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What the Leasehold Reform (Ground Rent) Act Means for Newbuild Flat and House Owners

The Leasehold Reform (Ground Rent) Act bans ground rent charges for newbuild flats and houses in England and Wales, protecting millions of leaseholders from huge increases every year.

There are generally two types of residential property ownership – freehold and leasehold. Freehold means the owner has total ownership of the property including the land that it is on. With leasehold property, the homeowner does not own the land it is on, but instead has a long lease for that land. Ground rent is a charge, often paid annually, that leaseholders pay to the owners of the land that the property is on, the freeholder. Leasehold ownership is common with blocks of flats and many newer housing developments.

Leasehold property reform

The Act was confirmed in the Queen’s Speech on 10 May 2022 and the first phase of the reforms came into force on 30 June. It will mean that people who sign up to residential long leases will no longer pay ground rent, other than a fixed ‘peppercorn’ amount, in turn protecting them from any future escalating charges. A ‘peppercorn’ amount just means a nominal sum and stems from a legal quirk that to make a contract binding there must be some form of value exchange or ‘consideration’. The key point is that ground rent will be abolished on all new leases.

Good news for leaseholders

Currently there are millions of householders who own their homes on a leasehold basis and pay an annual ground rent to the freeholder of the property. Normally this is a low ‘peppercorn’ charge. However, some developers of flats and newbuild homes include clauses in their leases, allowing them to significantly increase the ground rent on a regular basis. It’s a win-win situation for the freeholder but of no benefit to the leaseholders. Sometimes this leaves people unable to sell their homes as the huge ground rent and the cost of extending the lease can put off potential buyers as well as mortgage providers. The new Act will stop this by making sure that the ground rent is never more than the ‘peppercorn’ amount.

From July 2022 ground rent will also be scrapped on informal lease extensions – where a leaseholder has entered into informal negotiations with their freeholder, the ground rent cannot be increased for the newly extended term.

 For existing leaseholders, the freeholder will not be able to charge ground rent where a lease is extended through a formal lease extension.

There is also good news for people living in retirement properties as landlords will no longer be allowed to charge ground rent. They have been given slightly longer to comply – by April 2023.

What’s missing from the reforms?

Although these welcome changes will help new leaseholders, they will not benefit the millions of existing leaseholders.  We are waiting to see how the Government plans to help them and make it cheaper for them to extend their leases. As proposals weren’t included in the Queen’s speech it will mean that current leaseholders will have to wait at least another year to see if the next phase of reforms will be introduced.

Any future reforms?

Although we do not expect any further reforms this year, we hope that proposals will be introduced to allow leaseholders to extend their lease by up to 990 years with no ground rent payable, this would make home ownership more secure for them. At the moment, leaseholders of houses can only extend their lease by 50 years, while leaseholders of flats can extend by 90 years.

Commenting on the reforms, Head of Sweeney Miller’s Residential Conveyancing team in Newcastle, Partner Irenna Pietruszka said:

“If you’re a current leaseholder, you might think you should put off extending your lease and wait for the further reforms. However, there are circumstances where it may be sensible to progress with your lease extension. For example, if you’re thinking about selling your home you should be aware that a potential buyer may struggle to get a mortgage if the lease term is too low. Also, if you’re going to stay in your home and your lease term is low it may be hard for you to find a competitive mortgage deal or be able to remortgage. In particular, when the lease gets to around 80 years remaining, it becomes a lot more expensive to extend the lease at this point and therefore, it is advisable to act early. There are many implications and so it is important to get specialist advice.”

Next steps

All developers, landlords and estate agents should be aware of the new law scrapping ground rent. If you are a current leaseholder considering whether to extend your lease or a new homebuyer entering into a lease, it is important to consider getting specialist legal advice.

To talk you through the implications and explore your options, contact a member of the Residential Conveyancing team at Sweeney Miller Law by emailing enquiries@sweeneymiller.co.uk  or call 0345 900 5401.

 

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