Two examples of what leasehold reform could mean - Capital Economics
UK Housing

Two examples of what leasehold reform could mean

UK Housing Market Update
Written by Andrew Wishart

Government reform of leasehold will reduce payments from leaseholders to freehold landlords a lot in some instances. In this Update, we provide two examples of how the changes will affect “enfranchisement premia” – the cost of buying the freehold or extending the lease on a property.

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  • Government reform of leasehold will reduce payments from leaseholders to freehold landlords a lot in some instances. In this Update, we provide two examples of how the changes will affect “enfranchisement premia” the cost of buying the freehold or extending the lease on a property.
  • The government made four announcements on leasehold reform on Thursday. First, lease extensions will be lengthened to 990 years from 50 years on a house and 90 years on a flat at present. Second, following lease extensions ground rent will be reduced to zero. Third, the remaining ground rent that the leaseholder has to “buy out” will be capped. And fourth, the “marriage value” that the leaseholder currently pays half of when buying the freehold of their house will be abolished.
  • Our first example shows that the reforms will make the biggest difference to enfranchisement premia when ground rents are “onerous”. The ground rent on most leasehold flats is zero or a “peppercorn” token payment. But a small proportion have ground rent that doubles periodically to high levels.
  • Consider a £250,000 flat on a 250-year lease where the ground rent starts at £100 a year and doubles every decade in the first 50 years of the lease, reaching £3,200. The blue line on Chart 1 shows the cost of a 990-year lease extension under current rules. With 125 years on the lease, the extension would cost £54,000.
  • Ground rent of more than 0.1% of the value of a flat or house is widely recognised to be “onerous”. So the government could choose to set the cap on ground rent at that level, £250 per annum in our example, for the calculation of the enfranchisement premium. The black line on Chart 1 shows the enfranchisement premium were the ground rent capped at that level. With 125 years on the lease, the cost of the extension would be reduced to £4,920.
  • Our second example shows that the abolition of the marriage value would also lead to a substantial reduction in enfranchisement premia when purchasing the freehold. Traditionally houses are sold on a freehold basis. But developers have increasingly sold newbuilds on a leasehold basis.
  • Take the example of a £250,000 house with a ground rent of £100. The cost of buying the freehold still increases over time due to the right of the freeholder to take back the house at the end of the lease. An additional payment of half the marriage value, which reflects the benefit of holding the leasehold and freehold together, is also due when the lease has less than 80 years to expiry. The abolition of the marriage value will decrease the cost of buying the freehold of a house with under 80 years left on the lease substantially, in this case by up to £30,000. (See Chart 2.)
  • Details of the exact reforms that the government is planning are yet to be confirmed. But these examples based on the Law Commission’s calculations and the government’s announcement show that the changes could be very important. Leaseholders are set to benefit at freeholders’ expense, with the biggest impact on leases where ground rents are very high and with less than 80 years before expiry.

Chart 1: Cost of Extending the Lease of a Flat Valued at £250,000 with Onerous Ground Rent (£)

Chart 2: Cost of Buying the Freehold of a House Valued at £250,000 (£)

Sources: Law Commission, Capital Economics

Sources: Law Commission, Capital Economics


Andrew Wishart, Property Economist, +44 (0)7427 682 411, andrew.wishart@capitaleconomics.com