Historically, ground rent was always a peppercorn, zero or nominal rent charged by freeholders (or landlords) as token consideration in order to form a binding contract.
However, in the modern day, freeholders have set higher ground rents on long leases with a mechanism within the lease to increase the ground rent at regular intervals throughout the lease term. The issue caused by this practice is that it has made it harder for prospective purchasers to obtain a mortgage on leasehold properties which has a knock-on effect, has made it more difficult for leaseholders to sell their property as a result of prospective purchasers struggling to get a mortgage.
From 30 June 2022, Ground Rent will be abolished when the Leasehold Reform (Ground Rent) Act 2022 comes into force. The new legislation bans freeholders from charging anything above one peppercorn per year and further, it bans them from charging leaseholders an administration fee for collecting said peppercorn.
At present, ground rent in retirement home leases is notoriously higher than standard long leasehold properties as there is an increased cost to the freeholder for providing and maintaining the communal facilities within the estates. Therefore, to allow sufficient time for the transition to the new rules, the new legislation for those purchasing retirement home leases will not come into force until 1 April 2023.
This reform only affects leases which are residential long leases (usually granted for a term of 21 years or more), granted for a premium and entered into from and including 30 June 2022 onwards. The legislation cannot be applied retrospectively and so will not apply to existing long leases. The legislation also does not apply to business leases, community housing leases and home finance plan leases.
The new legislation does not apply to statutory lease extensions which are granted pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 as ground rent under said leases are already limited to a peppercorn. However, if a leaseholder wishes to extend their lease voluntarily via the informal route, the Landlord is not able to charge more than a peppercorn once the extended term begins but can continue charging the existing ground rent until the commencement of the extended term.
What’s next?
This legislation comes as the start of the government’s “promised” leasehold reforms which are a two-part strategy which, once they are all implemented, should assist leaseholders in many ways in particularly as follows:
- Allowing leaseholders to extend their lease through the statutory process by 990 years, rather than the current law which only allows for a lease term to be extended by 90 years.
- There are also calls for marriage value to be abolished. Marriage value equates to 50% of the increase in market value of the property arising from the lease having been extended. Marriage value occurs where a leaseholder seeks a lease extension and their current long lease has a term of less than 80 years remaining and makes the cost of the premium payable to the freeholder, significantly more.
- The final reform the government has promised is the introduction of a statutory calculation which will determine the value of the premium payable by a leaseholder. This would assist leaseholders by not having to enter, potentially costly, negotiations with the freeholder over how much the premium should be.
At present, there is no set timescale as to when the government will implement the above reforms, but they have said they are committed to delivering a second phase of the two-part leasehold reform within this parliament i.e. by 2024.
If you would like advice on the best way to extend your lease in light of this reform, please contact our property litigation team who would be willing to help.
