Following the furore of the leasehold ground rents scandal which came to prominence a few years ago, the Government has finally taken steps to limit the worst excesses, with the Leasehold Reform (Ground Rent) Act 2022.
New rules come into effect from 30 June 2022, the main changes are:
- Any new qualifying residential lease granted after this date must have a peppercorn ground rent;
- Landlords are forbidden from charging an administration fee to collect ground rent to close this loophole;
- Any qualifying lease extension to an existing lease will leave the ground rent as it currently is for the remainder of the current term, with the ground rent going to zero for any additional years added to the term;
- Retirement properties will not fall under this new regime until at least April 2023;
- Statutory Lease extensions are exempt but they would result in a peppercorn ground rent in any event.
What to check before buying –
We find that many leasehold transactions also involve a lease extension, where the Seller is seeking to extend their lease term to increase the value of the property.
Buyers should carefully consider what is on offer before they proceed to exchange and complete prior to 30 June 2022, and seek advice from their conveyancing solicitor. At the moment the rules state that for a “voluntary” lease extension the Landlord can increase the ground rent when providing a lease extension to the existing leaseholder.
This has the effect of increasing the Landlord’s income, and also of increasing the value of the freehold reversion.
Lease extension issues
Say for example the Seller is selling a flat for which the Lease was granted on 1 January 2000 for 99 years at a ground rent of £100 per annum. If the Seller then extends the Lease by voluntary arrangement before 30 June 2022 it is likely the Landlord will also, from completion of the new Lease term, seek an increase in the ground rent.
This would mean the landlord would receive a higher ground rent for the whole of the rest of the new term.
Steps a lease Buyer can take
If however the Seller waited until after 30 June 2022, the ground rent would remain at £100 per annum until 31 December 2099, and would then revert to one peppercorn for the additional years added to the term.
This is a significant long-term saving, and will likely result in a positive effect on property value.
What to do now
If you are unsure about how best to proceed with your sale or purchase, we suggest you seek advice from your property solicitor or surveyor.