Extend now or wait? The short-lease dilemma under leasehold reform – Griffiths

Leaseholders frequently ask whether they enfranchise now or wait until legislation (both the Leasehold and Freehold Reform Act 2024 and the soon-to-be-published Commonhold and Leasehold Reform Bill) is finalised.

When I look at the question from the point of view of a leaseholder with a shortening lease, there is no straightforward answer. The Leasehold and Freehold Reform Act (LAFRA) will change the economics of statutory lease extensions significantly once its relevant provisions come into force. It 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 in the government’s current leasehold enfranchisement valuation rates consultation.

The significance for mortgage lenders is that lease length can affect marketability and mortgageability and therefore the quality of the security. A borrower may have good reason to wait for reform, but a sale or remortgage may not wait with them.

The importance of the 80-year threshold

Under the current system, marriage value becomes payable when a lease has 80 years or fewer remaining. The LAFRA intends to remove this (more details in the Plain English explainer: Extending your lease or buying your freehold? It’s getting cheaper and easier). That creates an understandable incentive for some leaseholders with leases below 80 years to wait for.

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But lease length alone does not determine the answer; for a lease with perhaps 30-80 years remaining, marriage value can be a substantial part of the current premium, depending on the property value and ground rent. I can therefore see why many owners in this group may wait for greater clarity. 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.

Again, this is significant. The current benchmark deferment rate for flats is 5%. 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. These are illustrative figures and not the total premium, but they show how sensitive the calculation can be.

Very short leases can be different

At the shorter end of the spectrum, perhaps 10-30 years remaining, the calculation looks different. The freeholder’s reversionary interest becomes increasingly important because vacant possession is much closer in time.

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 in circumstances in which a borrower needs to sell, refinance or resolve the lease position within a defined timescale.

The same consideration can apply above 80 years. Currently (according to the government’s guidance on extending, changing or ending a lease), marriage value is not currently payable above that threshold. 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 LAFRA’s future 990 years, but a resulting term of 170 years or more is already a very long lease in valuation terms.

Looking ahead

Mortgage lenders cannot adopt a single approach to borrowers who are considering waiting, because lending policies differ and individual circumstances matter. That said, the reform makes lease length an issue that merits more active attention during the transition.

A borrower with a lease in the 30-80-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.

As an Association of Leasehold Enfranchisement Practitioners (ALEP) member, I support the government’s objective of making enfranchisement simpler and more predictable. The ALEP has consistently supported meaningful leasehold reform while arguing that the detail must work in practice. Until the final valuation rates and commencement arrangements are known, I would treat every short-lease decision as an individual valuation and timing question.

For lenders, advisers and leaseholders alike, I think the sensible course is to understand the cost of acting under today’s rules, the potential benefits of the future regime and the practical consequences of waiting before making that choice.