Editor's note: This brief was summarised by The Property AI Newsroom from a report by Mortgage Solutions. Read the original article for full details.

Short-Lease Extension Decisions Unclear Amid Leasehold Reform Changes

Leaseholders with short leases are facing uncertainty over whether to extend now or wait for new legislation, as key valuation rates under leasehold reform remain undecided. The Leasehold and Freehold Reform Act 2024 and the forthcoming Commonhold and Leasehold Reform Bill are expected to significantly change the economics of statutory lease extensions, but the timing and details are not yet finalised.

The government is currently consulting on the valuation rates that will apply to leasehold enfranchisement. The Leasehold and Freehold Reform Act will remove marriage value, cap the treatment of ground rent in valuation calculations, and provide 990-year extensions at a peppercorn ground rent. However, the key deferment and capitalisation rates are still under review.

For mortgage lenders, lease length can affect both marketability and mortgageability, impacting the quality of their security. Leaseholders with leases below 80 years currently face marriage value charges, but the new legislation intends to remove this requirement. This creates an incentive for some leaseholders to wait for the reforms, especially those with leases between 30 and 80 years, as marriage value can be a substantial part of the current premium.

However, the final valuation rates and the exact date when the new regime will take effect remain unknown. Illustrative government modelling shows that changes in the deferment rate can significantly affect the reversion element of lease extension valuations. For example, for a £250,000 flat with 80 years remaining, a change in the deferment rate from 5% to 4% increases the reversion element from £5,044 to £10,846, while a 6% rate reduces it to £2,363. These figures are illustrative and do not represent the total premium.

For very short leases, typically with 10 to 30 years remaining, the calculation differs as the freeholder’s reversionary interest becomes more significant. In these cases, waiting for reform may not necessarily produce a better outcome, as the current regime offers certainty in deferment rates, which may be valuable for those needing to sell, refinance, or resolve lease issues within a set timeframe.

Leaseholders with leases just above 80 years may also consider extending now to avoid the risk of falling below the threshold, as marriage value is not currently payable above 80 years.