On 30 June 2022, the Leasehold Reform (Ground Rent) Act 2022 went into effect, representing the first phase of the Government’s plan to improve the leasehold system.
The two-part reform aims to make leasehold properties more affordable, secure and straightforward.
Leasehold reform has been in discussion for decades, and there is still existing discussion about what will change.
In this article, we will dispel the facts from fiction and identify the reality of the changes to the law. We will address the current situation change and what this means for you as a leaseholder.
The Leasehold Reform (Ground Rent) Act 2022
The first phase of legislation addresses ground rent.
What is Ground Rent?
Residents who own long-term leases pay ground rent to the freeholder or landlord who owns the land.
The rent varies from property to property, accounting for factors like location and size. However, there isn’t a regulated method for calculating ground rent in the English and Welsh legal system.
The result is that leaseholders may end up paying excessive annual rents or remain tethered to properties that are too expensive to sell to a potential buyer.
The ambiguity and frustration surrounding ground rents have long plagued the leasehold system. However, the Leasehold Reform (Ground Rent) Act 2022 intends to see a change to this by making home ownership fairer and more transparent for future leaseholders.
What the Ground Rent Act means for you
The new Act abolishes ground rent on all new leases across England and Wales. From 30 June 2022 onwards, ground rent on new leases will never be more than a ‘peppercorn’, which sets the rate to zero.
As a result, anyone buying a new leasehold property (i.e. not a property with an existing lease) after 30 June 2022 will not pay ground rent.
What if the landlord doesn’t comply?
Landlords that demand ground rent and do not return the payment within 28 days can be issued a financial penalty of up to £30,000 per qualifying lease.
Which leases are covered by the Ground Rent Act?
The changes made by the Act apply to all new residential long leases (leases with a term of more than 21 years) of properties in England and Wales. It does not apply to short-term tenancies.
The ground rent act will apply to regulated leases for retirement homes, however, it’s not expected to come into action any earlier than 1 April 2023.
For those entering into informal (non-statutory) negotiations with the freeholder, your ground rent will remain but cannot be increased for the remainder of your lease. Ground rent will become zero when the current term ends and the new term begins.
Leases Excluded from the Ground Rent Act
Exceptions to the Act include:
- Existing leases
- Business leases
- Community housing leases
- Home finance plan leases
Statutory lease extensions also won’t see any changes because they must already have a peppercorn limit.
What to expect from the next phase of reforms
A second, separate bill aims to make extending a lease cheaper and more straightforward. A change we all welcome.
It is imperative to note that the following changes are still in discussion. As of yet, no draft legislation has been created, and powerful groups of freeholders have employed lobbyist groups to protect their interests. In short, nobody knows what changes will happen or the benefit of these changes.
We can only work with The Leasehold Reform, Housing and Development Act 1993 as it stands and the reality that the longer you wait to extend your lease, the greater the likely cost of the premium you pay your freeholder.
At the LEC, we do not own a crystal ball, but we suggest that anyone considering waiting to extend their lease based on these speculative changes should be cautious. Changes have yet to be agreed upon and formalised into legislation.
The following part of this article will look at the potential ‘proposed changes’ currently in discussion and how these changes may manifest.
Removal of Marriage Value Clauses
Extending your lease when it drops below 80 years means you will be dealing with much more expensive payments – due to ‘Marriage Value’ taking effect.
The Marriage Value clause requires that any increase in property value resulting from an extension of your lease must be split 50/50 with your freeholder.
For example, if a lease extension causes your property value to increase to £20,000, the leaseholder must give £10,000 to the freeholder. This cost is built into the premium calculation of your lease extension.
The second phase of the Government’s leasehold reformation plan intends to remove this marriage clause so leaseholders will no longer have to split the financial uplift added to the property resulting directly from the lease extension.
Initially, this sounds like it will save you thousands of pounds to extend your lease if it has dropped below 80 years. However, precisely how this proposed change will work at this stage is unknown.
The freehold value cannot simply be taken away from the Freeholder. Therefore, the cost of your lease extension could be allocated across the full term of the remaining lease. In effect, 80 years would no longer be the cut-off term, but the cost would remain the same – only spread out equally. Essentially the methodology used to calculate your lease may change, but you may not see actual savings.
Will it be worth the risk of waiting years for changes to be agreed upon, finalised and then made into new legislation whilst your lease depreciates and your premium increases?
The reality at this point is that nobody knows. We can only speculate that it won’t be legally possible to effectively devalue the value of millions of freehold titles.
990-Year Leaseholder Extension
Currently, under The Leasehold Reform, Housing and Development Act 1993, flat leaseholders can extend their lease by an additional 90 years (added to the current unexpired term from the date the S42 notice is served).
Proposals suggest that this added term will increase to 990 years. It will be a very welcome change, although it could increase the cost you pay for your lease extension. Also, the value added to your property by adding 90 years vs 990 years is, in most cases, surprisingly minimal. So again, it could be risky and potentially costly to delay extending your lease on this basis.
At this time, there is no definitive date set for these reforms.
Lease Extension Calculator
The Government has also promised the introduction of a statutory calculation to determine the amount a leaseholder should pay to a freeholder.
We would very much welcome this change as it will go a long way to assisting clients in answering How Much Will My Lease Extension Cost. Though again, we are unsure how this will be achieved given the differing nuances and specific terms of millions of individual leasehold titles.
There needs to be official information about what this calculation might be. For the time being, you can use our Lease Extension Calculator to get an estimated cost for extending your lease.
Hopefully, this article has provided clarity regarding the new lease extension laws. This article will be updated when there is any change to the current situation.
If you’re considering extending your lease, book a free, no-obligation appointment with our specialists and receive your free copy of ‘How To Extend Your Leasehold – The LEC Guide’.