The Leasehold Reform (Ground Rent) Act 2022 will come into force on 30 June 2022. The Act abolishes ground rent payments on all new residential long leases in England and Wales.
The Scottish Parliament has responsibility for property laws north of the border. Anything with a duration of 21 years or more qualifies as a long lease.
Anyone who buys a new leasehold can be charged only what is known as a ‘peppercorn rent’, that is, a nominal amount which is payable purely to observe the legal requirements of a contract.
The ultimate objective is to remove all ground rents from the system, however the Act does not have retrospective force, so existing leaseholds will remain subject to ground rent. However, if an existing lease is surrendered and then granted afresh, the new rules could apply.
Other amendments to a lease, such as the addition of extra land, may also bring it within the terms of the Act. If anything changes, including but not limited to the substance of the lease, its term and the identity of the leaseholder, a freeholder would be very wise to consider the new Act because any contravention can result in fines of up to £30,000.
A bit of background
The arcane laws applying to leasehold properties in the UK have been in desperate need of reform for decades.
The concept of a freeholder, who has outright ownership of the land on which a leaseholder takes up occupancy under a lease, dates back to the 11th century. In the early 20th century various acts of parliament were introduced to hold down rents and protect tenants from eviction.
This meant landlords faced restrictions on their profits, so this inspired the practice of selling long leases of 99 to 125 years, as a way of bringing in more money without relinquishing ownership of the property.
100 years later the system still exists largely unchanged, with people buying properties which have this residual rented character. When these long leases are new, there is no urgency, but after a few decades the sale value of a leasehold property is adversely affected.
Measures have been proposed to enable leaseholders to extend their leases however these don’t address the underlying problems in the system, which allows freeholders to continue collecting ground rent from leaseholders.
In many iniquitous cases the leases contain clauses which provide for the doubling of ground rent every few years, which means that a modest amount in the first year eventually becomes prohibitively expensive.
The Leasehold Reform (Ground Rent) Act 2022 is the first step in the government’s efforts to adjust the balance, and make the ownership of leasehold property fairer and more affordable.
Where does this leave existing leaseholders?
While the Act is relatively clear in its application, it does leave a very large number of leaseholders without any assistance.
Most modern ground rents are 0.1% of the value of the property, so on a property worth £300,000 the annual ground rent would be £300.
Where the system has been abused is in leases which contain escalating periodic rent reviews and increases. If a £300 ground rent doubles every five years, it will be £4,800 in 20 years’ time.
The problem with this partial legislative solution is the risk of creating a two-tier property market, in which new leases become automatically more attractive than older leasehold properties.
For now, all leaseholds are equal in terms of ground rent rules, but it is easy to see how a large number of people will be disadvantaged.
Is there any good news?
There are a couple of bright spots for the 4.5 million current leaseholders in England and Wales.
The next phase of reform is expected to make a drastic change to the law regarding lease extensions.
At present, a leaseholder can apply for a 90-year extension at a cost of about £5,000. Under the next legislative change the extension can be 990 years, effectively turning leasehold onto genuine ownership. The cost of getting the extension will be reduced, and the procedure simplified.
The other benefit for existing leaseholders takes effect sooner, and relates to current extension rules. There are presently two types of extension. With an informal lease extension if there are for example 80 years left, the leaseholder can add a 90-year extension.
The landlord can continue to charge ground rent fixed at the current level for the rest of the 80 years, but not for the extended period. This isn’t of any financial help in the medium term, but it does enhance the long-term value of the lease.
However, the better option is a statutory lease extension, which you can apply for if you have owned the property for at least two years. It involves serving a statutory notice on the landlord compelling them to grant a 90-year extension and the immediate reduction of ground rent to zero.
Your notice will include an offer for the extension which the landlord may counter with a higher figure, and there will probably need to be some negotiation, but ultimately the ground rent will be eliminated and the lease will increase in value.
Will these changes affect tenants?
At Inventory Base we are watching these developments closely because it is unclear how they will affect tenanted properties.
Although tenants have their own lease agreement which is entirely separate from the leasehold of the property held by the landlord. There is nothing in the Act that requires the landlord to pass on or share any savings on ground rent with the tenant.
It’s unarguable that ground rent is one of the landlord’s costs, taken into consideration when setting the rent. Therefore it is to be hoped that the vast majority of landlords will behave fairly and not seek to keep all the benefits for themselves.
Tenants should be aware that although they are not party to the contract between leaseholder and freeholder, their financial position could be directly affected by laws that vary such a contract.
Key Takeaways
- The Act bans freeholders from charging administration fees for collecting a peppercorn rent
- Fines of up to £30,000 may be levied where ground rent is charged in contravention of the Act
- Statutory lease extensions for both houses and flats remain unchanged and are therefore exempt from the provisions of the Bill
- Existing leaseholders entering into voluntary lease extensions after commencement, the extended portion of their lease will be reduced to a peppercorn
- Exceptions from the Act, are:
- applicable community-led housing
- certain financial products
- business leases which are defined by the Act as leases of commercial premises which include a dwelling, use of which substantially contributes to the business purposes
- retirement properties where it will not come into force before 1 April 2023