Leasehold Ground Rents: The beginning of the next generation

A fundamental change in residential leasehold ownership begins as the Leasehold Reform (Ground Rent) Act 2022 comes into effect on 30th June 2022. However, this change may not be as far reaching as some leaseholders would like and the promise of further leasehold reform legislation is yet to materialise.

The Leasehold Reform (Ground Rent) Act 2022 received royal assent on 8th February 2022 and subject to a few exceptions, prohibits grounds rents of more than a peppercorn (effectively nil) on all new leases.

Exception include leases for which properties were exchanged before 30th June 2022 and retirement properties will not be affected until April 2023.

Statutory lease extensions, which require ground rents be set to a peppercorn in any event, are not affected. However, anyone negotiating a lease extension outside the statutory regime may find themselves in a different position. Under the terms of the new legislation the lease extension will amount to a replacement lease. This means that the Landlord can retain the ground rent for the existing term, but the remainder of the new, extended term, must be a peppercorn. This may increase the premiums payable for lease extensions, although benefiting the leaseholder further down the line. It may particularly impact those extending their leases in order to sell their property, as retaining or increasing the ground rent can no longer be used to negotiate a lower premium.

Leigh Shapiro, a partner at Irwin Mitchell who specialises in leasehold matters says:

“This is an interesting piece of new legislation, the effect of which may not be easily apparent at the outset and we will really need to wait and see how it plays out in the long term. It is expected that this legislation will prevent developers from selling on freeholds to a third party and will result in the freeholds being transferred to leasehold-owned management companies instead, once the last unit has been sold. However, some leaseholders may wonder why they cannot retain a reasonable ground rent in their lease to reduce the premium they need to pay for a voluntary lease extension.”

The market effects of this new legislation will now begin to unfold. It is unclear whether the cost of new build properties will increase if developers are looking to compensate losing a long-term investment. The majority of ground rents were nominal, and general consensus may be that these developers should suffer the loss. However, these are the same developers who are facing increased pressure to deliver affordable, safe and sustainable housing to meet the Government’s housing targets. MP Theresa Villiers made the point in the House of Commons when the legislation was being considered

This is also an era where we urgently need investment in our building stock to make the changes to insulation and heating systems needed to meet climate change commitments. That is another reason surely to try to retain professional freeholders, not shut them down.

There has been much criticism that the Act does not go far enough and does not assist existing leaseholders who have higher ground rents and ‘onerous’ ground rents which are not acceptable to lenders or future purchasers. We may find further leaseholders facing issues if a development now has a mix of properties sold with ground rents (pre 30th June) and those sold after the new legislation comes into force, i.e. without ground rents. A two-tier market may form. Valuers may struggle to assess the impact of removing the ground rent, and leaseholders may find their property snubbed in favour of one without ground rents. They may be forced to look at varying their lease to compensate this – ultimately at a further cost.

The promise of further legislation to address these issues has not materialised, although it remains promised by the government in this Parliament, and many leaseholders and others in the residential property market will be looking at this new reform as a loss on all sides.