Further changes to Leasehold Reform as the Leasehold Reform (Ground Rent) Act 2022 set to become law in 2022.

On 8 February 2022, the Leasehold Reform (Ground Rent) Act 2022 (‘the Act’), which puts to an end ground rents for new, qualifying long residential leasehold properties in England and Wales, received Royal Assent.

Whilst it has received Royal Assent, its provisions and all the reforms proposed by the government are not yet in force, although it is expected that all the provisions will commence within six months of the Royal Assent being provided.

This Act focuses specifically on ground rent clauses of future long residential leases, so only new build leases will apply that are granted after the legalisation commencement date and leases entered into before the commencement date, but that are surrendered and re-granted after this date.

This also applies to new shared ownership leases where the landlord will be able to charge a rent for the proportion they retain, but any rent on the tenant’s share can only be a peppercorn.

The Act will come into force no earlier than 1st April 2023 for retirement properties. Once the Act commences, if any ground rent is demanded as part of a new residential long lease (with exceptions), it can only be for peppercorn (£0) per annum. It will also ban freeholders from charging administration fees for collecting a peppercorn rent. The Government are using fines to enforce this of up £30,000 for freeholders who charge a prohibited ground rent in contravention of the Act.  This Act is the first of two-part seminal legislation to completely reform the leasehold system.

How will this Act affect non-statutory lease extensions?

Once the Act becomes law, leaseholders can still extend their lease informally (non-statutory), but the freeholder will still be able to charge a ground rent under the new extended lease with some restrictions:

  • A ground rent can only be charged up to the end date of the current lease term. No ground rent can be charged in relation to the extended period.
  • The ground rent charged up to the end date of the current lease can be no more than the ground rent stipulated by the existing lease.

What about the other leasehold reforms the Government proposed including the changes to statutory lease extensions?

It is not expected that there will be any further leasehold reform that will come into force in 2022. However, once the Ground Rent Act receives Royal Assent and becomes legislation, there will likely be announcements from the Government about further leasehold reform that may become law in the coming years. The Government previously hinted that this second stage of reform would aim to become law before the next General Election, expected in May 2024 so we may be waiting some time yet for the next changes to come to fruition.

What can we expect from these future reforms?

The Government has proposed substantial changes to the processes for lease extensions and collective enfranchisement as well as to the calculations for of the premiums.

Marriage value – The Government have suggested they will seek to ‘deal’ with the issue of Marriage Value (which can substantially increase the cost to extend a lease if the lease term is below 80 years), by potentially reducing the overall cost of extending a lease or purchasing a freehold. They intend to do this by introducing a statutory calculation to determine the value of the premium (the cost of extending a lease). Their main aim is to reduce the overall cost of extending a lease for leaseholders but there has been no information provided on what this future calculation may be.

Statutory lease length – presently, statutory lease extensions are for a maximum of 90 years, which is added on top of the existing unexpired term. The Government are proposing to statutory extend leases to a maximum term of 990 years, at a peppercorn ground rent, so leases will not require extending again for some time into the future.

Onerous ground rents – if leaseholders have what is considered an onerous ground rent, it can often cause difficulty in selling or remortgaging the property and if freeholder’s refuse to sign a deed of variation to vary the ground rent clauses, leaseholders have no statutory right other than to extend their lease (in order to get a peppercorn ground rent), even if their lease does not require extending. Therefore, the Government aims to provide leaseholders the statutory right to agree a Deed of Variation with a freeholder, therefore negating the need to extend their lease at the same time.

Overall, the news this month of the Ground Rent Act receiving Royal Assent is a step in the right direction but leaseholders and freeholders are still waiting for real answers as to how premiums over lease extensions and enfranchisements will be calculated and when these new reforms will become law.

For guidance on Leasehold Reforms, contact Sian Edwards, Associate Director in our Valuation team, on 01727 732 216 or via email to sian.edwards@argroup.co.uk.