Waiting for Leasehold Reform Could Cost You Thousands
Many leaseholders are holding off extending their lease because they've heard that leasehold reform could make lease extensions cheaper.
On the face of it, that sounds sensible. Why pay now if the government is about to reduce the cost?
The reality is a little more complicated.
While some leaseholders could benefit from the proposed reforms, others could find themselves paying more by waiting. One of the biggest reasons for this is something called the deferment rate.
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Why Are Leaseholders Waiting?
The proposed leasehold reforms include plans to abolish marriage value when calculating lease extension premiums.
Marriage value can significantly increase the cost of extending a lease once it falls below 80 years. As a result, many leaseholders with shorter leases are understandably hoping that waiting could save them money.
However, marriage value is only one part of the valuation calculation.
There are other factors that affect the premium and some of these could move in a direction that increases costs.
What Is the Deferment Rate?
The deferment rate is one of the key assumptions used when calculating the premium payable for a lease extension.
Rather than getting lost in technical valuation jargon, think of it like this.
Imagine somebody offers you £10,000 today or promises to pay you £10,000 many years in the future. Most people would choose the money today because money received now is generally worth more than money received later.
The deferment rate is the mechanism valuers use to reflect that principle when assessing the landlord's future interest in the property. The lower the deferment rate, the more valuable that future interest becomes and the more a leaseholder may need to pay to extend their lease.
Why Waiting Could Increase Costs
One of the concerns surrounding the proposed reforms is that changes to the valuation methodology could include changes to the deferment rate.
To illustrate the point, let's use a simplified example:
A lease extension premium calculated using a 5% deferment rate (which is currently standard across surveyors and valuers) might produce a premium of around £6,200.
If the deferment rate were reduced to 4%, the same lease could produce a premium closer to £12,000.
That's almost double.
The exact figures will vary from property to property, but the example highlights an important point: removing one element of the calculation doesn't automatically mean every leaseholder will pay less.
The Problem Is Uncertainty
At the time of writing, many of the finer details surrounding leasehold reform remain unresolved.
Although legislation has been passed, there are still legal challenges and consultation processes taking place before the new valuation framework can be fully implemented.
As a result, nobody can say with certainty exactly how every lease extension valuation will be affected.
For some leaseholders, waiting may prove beneficial.
For others, it may not.
Should You Extend Your Lease Now or Wait?
There isn't a one-size-fits-all answer.
The right decision depends on factors including:
The remaining term of your lease
Whether marriage value currently applies
The value of your property
Your future plans for selling or refinancing
How any future valuation changes could affect your premium
What is clear is that delaying solely because you expect reforms to reduce costs may not always be the safest strategy.
Before making a decision, it's worth obtaining advice from experienced lease extension solicitors and specialist valuers who can explain the potential risks and opportunities based on your individual circumstances.
Need Advice on Your Lease Extension?
If you're unsure whether to extend your lease now or wait for leasehold reform, we can help.
At Conveyancing Collective, we work with experienced lease extension solicitors and specialist surveyors who can provide clear, practical advice without the jargon.
Contact us to discuss your options and obtain an illustration of potential costs before deciding on your next steps.