A game-changing new law has just come into effect abolishing ground rent on new leasehold residential properties, but what are the rules for existing flats?
The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June after years of controversy surrounding what have been labelled as unfair ground rent charges on UK properties.
It means that anyone buying a new long residential leasehold property in England or Wales no longer needs to pay ground rent. The change has come about to prevent leaseholders from having to pay sums amounting to several hundred pounds a year on some new property leases, with no evidence of a service in return.
This is separate to a service charge, which often applies on leasehold homes to pay for things like buildings insurance and maintenance.
Does the new ground rent law apply to all properties?
The new law applies to residential houses and flats where a lease was granted on or after 30 June.
In the UK, it is extremely common to own a flat on a leasehold rather than freehold basis. It means that you own the property, but not the land it is on, for a set number of years. Lease lengths can range up to 999 years.
As an owner of a leasehold flat, you will often need to pay fees – which have normally included ground rent and service charges – to the freeholder or landlord. Sometimes, leases contain restrictions, such as needing permission to make changes to the building.
What’s the problem with ground rent?
While leasehold flats have historically caused few issues, a rise in the sale of new leasehold houses caused great controversy and caught media attention in 2017.
There were reports of homeowners being stuck in properties with spiralling ground rents that they were obliged to pay and that increased annually. Some saw their ground rent double every 10 years, or more frequently.
This not only financially affected the property owners, but also meant their homes were effectively unsellable. Mortgage lenders also became reluctant to lend on such properties.
What about a flat I already own?
If you are one of the many thousands of people across the country who already owns an existing leasehold property, you will currently not be affected by the law change, so the likelihood is you will need to continue paying the ground rent agreed at the time of purchase.
All leaseholders have the right to a lease extension of 50 years, with no premium payable. Statutory lease extensions for flats must be granted rent at a peppercorn.
For non-statutory, or voluntary, lease extensions, the new portion of the lease that extends beyond the original term must only charge peppercorn ground rent. If you are considering extending your lease, it is advisable to seek specialist advice.
Industry comment
For those who are still trapped in leasehold houses with multiplying ground rents, the Act does not address what is being done to alleviate the situation.
On the whole, though, the new ground rent law has been welcomed across the industry, with many hoping that the government will continue to look at and improve the situation.
Leasehold minister Lord Stephen Greenhalgh said: “This is an important milestone in our work to fix the leasehold system and to level up home ownership.
“Abolishing these unreasonable costs will make the dream of home ownership a more affordable reality for the next generation of home buyers.”
Jonathan Walker, CILEX (Chartered Institute of Legal Executives) head of policy, points out that problems still remain, with no retrospective inclusion of leasehold tenants.
“They will still be obliged to pay their existing rents, even in cases where they are seeing those rents escalate – some doubling every ten years.
“Those attempting to sell on properties will find ground rents prove unattractive to buyers who now have the option of purchasing a rent-free leasehold property, and many will experience difficulties when looking to remortgage, or extend or vary their existing leasehold.
“Such fundamental changes to the leasehold market must be implemented alongside awareness raising and education amongst both consumers and professionals so that both understand the implications for property transactions.
“It is vital that we see a continued programme of reform that benefits those who are new to the leasehold market whilst not disadvantaging or restricting those currently within the system. We hope to see further measures to address residential leasehold houses and cap ground rent for all existing leasehold properties.”
