Long-awaited reforms to 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 newbuild companies imposing unfair ground rents that regularly doubled over time, leaving some homeowners unable to sell.
Leaseholders also want the option of extending a lease for more than 90 years, which is currently the maximum available when a lease is increased 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 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. Substantial penalties exist for freeholders who breach the rules.
Ground rent is also 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 of the lease is in effect, no ground rent can be charged.
Future leasehold reforms
It is proposed to put further legislation in place to address other issues of concern to leaseholders. One of the main points that they would like addressed is the length that a lease can be extended by using the formal and statutory lease extension process. Currently, a maximum of 90 years can be added to a lease using this procedure. While this may seem substantial, in reality, once a remaining lease term falls below 75-80 years, leaseholders need to start thinking about extending it as mortgage lenders do not generally like to lend on leasehold property when a remaining lease term is much 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 change the law so that leaseholders will be able to extend a lease by 990 years.
It is also proposed to introduce a standard calculation for working out how much the leaseholder will be required to pay to the freeholder. This will avoid the need for lengthy negotiations and give leaseholders a level of certainty when they are considering whether to start 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 a 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.
It is also proposed to give those with leasehold houses the right to extend their lease for 990 years, again with no ground rent payable.
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