Author : Mary-Anne Bowring
The UK Government announced recently that ground rent on new leases will not be applied from the 30th of June 2022. This is the date that ground rent is scrapped on all new residential leases in parts of the UK, i.e., the date when the Leasehold Reform (Ground Rent) Act becomes law. This can result in a potential savings of hundreds of pounds annually for future homeowners and some existing leaseholders as typical ground rents range on recently built properties from £250 to circa £500 per annum and traditionally have doubled every 25 or 33 years.
However, some property experts have signaled a note of caution. They believe this can lead to creating a two-tier system in the sales market. It will become tougher to sell homes with ground rent, i.e., existing leasehold properties, as the ground rent ban is not retrospective. The new law applies only to fresh leases, giving no relief to others paying substantial ground rents. The ground rent ban will also apply to retirement homes. However, in contrast to other types of residential properties, for later living or retirement properties, the rule is unlikely to be applied until April 2023. Apparently, retirement developers need more time to make adjustments to their systems.
It is estimated that there are around 4.6 million leasehold properties in England and Wales but as this new rule is not retroactive, that is 4.6 million leaseholders whose only opportunity to scrap their ground rent is as part of a statutory lease extension (where the leaseholder claims an additional 90 years and the ground rent is reduced to peppercorn). Also, the Government's new rules won’t apply in Northern Ireland or Scotland, where freehold called common hold is used. The common hold model offers homeowners a structure to own the building collectively with other flat owners and is already a no-ground rent model and effectively plans from the outset a formal structure for owners to have a say on the building’s management, shared facilities, and associated budget.
Why Was The New Ground Rent Rule Necessary?
There has been much controversy surrounding the ground rent rules. We can trace the origins of which are all the way back to medieval times. Ground rent is an annual payment made by the leaseholder to the landowner for the privilege of living on their land (or rather in a flat (a leasehold demise) on a block that sits on the Freeholder’s land. The rise in greedy developers creating leases with ground rent 'doubling' clauses incorporated to drive the price they could get on the investment market by selling not just new houses or flats, but also selling the ground rent income too.
The outrage of doubling ground rents reached parliament in the late 2010s and the papers seized on stories of leaseholders forced to pay double the annual ground rent every ten years. Imagine, a ground rent of £295 in 2008 would reach nearly £9,500 in 2058. All the while wages, household incomes and inflation were not rising anywhere near leaving homeowners in jeopardy and simply not understanding what they had bought into. As each ground rent doubling date drew nearer, many homeowners were left with properties that were almost impossible to mortgage with no one willing or able to buy. Arguably, they had been badly advised by solicitors in the first place, and ten-year doubling ground rent claims became a regular source of negligence cases against solicitors.
How The New Rules Will Work
· A freeholder selling a leasehold property, house, or flat on a long lease cannot charge ground rent from the 30th of June 2023. Doing so would be illegal.
· Ground rent can only be charged at 'one peppercorn.’ It means the rate will be set to zero. Peppercorn is a metaphor for a minimal payment in cash or other forms, usually done to fulfil contractual rental obligations.
· The new rules will also apply to retirement housing from 1 April 2023 at the earliest.
· The new law may exempt a few community-led housing and business leases.
· Existing leaseholders extending their leases are required to set ground rent to zero upon completion of the extension.
According to the new rules, those entering a new lease or purchasing a leasehold property now and up to 30th June 2023 must just remind their freeholder to incorporate the new ground rent rules into the contract.
What Lies Ahead For Leasehold?
The New Ground Rent Act is among the first series of changes planned to reform the leasehold system. The next step involves introducing a new rule for empowering leaseholders. The new rule plans to extend the standard period of a long residential lease by 990 years. The government is also considering replacing the present leasehold system with the simpler common hold system. It works by offering leaseholders in a block a share of the building's freehold. They can also carry out the maintenance of the block themselves and share the expenses very much like a residents management company or freehold management company or right-to-manage company structure.
Last year, the government announced a package of reforms that can make buying a freehold or extending a lease less stressful and cheaper for leaseholders. The government is working on introducing more changes to help leaseholders buy or extend their leases. Ringley Group provides comprehensive Freehold and Ground Rent Management services to institutions, companies, and leaseholders throughout the UK. The company has in-house professional experts and the best software to deliver an enhanced customer experience in all aspects of ground rent solutions
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