Leaseholders frequently ask whether they should extend their lease now or wait until the Leasehold and Freehold Reform Act 2024 and the soon to be published Commonhold and Leasehold Reform Bill are finalised. However, from the point of view of a leaseholder with a shortening lease, there is no straightforward answer.

The Leasehold and Freehold Reform Act will remove marriage value, cap the treatment of ground rent in the valuation calculation and provide 990-year extensions at a peppercorn ground rent. But the key deferment and capitalisation rates are still being consulted on.

Under the current system, marriage value becomes payable when a lease has 80 years or fewer remaining. The Act intends to remove this, which creates an understandable incentive for some leaseholders below 80 years to wait. But lease length alone does not determine the answer. For a lease with perhaps 30 to 80 years remaining, marriage value can be a substantial part of the current premium, depending on the property value and ground rent.

I can see why many owners in this group may wait for greater clarity as they potentially stand to benefit from the abolition of marriage value, the new treatment of ground rent and changes to process costs. The difficulty is that nobody yet knows where the prescribed valuation rates will land or exactly when the new regime will take effect.

Price

The price of extending a lease depends partly on assumptions about how much the freeholder’s future interest in the property is worth today. One of those assumptions is the deferment rate. The current rate for flats is 5%, but the government has yet to set the new rate. Even a relatively small change could significantly alter the valuation - meaning that waiting for the new system could make an extension cheaper or more expensive.

Government modelling illustrates that, for a £250,000 flat with 80 years remaining, changing the deferment rate from 5% to 4% increases the reversion element of the valuation from £5,044 to £10,846. At 6%, it falls to £2,363.

With 10 to 30 years remaining, the calculation looks different as the freeholder’s reversionary interest becomes increasingly important as vacant possession is much closer in time. The shorter the lease, the more significant the value of the flat reverting to the freeholder becomes when calculating the lease-extension premium.

Cautious

In those cases, I would be cautious about assuming that waiting must produce a better outcome simply because marriage value is due to disappear. Under the existing regime, the deferment rate is known. Under the future regime, it is not. There may therefore be value in certainty, particularly when a borrower needs to sell, refinance or resolve the lease position within a defined timescale.

The same consideration can apply above 80 years. Marriage value is not currently payable above that threshold so for an owner with, say, 82 or 85 years remaining, extending now can remove the risk of falling below 80 years while the implementation timetable remains uncertain. The statutory extension currently adds 90 years to a flat lease. That may be less generous than the Act’s future 990 years, but a resulting term of 170 years or more is already a very long lease in valuation terms.

Borrower

A borrower with a lease in the 30 to 80-year range may have a rational financial reason to wait. A borrower with a very short lease may face a narrower mortgage market before the reforms arrive. Someone planning to sell or remortgage soon may place greater value on certainty than someone with no transaction in prospect.

The key point is that ‘wait for reform’ should not become default advice. Nor should owners rush into an extension because the future system is uncertain.

Vanessa Griffiths is a member of the Association of Leasehold Enfranchisement Practitioners and partner, Leasehold Reform & Litigation at Knight Frank

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