lease
The statutory lease extension process involves several steps:
Assess Eligibility: Determine whether the leaseholder qualifies for an extension.
Obtain a Premium Valuation: A surveyor estimates the premium (price) for the lease extension or freehold purchase.
Serve Notice to the Freeholder: The leaseholder sends a formal notice outlining the proposed extension terms and allows the freeholder at least two months to respond.
Freeholder’s Response Options:
Accept the extension and proposed terms.
Accept the extension but dispute the terms.
Dispute the right to extend the lease.
Negotiate Terms: Resolve any disagreements over the terms.
Document the Agreement: Record the agreed terms in a formal lease extension document.
Complete and Register: Finalize the lease extension and register it with the Land Registry.
If terms cannot be agreed upon within six months, either party can apply to a tribunal for resolution.
Costs of Lease Extensions
Leaseholders are responsible for several costs during the process, including:
The premium for extending the lease.
Stamp Duty Land Tax (SDLT) if the premium exceeds £40,000.
The freeholder’s legal and surveyor fees.
The leaseholder’s own legal and surveyor fees.
Land Registry fees.
Should You Extend Your Lease?
Extending your lease can increase property value, enhance security, and make the property more attractive to future buyers.
If your lease has less than 80 years remaining, extending it is almost always advisable.
Government reforms may also reduce extension costs or simplify the process further in 2025.
However, waiting could risk potential cost increases, so consider your financial situation and consult professionals before deciding.
Tax Considerations
Lease extensions may involve tax implications, including:
Tax on the freeholder’s premium income.
SDLT on the leaseholder’s premium (if over £40,000).
Capital Gains Tax (CGT) on leaseholder profits (for non-primary residences).
Potential income tax implications if the freeholder is a company.
Conclusion
This reform is a significant win for leaseholders, granting more flexibility to extend leases or purchase freeholds without the two-year waiting period.
However, tax and cost considerations remain complex. If you have questions, consult a tax expert for guidance.