Changes to the Leasehold Law: How you’re affected as a property investor?

With three significant proposed changes in leasehold law, you must understand precisely what they are and how they can affect you. Property investors need an in-depth analysis of these changes to know exactly how their finances will fare in the future.

The government has announced some major changes in leasehold law to support the 4.5 million leaseholders who feel like the current system isn’t fair. It is some of the biggest reforms in English property law in the last forty years. As a property developer or investor, you must precisely understand these changes and how they will affect your property portfolio. 

The government has vowed to end complex leasehold costs. The first change is to remove ground rent costs for new leases. This effectively abolishes the system, allowing leaseholders to buy a freehold at a cheaper cost. It also prevents escalating clauses in leases tied to the property’s value, which often leads to ground rents doubling or more over time. Finally, for this first change, leaseholders will also be allowed to extend their lease by a maximum of 990 years at zero ground rent. This is up from 90 years for flats and 50 years for houses.

The second major change announced is that the ‘marriage value’ when buying a freehold property will end. The ‘marriage value’ applies to properties where the lease has less than 80 years to run and is charged on the basis that holding the leasehold and freehold together is more valuable.

So how does this impact you as a property developer or investor? Well, it’s good news for owners of flats on shorter leases as buying the freehold would become cheaper and more straightforward. However, larger landowners will lose this part of their income.

The third and final proposed change is that development rights would also be placed in the leaseholder’s hands. At the moment, if leaseholders wish to buy the freehold of their block and the freeholder has planning permission for extras such as additional floors, then the leaseholder has to ‘buy’ these rights from them as well. They are essentially paying for the loss of profit the freeholder would make. However, this third proposal means leaseholders can now block the freeholder’s plans or develop if they wish as long as they compensate the freeholder.

Something to consider as a property developer or investor is that while the government is serious about passing this legislation, these changes could still be around two years away. And, while this news will give tenants more hope for a fairer future, it can cause investors to look at purchasing property to rent with a new perspective. Stuard Bailey, head of prime sales in London at Knight Frank said, “if I was a buyer in prime central London today I’d be more open-minded about seeing properties with shorter leases.”

However, Alastair Nicholson at Knight Frank’s Knightbridge office suggests that any simplification of the buying process in prime central London is good news for all buyers. He states “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.” This could mean good news for overseas and new property investors looking to get on the property ladder in 2021.

Raul Cimesa, also of Knight Frank, also points out that “for buyers, taking the ground rent out of the calculation will improve 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.”

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