The act received Royal Assent on February 8. Lord Greenhalgh stated during its final stop in the House of Lords that it would come into effect within six months of this date.
Why is the act so important?
Historically, ground rents have been very low. Leases bought from Local Authorities commonly have a fixed annual rent of £10. Even leases written by commercial freeholders tended to include modest ground rent.
However, starting in the early-2000s, developers and freeholders have leased property with substantial ground rents and set them to rise significantly. For example, I read a lease this week where the ground rent rose to an astonishing £722,495 per year.
This practice is considered so unfair that in 2019 the Competition and Markets Authority launched an investigation and have successfully encouraged some of the major developers to remove these terms from existing leases.
This act will ensure that no new leases will be created with these unfair terms.
However, the act has two significant flaws:
There is a loophole
Leaseholders already have a legal right to a lease extension, called a statutory lease extension. This right is given to them under the Leasehold Reform Housing and Urban Development Act 1993 and ensures the terms of the existing lease cannot be changed when the lease is extended.
Inadvertently, this new act incentivises freeholders to offer informal lease extensions outside of the existing legislation. These informal extensions allow a freeholder to change the terms of the lease and introduce new charges which will replace the loss of ground rent. For example, adding uncapped administration charges which are levied when the flats are let, sold, or mortgaged.
The view from both Labour and the Liberal Democrats in the House of Lords on the 7th of February was that the incentive to offer informal lease extensions would be even worse between now and when the act comes into effect – because this window is the last opportunity for freeholders to tie leaseholders into a high ground rent before it becomes illegal.
It will make things worse for current leaseholders
Ground rent is very common, but in many cases, it doesn’t currently cause a practical issue when you come to sell or mortgage. For example, Nationwide are usually happy to lend so long as the ground rent is no greater than 0.1% of the property value. According to UK Finance Lender’s Handbook, many other lenders will accept a ground rent of up to 0.2% on second-hand property.
However, the fact this act makes charging any ground rent illegal is a very bold statement. Why would a prospective buyer purchase a property – even with an existing and manageable ground rent – when they have been told that this charge simply shouldn’t exist?
This creates a two-tier system that only adds to the woes of existing leaseholders.
I have an existing ground rent, what are my options?
If you have a ground rent, and you want to get rid of it, then you do have a lifeline.
A statutory lease extension will set your ground rent to £0, and this includes the remaining years of your existing lease. It will also extend your lease by an additional 90 years.
However, to “buy out” you ground rent, a price must be paid to your freeholder. The higher the ground rent charged in your lease, the greater the price this will be.
What other legislation do we need?
Early last year, the government promised to launch a second bill which would make it cheaper for existing leaseholders to extend their leases using statutory lease extensions, amongst other things.
One of their promises was to cap the amount of money that leaseholders would have to pay to a freeholder to compensate them for the loss of ground rent after a lease extension. In cases where the ground rent is high, this could make the lease extension premium much lower.
The government has also promised to abolish “marriage value”, which is an additional charge payable by the leaseholder when the lease they are extending is below 80 years. The savings to someone with a £250,000 flat with a 79-year lease would be in the region of £7,500. The saving could be £16,500 where the lease has only 60 years remaining.
My concern is that these promises are a long way from being law – and the journey to get there is both contentious and complex.
It is contentious because, whilst leaseholders are unsurprisingly excited by the prospect of cheaper lease extensions, the freehold sector is less enthusiastic. Freeholders are likely to lobby hard against it.
It took the current Leasehold Reform (Ground Rent) Act 23 pages to simply ban ground rents on new leases. There are 4.5 million leasehold properties in England and Wales and legislation which caters to all of these will have to be very complex.
When the act had its final reading in the House of Lords, Lord Greenhalgh was pressed on whether the legislation would be introduced in this year’s Queen’s Speech. He simply refused, stating “I cannot give a commitment about what will appear, but my expectations are that leasehold reform will be front and centre around his [Michael Gove, secretary of state for housing] ambition for a wider reform of housing.”
This legislation is needed now. Existing leaseholders are left in a position where they do not know whether to extend their leases or put their lives on hold to see if it might be cheaper and fairer in the future.
*Linz Darlington is CEO of specialist lease extension valuers and project managers, Homehold