What is the Leasehold Reform Act?
The Leasehold Reform (Ground Rent) Act is a piece of legislation pushed through by the government that will ensure anyone buying a leasehold property on a new residential long lease in England or Wales cannot be charged ground rent fees. A long lease is one with a term of more than 21 years.
A ‘leasehold property’ means you own the property, but not the building or land and therefore you must pay an amount of ‘ground rent’ each month to the freeholder who owns the land. The alternative to a leasehold property is a ‘freehold property’, which means you own the building and the land it sits on.
Historically, expensive ground rent fees have often caused problems for homeowners of leasehold properties because the fees can rise sharply every year, so the purpose of the Act is to make owning a leasehold residential property fairer, more transparent and more affordable for the leaseholder, as well as to fulfil the government’s commitment to set future ground rents to zero.
How will the Leasehold Reform Act work?
The Leasehold Reform Act will limit ground rent to something called a 'peppercorn rent' and will also prohibit administration charges for peppercorn rents as an anti-avoidance measure. A peppercorn rent has no financial value so this essentially means ground rent will be £0.
Now you might be thinking that’s strange terminology, but it refers to the traditional practice of supplying a peppercorn as a form of token consideration to make a binding contract.
When is the Leasehold Reform Act coming into play?
The Leasehold Reform Act 2022 will come in to force on 30t June 2022 for residential properties. The exception to this is for retirement properties, where it will not come into force until 1 April 2023 at the earliest.
What type of leases will the Leasehold Reform Act apply to?
The Leasehold Reform Act will apply to new, residential long leases that are entered into from 30th June 2022, and onwards. Long leases are leases which are for a term of more than 21 years, and do not include short-term tenancies.
There are some types of leases that are excluded from the Act, and these include business leases, statutory lease extensions, community housing leases and home finance leases.
What will it mean for people buying a leasehold home?
The Leasehold Reform (Ground Rent) Act will mean anyone buying a new leasehold home that has a new lease of more than 21 years won’t need to pay any ground rent fees.
However, it’s important to note that this is only the case when the lease itself is new. Regardless of the fact the home would be new to you, if you are buying a leasehold home that has an existing lease, the Act won’t apply, and you’ll need to pay whatever ground rent fees are set out in the lease.
If you are looking at leasehold homes, we would urge you to investigate the lease properly to find out for sure whether it’s a new lease covered by the Act, or whether it’s an existing lease where ground rent charges will apply.
If it’s the latter, make sure to check the terms of the lease – particularly in relation to fees each year and whether there’s a cap on the amount they can charge you. It’s very common for existing leases to have uncapped fees and some homeowners have seen their charges double each year, which as you can imagine is very unsustainable and also poses problems for selling or re-mortgaging because a lot of lenders are reluctant to lend on a property with those terms.
What will it mean for people with an existing leasehold home?
The Act only applies to new residential long leases on or after 30 June 2022* so unfortunately, there’ll be no change for you if you already have a leasehold home.
However, this is a continuing area of reform, and the government is due to address the issue of paying ground rent under existing leases in the future. So far, all we know it the government is working on a second bill which will include a new right for you to extend your lease to 990 years at zero ground rent.
The only downside to this is that it won’t be free for you. Lease extension can be a difficult process and we would always recommend you get professional help from a solicitor and surveyor with experience in this area, which could cost a few thousand pounds when you consider the fees as well.
That being said, hopefully this is something the government will consider so that when we hear more about the bill, it also includes measures to make sure it is an affordable solution. We will keep you informed as and when we hear more.
If you want to read more about this topic, we've written a blog about why we think the new rules aren't currently enough.