Long-awaited reforms to the law surrounding leasehold property will start to take effect in 2022 as the government seeks to make matters fairer for leaseholders.
Problems for those owning leasehold property have increased over recent years, with the some new-build companies imposing unfair ground rents that have regularly doubled over time, leaving some homeowners unable to find a buyer for their property.
Leaseholders would also benefit from the option of extending a lease for more than 90 years, which is the current maximum term available when increasing a lease using the formal statutory process (as opposed to a negotiated agreement).
The Leasehold Reform (Ground Rent) Act 2022
The Leasehold Reform (Ground Rent) Act 2022 became law on 30 June 2022, prohibiting ground rent payments on new residential long leases, ie. leases for over 21 years. Any new leasehold residential property will have a ground rent of nil or a peppercorn, meaning that no (or negligible) ground rent payments will be made.
The new Act will not apply retrospectively, so it will not affect existing freeholders and leaseholders, although as it covers all new residential leases, it will apply if a new lease is granted. There are substantial penalties imposed for freeholders who breach the rules.
Ground rent has also been abolished on leases that have been extended informally. This means that if you negotiate an extension of the lease with a freeholder, they cannot increase the ground rent for the remaining period of the lease, and once the new term is in effect, no ground rent can be charged.
Future leasehold reforms
Further legislation is proposed to address other issues of concern to leaseholders. One of the main points to be addressed is the length that a lease can be extended by using the formal statutory lease extension process. Currently, a maximum of 90 years can be added to a lease using this procedure. While this might seem substantial, in reality, once a remaining lease term falls below 75-80 years, leaseholders need to start thinking about extending as mortgage lenders are not generally inclined to lend on leasehold property when the remaining term is below this level.
The extension process can be expensive, with leaseholders needing to pay for the extension itself plus their own legal costs, the freeholder’s legal costs, valuation fees and Land Registry fees. The government intends to update the law so that in future leaseholders will be able to extend a lease by up to 990 years. It is also proposed that those with leasehold houses will be given the right to extend their lease for 990 years, with no ground rent payable.
A standard calculation for establishing how much the leaseholder will be required to pay to the freeholder is also proposed. This will avoid the need for lengthy negotiations and will give leaseholders a level of certainty when they are thinking about beginning the lease extension process.
At some point the ‘marriage value’ element of paying to have a lease extended may also be removed. This is a payment to the landlord where less than 80 years remain on the lease and a leaseholder wants to extend it. – Marriage value is half of the increase in the market value of the property, once the lease has been extended.
It is hoped that in the future, valuing the amount payable to a freeholder to extend or buy a lease will be a simpler process. For properties below a certain value, there would be a separate method of assessing the amount payable.
Leaseholders may also be given the right to buy their ground rent without the need to extend the term of the lease at the same time.
If you own a leasehold property, and are looking to extend your lease, with a view to selling in future or increasing your stability as a property owner, we would be happy to discuss your situation and potential options with you. Call us on 01252 733 770 or email us at email@example.com to make an appointment to speak to one of our specialist property lawyers.