The Leasehold Reform (Ground Rent) Act, which went into effect on June 30th, has eliminated ground rent for all new leases in England and Wales. There would be no more than a ‘peppercorn’ amount of ground rent on new leases, meaning that prospective homeowners and some current leaseholders might save hundreds a year, a welcome for homeowners at a time of increasing financial hardship.

In January 2021, as part of a slew of leaseholder-friendly changes, the specifics of the shake-up were officially announced. However, the formal date of the new law’s implementation was just announced in April. Because it takes retirement home developers longer to implement the ground rent system than it does for other types of housing, it won’t take effect until at least April 2023.

One of two proposals the government is currently developing, the Leasehold Reform (Ground Rent) Act, particularly benefits future leaseholders. No timetable has yet been established for the adoption of a second measure that aims to make it simpler and cheaper for current leaseholders to renew their leases.

The number of leasehold homes in England and Wales is around 4.6 million, which means the new rules will potentially be far reaching. The coming legal changes to ground rent are not applicable in Northern Ireland or Scotland, since they have separate systems.

How will the changes affect leaseholders?

If you are a current leaseholder or thinking of buying a leasehold home in the near future, you will naturally be wondering how the coming changes will affect you.

New leases will not be subject to ground rent

If you acquire a leasehold home with a new lease, you won’t have to pay ground rent under a new rule that takes effect in July.

Many leasehold property owners are required to pay a yearly fixed amount of ground rent to their freeholder in exchange for the use of the land on which their property is situated. Ground rents of £100 to £250 or even higher have become more common in leasehold properties in the last two decades as this charge has been creeping up more and more.

Since developers and freeholders started creating leases that caused ground rents to double every 10 or 20 years, which often made it difficult for affected homeowners to sell or mortgage their properties, though some major developers have agreed to amend leases on homes that have these onerous ground rent terms.

On informal lease extensions, ground rent will be eliminated as well

Existing leaseholders will also benefit from the new law in that the freeholder who owns the lease will not be able to raise your ground rent for the remainder of your lease term if you decide to extend your lease informally (although it’s always advisable for leaseholders to take the formal route). The ground rent will be reverted to zero when the current lease term expires and the next term begins.

Why has ground rent been controversial?

Ground rent, which dates back to the Middle Ages, is a very divisive levy. The leaseholder pays the landowner an annual sum in exchange for the right to occupy their land. The way it has been used in more recent years has left many leaseholders in houses that can no longer be sold or at least much harder to sell. Many leaseholders’ yearly payments were being doubled every ten years as a result of developers’ inserting “doubling” terms into their leases. As a result of this practice, many homeowners now own homes that no one wants or can afford to buy and where lenders are unwilling to grant a mortgage for.

Right to extend lease by 990 years

A new provision for leaseholders to extend their leases by 990 years at zero ground rent is the next stage in leasehold reforms.

Leaseholders won’t be overcharged thanks to a calculator that uses a set formula to figure out how much a lease renewal must cost.

The government is considering switching from a leasehold to a commonhold structure for flats. All the tenants of a building own a piece of the freehold and are responsible for its upkeep under a commonhold system.

Summary

As part of the government’s plan to change the leasehold system, this announcement will keep future homeowners from having to deal with the problems that many leaseholders already have.

However, there is still a lot that needs to be done. For a number of leaseholders who have had their ground rent modified so that it doesn’t grow or double with inflation, they will still have to pay an annual charge.

Because of this, the proposed changes to lease extensions are likely to have a bigger effect on a large number of leaseholders.