Property ownership has been on the Government’s agenda for many years with the aim to address the challenges some people encounter. The Government has now focused its attention on leasehold properties and from the end of this month will implement a ban on ground rent charges for new leases of residential property.  This is one of several measures being introduced to assist with a structure that has roots dating back to feudal times, intending to modernise the system and remove the barriers to home ownership. Tom Bessant, Partner in our Property department explains more about the changes being introduced and what this means for the future.

What is ground rent?

When purchasing a leasehold residential property, the leaseholder is purchasing a lease of a defined part of the building but not the land the building sits on.  It is the leaseholder’s immediate landlord, usually the freeholder, who owns the land together with the structural and common parts (as defined in the lease). Normally, leases of residential properties are granted with a term of between 99 years and 999 years, but they can sometimes be longer.

Under industry-adopted practices, the leaseholders are under an obligation to pay an annual ground rent on top of service charges and buildings insurance. No restrictions currently exist on the level of ground rent payable, which means liability can vary from £1 per year to hundreds or even thousands per year. Furthermore, the review of ground rent can in some leases lead to increases, which negatively impact the marketability of leasehold residential properties, the ability to secure a mortgage and the value.

What changes will the Leasehold Reform (Ground Rent) Act 2022 introduce?

From the 30 June 2022, the Leasehold Reform (Ground Rent) Act 2022 (the ‘Act’) will prohibit new ‘regulated leases’ of residential property from containing an obligation to pay ground rent of more than a peppercorn per year. Essentially, this sets the ground rent to zero, meaning that freeholders will be banned from charging ground rent on these new ‘regulated leases’.

Other future reforms include:

  • simplification of the process of collective enfranchisement and right to manage;
  • the right for leaseholders to extend their leases to 990 years with no ground rent payable;
  • a new online calculator to work out the cost of extending the term of a lease thus removing the need to consult the existing complicated statutory formula and the cost of a surveyor; and
  • a ban on ground rent for new residential leases on retirement homes, due to come into force no earlier than April 2023.

Will the ground rent ban apply to all leasehold properties and leasehold extensions?

The definition of ‘regulated leases’ excludes business leases, community housing leases and home finance leases but includes deeds of variation and surrenders and regrants. Unfortunately, the Act will not apply retrospectively to existing leases granted before 30 June 2022.

Evidently, the Act will have an impact on the future for leasehold properties, making leasehold property ownership fairer, more transparent and affordable by reversing an out of date structure.

The removal of doubling ground rent mechanisms

The Competition and Markets Authority (“CMA”) has been orchestrating commitments from developers and investors to remove terms that cause ground rents to double in price. Such terms often mean people find it difficult to sell or obtain a mortgage on their leasehold home.

The CMA are also seeking the removal of terms which had originally been ground rent doubling clauses but were recently converted so that ground rent increased in line with the Retail Prices Index. The rationale being that the original doubling clauses were unfair terms and should therefore have been fully removed, not replaced with another mechanism that increases the ground rent payable.

Thousands of leaseholders will benefit from the work of the CMA who will now only be liable to pay the original ground rent payable when the property was first sold with no mechanism to increase the ground rent during the term.

If you are a leaseholder who has been approached with an offer to remove the terms from your lease which allow ground rent to be doubled, please contact us for advice on the steps that you need to take.

You can also contact Tom or a member of the team if you are considering buying or selling a leasehold property, you are considering varying the terms of an existing lease, or you are developer with questions about how the Act will affect you.  Contact us today at moc.n1669564436ellub1669564436rekra1669564436p@tna1669564436sseb.1669564436mot1669564436 or call 01722 412000.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.

Our contributor

Tom Bessant

Partner

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