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Ground Rent Reform and what it means for Property Investors

by Dexter Bardua -

The Leasehold Reform (Ground Rent) Act 2022  came into effect on the 30th June 2022 and heralds the start of ground rent reform. The Act “…puts an end to ground rents for most new long residential leasehold properties in England and Wales.” This is the first phase of the government’s plan to make home ownership fairer, more transparent and less ambiguous for millions of future leaseholders. This article aims to explain these changes and what it means for property investment.

Different Types of Property Ownership

 

In England there are two ways you can own property; freehold ownership and leasehold ownership.

The Enfranchisement Valuation Report, the report from the law commissions 13th Programmer of Law Reform included leasehold reform, defines Freehold Ownership as “property ownership that lasts forever, and which generally gives fairly extensive control of the property.” This is essentially the ownership of the land and the structure on top of it.

Leasehold Ownership is ownership which is time-limited. For example, ownership of a 99-year lease. Control of the property is shared with, and limited by, the landlord”. This is effectively ownership of the building (or part of the building) only and not the land. The “landlord” mentioned in the definition has freehold ownership of the property.

 

What is Ground Rent?

 

Ground Rent is rent that the leaseholder pays to the freeholder for the use of the land. The law commission’s report defines ground rent as “…a regular payment which a leaseholder is required by his or her lease to pay to the landlord. Ground rents can be “fixed” (for instance, £300 per annum), subject to a simple review (for example, increasing by £50 per annum every 25 years), or subject to a “dynamic” review (for instance, increasing in line with the Retail Prices Index).”

 

The Problem with the Old Ground Rent Rules

 

Following on from that, the problem that the Act attempts to tackle is the ability for some freeholders to increase ground rent exponentially year on year through dynamic review. Leaseholders incur costs that they were not aware of previously. They purchased the leasehold, leaving them with unforeseen and onerous bills. The other issue with these potentially onerous costs that can affect the ability to get a mortgage against the property or to extend the leasehold or to purchase the freehold.

 

What the Act Does

 

 

Firstly, it limits the ground rent on any new leases to one peppercorn. A peppercorn is the legal way of saying that the rent is not ‘substantive’. Although, interestingly, is it is technically enforceable but seldom demanded. Secondly, there must also be no admin fees for the collection of the ‘peppercorn’. Leases which came into effect before the 30th June 2022 can still subject to ground rent.

 

What type of leases will the Act apply to?

 

The Act applies to new leases and residential long leases that came into affect on or after 30th June 2022. Long Leases are leases with a tenure of more than 21 years. Also The Act does not cover short term leases. Moreover, the Act does not cover statutory lease extensions, business leases, home finance leases and community housing leases.

 

What this means for Property Investors

 

These changes to ground rent give more clarity and certainty to investors about their costs and therefore the viability of an investment. Basically costs will be lower and more predictable and this is therefore a win for property investors.

 

Future Reform

 

 Future legislation will:

  • Reform the process of evaluation used to calculate the buying of the freehold or  extending a lease
  • Also Abolish marriage value.
  • Cap the treatment of ground rents at 0.1% of the freehold value
  • In Addition, maintain existing discounts for improvements made by leaseholders
  • Give leaseholders  the right to extend their lease agreements. “As often as they wish, at zero ground rent, for a term of 990 years”.
  • Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue. “Subject to existing safeguards and compensation”.
  • Enable leaseholders, to buy out the ground rent without having to extend the lease term.

Some of Our Developments are already enjoying the benefits of no ground rent

 

Property Investment Opportunity with no Ground Rent

References

 

https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2020/01/Enfranchisement-Valuation-Report-published-9-January-2020.pdf – Enfranchisement Valuation Report

 

https://www.legislation.gov.uk/ukpga/2022/1/introduction/enacted The  Leasehold Reform (Ground Rent) Act 2022

 

https://commonslibrary.parliament.uk/research-briefings/cbp-9236/ The Act Research Briefing

https://www.lease-advice.org/article/ground-rent-and-its-escalation/#:~:text=A%20large%20ground%20rent%20or,flats%20with%20your%20fellow%20leaseholders. Ground Rent Escalation

 

https://hoa.org.uk/2021/01/lease-extension-process/#:~:text=Government%20has%20said%20they%20are,for%20when%20things%20go%20wrong.


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