Should You Extend Your Lease Now or Wait for Reform? Why Some Leaseholders Could Pay Double

It Depends on Your Lease

Whether you should extend now or wait for the reforms depends on your lease, and I know that isn’t the answer most people want. Anyone who gives you a blanket answer without understanding your property, your lease and your situation is either guessing or trying to sell you something. For some people extending now is close to a guaranteed good decision, and for others waiting could leave them better off. The difference comes down to how many years are left on your lease, what your ground rent is, and how much your property is worth.

Why Reform Has Winners and Losers

A lease is a contract between the person who owns the land and the person who owns the flat, and the right to the peaceful enjoyment of your property is a human right. The government can force you to sell your house to make way for a motorway, but it has to compensate you. Leasehold reform is a zero-sum game, because every £1 taken from the freeholder is £1 given to the leaseholder, and the better the government makes things for leaseholders, the harder freeholders will argue their rights have been breached. That is why reform has historically made things 5% to 10% better every 20 or 30 years, and why the way the law is drafted will create winners and losers.

Years Left on Your Lease

The 80-year cliff

With 80 years or less remaining, you pay an extra amount called marriage value when you extend. A knife and a fork might be worth £2 separately and £5 together as a set of cutlery, and the freehold and leasehold work the same way when they are joined back together. The 80-year point itself is arbitrary.

A flat worth £300,000 with no lease issues might be worth £260,000 with 75 years left. Under current rules you split that £40,000 with your landlord, so £20,000 comes out of your pocket on top of the rest of the premium. One day between 80 and 79 years can cost you tens of thousands of pounds, and nobody warns you it is coming. Almost everyone I speak to who has crossed that line says they wish someone had told them, because they would have found a way to extend in time.

What the reforms could change

The government’s own impact assessment estimates that removing marriage value would cost freeholders about £1.9 billion over 10 years, and freeholders argue it is significantly more. Taking that away with nothing in return would be a strong case for a human rights breach, so the government needs to give something back, and its main lever is the deferment rate, which affects what you pay for each extra year on the lease. It is currently 5%, set by a landmark case. A lower rate means you pay more, and a 0.1% shift moves nearly £1 billion between leaseholders and freeholders.

Nobody knows where the rate will land, so treat these as estimates. For a £400,000 property:

At 81 years you could pay more than double what you would pay today. At 79 years you could pay less, because marriage value would no longer apply.

Your Ground Rent

When you extend, you also pay the freeholder to give up your ground rent. With £100 a year and 80 years left they expect £8,000 over the term, but you get a discount for paying up front, set by the capitalisation rate.

The reforms have discussed capping ground rents at something like 0.1% of the property value or £250, partly because some are horrendous. I have seen 500-year leases where the rent doubles every 5 years, which would add up to around half a billion pounds by the end. A cap could limit what you pay each year without limiting what you pay to buy the rent out, and to compensate freeholders the government could also reduce the capitalisation discount. Someone with a few hundred pounds of ground rent might then pay more to get rid of it than they would today, whilst people with the most onerous terms would be significantly better off. Our guide to ground rent reforms has more detail.

Across the tens of thousands of leases we have analysed, about 10% have ground rent above 0.1% of the property value and about 5% are above 0.2%. On a £500,000 flat that is £500 or £1,000 a year, which is not nothing, but it is not £10,000 either. For most people this part of the reforms would make little difference either way.

If your ground rent is above 0.1% of your property value, or it escalates in an onerous way, waiting might make sense for you. Check whether it is fixed, whether it changes over time and how often.

Property Value and Legal Costs

At the moment you pay your freeholder’s reasonable legal costs. In our experience these land between £2,000 and £4,000, but they have been rising, and we are now seeing a few cases at around £5,000. Under the reforms leaseholders would no longer pay them, with exceptions such as withdrawing from the process or a premium lower than the costs. Across our clients, these savings get lost in the wash next to the deferment and capitalisation rate changes. A politician could say they have saved leaseholders millions in legal costs, which would be technically true, whilst freeholders could recover more through those rates.

Waiting Has Its Own Cost

A lease is like a sand timer. Every day another grain drops, your property becomes less valuable and harder to sell or remortgage, and the sand falls faster as the lease gets shorter. Waiting means betting on whether the reforms pass, when, and at what rate.

When Michael Gove was talking about abolishing leasehold, a client of ours had 80 and a bit years left. They decided to trust him and wait, fell below 80 years, and their premium went up by £20,000 overnight. They could afford the premium at the time but cannot afford the extra £20,000, so now they are stuck. If you are near the 80-year mark, there is almost no scenario where waiting is worth the gamble.

What about 990-year leases?

The reforms mention extending by 990 years instead of 90, which is largely academic. Once a lease reaches 150 years, each extra year adds pounds or tens of pounds in value. From our analysis of transactions, above about 100 years there is no impact on mortgageability unless the ground rent is a problem, and above 120 years no real impact on saleability. Extend an 80-year lease by 90 years and you are at 170, and if the 990-year option does arrive you could extend again for less because you have already extended. What it would do is stop extensions being a recurring problem.

Where the Reforms Stand

A skeleton bill was enacted as the last act of the Conservative government, but nothing in it affecting lease extensions has come into force, apart from removing the two-year ownership rule. That change was easy because it cost neither side anything. The government has said it will consult, but it is being challenged in court over the bill and is unlikely to consult until that is settled:

• The legal challenge could take two, maybe three years.
• A consultation could take 6 to 12 months.
• Drafting the new legislation could take another 6 to 12 months, plus notice to the market.

That points to 2027, maybe 2028, at the earliest, which is a long time to put your plans on hold. Our leasehold reform guide tracks where things are.

Deciding for Yourself

I can’t tell you whether to wait, but I can give you the question I ask everyone in this position. Would you regret extending now and finding out a few years later that you could have saved a bit of money, or would you regret waiting, watching the reforms fail to arrive and paying a higher premium with your plans delayed? Whichever you choose, base it on your own numbers rather than political promises that may or may not appear.

If you would like those numbers, request your free lease report. It covers your premium, your ground rent and how it changes over time, and your likely all-in costs, and you can then book a free call with our team to talk it through. It is not a sales call and there is no obligation to go ahead.