Properties in the UK are sold with a leasehold or freehold. The former is most common in flats with shared blocks and is when the home sits on the land occupied by a different owner. Over the years, leaseholders have had growing concerns about the fairness of the terms set out in their agreement. With ground rents and lease lengths a significant part of the issue. It all came to a head with the leasehold reform act. But what does it entail, and when will the leasehold reform happen?
What is leasehold reform?
In December 2017, the government announced the leasehold reform bill. The intention was to set a limit on ground rents for new lease agreements. While also trying to find ways to make buying a freehold or extending a lease easier.
Since then, it has gone through various drafts in the House of Commons. With the first phase – known as the Ground Rent bill – set to come into effect in late June 2022. Once the law is in force, buyers will no longer need to pay ground rent on new properties (more on that shortly).
Why did the leasehold reform become a thing?
Ground rents have long been a contentious issue in England and Wales. They cost around £300 per year on average but can be much higher. Beyond that, some developers had the power to double ground rent costs each year.
This, coupled with other various leasehold issues – such as the time a lease takes to renew – led to pressure on the government to conduct a full review. And the ground rent is the first part of the leasehold reform to pass into legislation.
What is ground rent?
Ground rent is a legal requirement where the leaseholder pays the freeholder for living on the land where the building is located. In England and Wales, most purpose-built flats are leasehold and require ground rent from each property owner.
When will ground rent be abolished?
From 30th June 2022, buyers of new properties will no longer need to pay ground rent. It means they’ll save hundreds of pounds each year. Then, from July, ground rent will also be abolished on informal lease extensions.
When the leaseholder enters into informal negotiations with the freeholder, the ground rent must not exceed the remaining years of the lease. Once the current term expires, a new one will begin with no ground rent due.
Unfortunately, if you currently pay ground rent as part of a leasehold, this new legislation won’t affect you. However, the government is looking at ways to make it fairer for current leaseholders who currently pay ground rent.
What about the other reforms, like the 999-year lease?
Many hope the Ground Rent bill is just the start and the government passes other legislation, such as the length of leases. However, there has been some disappointment: there was no mention of the reforms in the Queen’s speech this year. Consequently, it won’t be until 2023 when potential new reforms occur.
An increasing number of new-build homes offer 999-year leases as a default. But current leaseholders don’t have the same luck and can only extend a term by 90 years. This will hopefully change, and leaseholders have been promised that they can extend a lease to a 990 term through a better and more transparent process.
The government also plans to create a leasehold calculator, which will provide a statutory calculation to determine the value of the premium a leaseholder pays to a freeholder. The aim is to avoid negotiations, which can be costly and time-consuming.
Lastly, the marriage value will also be on the agenda. The cost of extending a lease increases when there are fewer than 80 years to run. It’s a result of the marriage value, which equates to 50% of the increase in the property’s market value due to the lease extension.
What happens next?
From 30th June, legislation occurs, and anyone buying a new home with a leasehold will no longer be required to pay ground rent. What happens after that, however, is still up in the air. The government is said to be committed to delivering the next phase by 2024, meaning leaseholders up and down the country may have to wait for another two years before further reforms. In the meantime, however, homebuyers can take the win knowing that ground rents will be abolished.
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Last Updated: June 28th, 2022