Freeholders cannot charge new ground rents

On 30th June 2022, a new act came into force - the Leasehold Reform (Ground Rent) Act 2022. This act prohibits freeholdersowning long residential leases from collecting ground rent on new leases. The law applies to all relevant properties in both England and Wales. Ground rent is a recurring payment that the leaseholder must pay to the freeholder as per the terms of their lease.

Ground rent is payable when one buys a leasehold property because unlike title absolute, where one owns the land and the buildings on it, a leasehold title is for a fixed and diminishing term of years and is for the right to own, for the remaining term of years, the right to occupy the property. Until now, customarily pays the freeholder ground rent.

This Act has been introduced to put an end to the, often rising, yearly ground rent for leasehold property owners which has been a convention since Tudor times! This new legislation was triggered by some leases containg a clause where the ground rents doubled every 10 years. By banning ground rent on new leases the Act aims to make ownership of homes cheaper, fairer and more secure.

So what are the new rules?

Under the Leasehold Reform (Ground Rent) Act, landlords are banned from charging ground rent on most new long residential leases (21 years or more) in England and Wales.

The Leasehold Reform (Ground Rent) Act Applies To Specific Leases

The Act only applies to the qualifying leases. They are defined in the Act as follows a lease granted:

- For more than 21 years old and intended to be a single residential dwelling.

- For a premium. This means the price paid to buy the leasehold property.

-On a property where on or after June 30th 2022, or an agreement for the lease was completed before June 30th 2022, and

- Where the ground rent collected from the leaseholder is more than one peppercorn per year.

There are Some Exceptions

The Act does not apply to:

- Non-regulated leases

- Retirement homes

- Leases offered to community-led housing.

- Shared ownership leases of specific types where a rent is payable on the retained share of the landlord.

- Agreements in which buyers and sellers have mutually agreed to and completed the grant of a lease before 30th June 2022.

Transactions falling within the Act

If a lease is surrendered and a new lease is re-granted, then the new lease will fall within the Act and, consequently, no ground rent will be payable by the leaseholder.

Existing leaseholders may enter into voluntary lease extensions. In all such cases, the lease extension must be registered with HM Land Registry through Surrender and Regrant. This means that the balance of the extended term will be subject to a ground rent of a peppercorn.

What if a freeholder doesn't comply?

If landlords mistakenly demand ground rent in violation of this Act, they can still escape censure by returning the payment received from the leaseholder within 28 days.

If they do not, a fine will be imposed on the landlord ranging from £500 to £30,000 per qualifying lease. The leaseholder with a qualifying lease can apply for a declaration to the Property Chamber, also known as the First-Tier planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal. This declaration must state that the ground rent is replaced with a peppercorn rent.

Commercial Concerns

Landlords must get familiarised with all of the provisions of the Leasehold Reform Act. They can then avoid incurring liability due to unintentional non-compliance.

The Act will NOT be applied retrospectively. Leases granted many years ago do not benefit, the ground rents will continue to rise for the duration of the lease. And, in this year of transition developers who had signed the leases before the Act came into force can argue that the ground rent rules don’t apply to them. This will be on the basis of the date of the ‘agreement for the lease’ - basically when contracts were exchanged – the relevant date being 30th June 2022.

A lease agreement signed after the Act was introduced will still have to comply with its provisions under an option of the Section 5 right of the first refusal, which existed before the Act. The Section 5 right of the first refusal ensures that Freeholders cannot sell the ground rents without first offering it to the existing leaseholders, save for where the agreement to sell the ground rents was entered into before the first lease was sold.

What is not included

The new law favours new leaseholders only. The 4.6 million current leaseholders in England want the Government to fulfill its promise of making lease extensions easier and cheaper. Some of the most important issues to be addressed in the next phase of reforms are:

The 990-Year Lease

Currently, leaseholders can only extend the existing term by 90 years. Leaseholders have been promised that they could extend the lease to a 990-year term using a more simplified and transparent process.

Lease Extension Calculator

The Government has promised the introduction of a statutory calculation. This would provide an estimate of the premium for a lease extension for a property. The government can protect leaseholders from time-consuming negotiations by fixing the cost of extending a lease. T

Marriage Value

Marriage value is hugely significant for leaseholders where their lease has less than 80 years remaining. Once this occurs it is more expensive, as the marriage value becomes enters the calculation. Marriage value equates to 50 percent of the increase in the property's market value when there is an extension of the lease.

Other Potential Leasehold Reforms

The future leasehold reforms are expected to

- Simplify the valuation process of extending a lease or buying a freehold.

- Abolish marriage value which can result in an increase in property value on the lease extension.

- Introduce a separate valuation process for low-value properties.

- Provide leaseholders the option to buy out the ground rent without extending the lease term.

- Allow leaseholders to prolong the existing leases at zero ground rent for a period of 990 years.

References:

https://www.birketts.co.uk/legal-update/an-overview-of-the-leasehold-reform-ground-rent-act-2022/

https://www.landlordtoday.co.uk/the-big-issues/2022/6/leasehold-reform-ground-rent-act-2022-what-you-need-to-know

https://www.michelmores.com/news-views/news/ground-rent-and-leasehold-reform-ground-rent-act-2022

https://www.jdsupra.com/legalnews/leasehold-reform-ground-rent-act-2022-5413151/

https://www.mondaq.com/uk/landlord-tenant--leases/1221670/an-outline-of-the-leasehold-reform-ground-rent-act-2022