The potential financial implications of leasehold reform in England and Wales

The report Leasehold Reform Proposals in England and Wales: The unconsidered financial implications of reducing the premium in lease extensions has been produced for the UK Collaborative Centre for Housing Evidence to analyse the implications of the UK government's plans to make leasehold extensions easier, fairer, and cheaper.

In England and Wales, the current legal forms of owning a residential dwelling are the freehold, the leasehold, the share of freehold and commonhold. Most apartments are owned as a leasehold interest while the building and the land they sit on are owned separately as freehold interests. The freeholder (lessor) is responsible for maintaining the condition of the land and the building. A leasehold is a legal contact conferring the holder of this legal interest (the lessee) exclusive rights to live or rent out the dwelling for the duration of the lease. Leaseholds are finite assets sold at a discount to its freehold value. The government intends to make it easier and cheaper for lessees to renew their lease or purchase the freehold interest.

For the report, the authors analyse the potential financial implications of leasehold reform which involves changing the extended lease length and eliminating the marriage value payment beyond the distribution of a premium reduction. Lessees who extend a short lease will benefit from a premium reduction and from the increase in the extended leasehold value from a long to a very long lease. The report argues that lessees’ who do not extend also benefit from the capitalisation of the premium reduction into short leasehold prices.

Some of the outcomes would seem to run contrary to government objectives.

Large prospective financial gains to high-income homeowners and investors are unlikely to be the intended outcomes of the reforms. Furthermore, the inter-regional and intra-regional distribution of lessee types indicate that there are complex regional implications for levelling up. The reform’s potential impact of decreasing housing affordability in the ownership and private rented markets contradicts the government aim of promoting housing affordability. Finally, the potential impact of a premium reduction on short leasehold prices and the leasehold market is likely to be much larger than that considered so far.

The report Leasehold Reform Proposals in England and Wales: The unconsidered financial implications of reducing the premium in lease extensions is available for download at City Research Online.