As part of the recent review of leasehold properties in the UK new laws have come into effect, abolishing all ground rent on new leases. But what are the rules for existing flats?
From the 30th of June 2022 the Leasehold Reform (Ground Rent) Act 2022 has applied to all new leases, after years of controversy around the ground rents that some freeholders charge on properties in the UK.
It means that anyone who is extending their lease, renewing their lease, or purchasing a new leasehold property, no longer needs to pay ground rent. These changes have primarily been brought into effect to prevent leaseholders from having to fork out up to hundreds of pounds a year on some new leases, often without any services in return.
This is often in addition to the service charge, which is in place to pay for the upkeep or maintenance and insurance of the leasehold property.
However, this new ruling does not apply to all leasehold properties and is only valid on residential property where the lease was granted on or after the 30th of June.
Typically, most apartments in the UK are owned on a leasehold basis, whereby the property is owned by the buyer, but the land is owned by a freeholder. This ownership is for a set number of years, ranging up to 999 years. Most new leases are set at 250 or 999 years. If a lease drops to less than 85 years, the property usually becomes very difficult to finance and so most leaseholders will renew the lease at this time.
As a leaseholder the usual fees that are applicable are the ground rent and service charge, as discussed earlier, however sometimes there will be restrictions, such as needing permission to do any work within the building.
Whilst there have been very few issues around historical ground rents, there were several sales of new leasehold homes in 2017 from unscrupulous home builders that caught media attention. These were properties that were being sold with no cap on how the ground rent could change over time, and saw them spiralling in cost, with no way to exit. Not only did this cause financial difficulty for the owners of the properties, it also meant that the properties were unsellable. These properties also became un-mortgageable as lenders saw them as poor collateral.
In reality the majority of people across the UK will not be affected by the recent laws. Unless you have recently changed your lease structure or purchased a newbuild property, as an existing leaseholder you will have to continue paying the ground rent agreed within the contract.
However, all leaseholders have the right to extend their lease by 90 years, which then sets the ground rent for the remaining lease to a peppercorn (or essentially 0). There will likely be a marriage value to pay to the freeholder in order to do this, and there is a strict legal process involved.
A voluntary lease extension can also be applied for, whereby the property owner asks the freeholder whether they are willing to extend the lease. This is typically less strict than the statutory process, but the freeholder can withdraw from negotiations at any point in time. It is worth seeking advice from a specialist in either scenario, however.
At the moment the current laws still have no process to address those who are trapped within leases with multiplying ground rents, however this is the first step in the review of leasehold properties, with more discussion in the government happening for 22/23. 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 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 re-mortgage, 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.”