Lease extension solicitors comment on Premiums calculations in light of proposed leasehold reform

Specialist lease extension solicitors at Holmes & Hills comment on what the recent Government press release regarding potential leasehold reforms might mean for lease extension Premiums. A summary of the Government's press release of 7th January 2021 can be read at 'Lease extension solicitors summarise Government leasehold reform announcement'.

Lease extension Premiums for those with a lease currently above 80 years

These leaseholders appear to stand to benefit to a lesser degree in respect of lease extension Premiums than those whose leases are already below the 80 year mark, or those whose leases would fall below the 80 year mark before any new legislation is introduced. 

This is due to the fact that one of the proposed changes relates to the removal of ‘Marriage Value’ in order to make extending a lease cheaper. However, leaseholders with a lease that has at least 80 years remaining at the point it is extended do not pay ‘Marriage Value’ under existing legislation. This is therefore not a new or added benefit for this group of leaseholders.

Leaseholders with leases that have more than 80 years remaining may benefit from the Government’s proposal to stipulate a new calculation which will determine the Premium payable. However, it is not known what this calculation will be or how it will differ to current calculations. In a worst case scenario, if changes are made to rates of Deferment or Capitalisation, it may be that Premiums where ‘Marriage Value’ would not have been payable under current legislation may be higher. This could potentially negatively impact leaseholders with more than 80 years remaining. In addition, aspects of the calculation of the Premium mean that extending a lease is more costly the longer leaseholders delay doing this. Delaying extending your lease may therefore reduce the saving potentially made by a positive reform in the calculation of the Premium. 

Unfortunately, there is currently not enough detail to be able to say that Premiums will be cheaper for ALL leaseholders following the introduction of new legislation. 

Lease extension Premiums for those with a lease currently below 80 years

These leaseholders appear to stand to benefit to a greater degree in respect of Premiums. This is due to the Government proposing to remove the requirement to include ‘Marriage Value’ in the calculation of the Premium where a lease has less than 80 years remaining on the term. ‘Marriage Value’ is often a considerable proportion of the Premium to be paid when extending a lease that has less than 80 years remaining.  

Leaseholders that have had a lease extension valuation report provided by a surveyor will know what proportion of the Premium that would currently be payable is made up of the ‘Marriage Value’. They will therefore understand how much they might save if new legislation is introduced as suggested by the Government. 

Leaseholders with less than 80 years remaining on their lease, who wish to understand how much they might save on their Premium if new legislation is introduced as suggested, can obtain a lease extension valuation report to assist them in their decision making. A specialist surveyor would provide such a report for a fee of approximately £500 - £600 +VAT.

The removal of ‘Marriage Value’ from Premium calculations is likely to receive considerable resistance from freeholders and freehold investors. There will likely be legal challenges. 

In a worst case scenario, if the legislation does not come into force as proposed and ‘Marriage Value’ is not removed, or not removed in full, leaseholders may not save the full amount. In addition it may be that other aspects of the calculation of the Premium are more expensive - aspects of the Premium calculation become more expensive with each year that passes without the lease having been extended. Delaying extending your lease may therefore reduce the saving potentially made by a positive reform in the calculation of the Premium.