The abolition of ground rents on new leases in England and Wales came into force on 30 June 2022 with the introduction of the Leasehold Reform (Ground Rents) Act 2022. This is the first stage of what the government has promised will be a radical reform of the leasehold system. But details of future leasehold legislation are vague. Joe Genco examines the new law on ground rents, other possible leasehold reforms, and where this leaves leaseholders in the meantime.
The ground rent on a new lease cannot now be more than a ‘peppercorn’, ie. zero. The abolition of ground rents applies to leases granted (or contracted for) after 30 June 2022, but ground rents in leases entered into before this date will continue to be payable. It is important to note that where a lease extension is being granted voluntarily (ie informally), the landlord can insist on the existing ground rents being paid for the remainder of the current lease term. The ground rent will be zero from the date the current lease term expires and the new lease term takes effect.
The above changes are the first phase of leasehold reforms promised by the government. Michael Gove, the Secretary of State for Levelling Up, Housing and Communities, said on 29 January 2023 that further reforms to the leasehold system are forthcoming: “We want to introduce legislation in the final parliamentary session – later this calendar year – in order to change the leasehold system.”
The government has previously expressed its desire to change the enfranchisement, right to manage and lease extension procedures, including reducing the premiums payable for lease extensions under the Leasehold Reform Housing and Urban Development Act 1993. Despite Michael Grove’s announcement, no light was shed on which elements of the leasehold system the government will turn its attention to next. This makes it difficult for leasehold practitioners to advise freeholder and leaseholder clients.
The Minister for Housing and Planning, Lucy Frazer, stated last month that the government is committed to building on the Leasehold Reform (Ground Rent) Act 2022 and delivering the second phase of its two-part leasehold reform programme within this parliament. We look forward to receiving clarity on the government’s agenda for leasehold reform and details of any new legislation.
The new ground rent legislation is welcome, but its drawback is that it only helps new leaseholders and does not affect ground rents in existing leases.
Should leaseholders wait for new laws or extend their leases now?
Many leaseholders are delaying extending their leases in the hope new legislation will come in, even though it could be years before it comes into force. This could prove a costly and risky strategy. For example, it could backfire if you are thinking of selling your property, as buyers may not be able to get a mortgage if the unexpired lease term is too short. If you are planning to remain in your home and the unexpired lease term is less than 70 years, you may not be able to find a competitive mortgage deal. With less than 60 years expired, you are unlikely to be able to remortgage at all.
If your lease term is nearing or approaching 80 years unexpired, you may be best off extending it now before “marriage value” becomes payable rather than waiting for further leasehold reforms. Marriage value is the uplift in the property’s market value arising from the extended lease term.
The government has suggested in the past that it wants to do away with marriage value in the next stage of reform. So, if your lease falls below 80 years, you could save substantial sums when the leasehold reforms come in. However, as mentioned above, this could be a risky strategy. If the reforms are not introduced in time, you may need to pay more the longer you wait. Every year below 80 years can cost leaseholders hundreds, if not thousands of pounds.
So, leaseholders with a lease at or close to 80 years remaining should consider extending their lease before marriage value becomes payable rather than waiting for further leasehold reforms.
If you require further information on this article, please contact Joe Genco at [email protected].
Disclaimer: The above is merely general guidance and should not be relied on as formal advice. We suggest you take professional advice before taking any action in relation to the issues discussed above.