Ground Rent for Leasehold Properties
The Leasehold Reform (Ground Rent) Act 2022 took effect from 30th June 2022 (effective from 1st April 2023 for retirement homes) and was introduced following widespread publicity about unfair ground rent and ground rent increases.
The purpose of the Act is to put an end to ground rents for new, qualifying, long residential leasehold properties in England and Wales and represents the first stage of the Government’s aim to make leasehold property ownership fairer more transparent and more affordable.
What is Ground Rent?
Ground rent is essentially the annual sum a leaseholder must pay the property freeholder for use of the land and the building it sits within/on. The amount of ground rent will vary from lease to lease. It can be a peppercorn, £1 or anything above that. The ground rent can be a fixed sum for the entire length of the lease, or the lease can provide a mechanism for increase over the course of the lease term.
All of these factors will affect the value of a property and the premium payable to extend the length of the lease term. This is why issues can arise with obtaining a mortgage should ground rent be high or the means by which it may be increased onerous.
What type of leases will the Act apply to?
The Act will limit ground rent in most new long residential leases to a peppercorn. This sets the ground rent to zero financial value. The Act also prohibits landlords from charging administration fees for collecting a peppercorn rent. It will apply to new residential long leases that are entered into from 30th June 2022. Long leases are leases which are for a term of more than 21 years and do not include short term tenancies. There are some types of leases which are excluded from the Act and these include business leases, statutory lease extensions, community housing leases and shared ownership leases.
How will this change benefit people purchasing a leasehold residential property?
The Act will ensure anyone buying a leasehold property on or after 30th June 2022 cannot be charged ground rent. Historically expensive ground rent has often caused problems for homeowners of leasehold properties, particularly where the level has increased exponentially year on year. The Act will put an end to this for people entering into new leases and ensure that they cannot be charged more than a peppercorn rent.
Do freeholders of leasehold residential properties need to do anything?
The Act will not apply retrospectively so it will not affect Leases that are already in existence. However, if any existing lease is surrendered and re-granted it may be caught by the Act and the new regulations surrounding ground rent will apply. Freeholders need to be careful not to fall foul of the regulations when re-granting or extending the terms of an existing lease. Fines can be imposed on freeholders who breach the new rules and charge ground rent in contravention of the Act.
Will anything change for people who currently own a leasehold property?
The Act only applies to new residential long leases granted on or after 30th June 2022 so will not change the terms of an existing lease. However this is a continuing area of reform and the government is due to address the issue of paying ground rent under existing leases in the future.
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