The Leasehold Reform (Ground Rent) Act 2022 first came into force in 2022, aiming to tackle issues relating to ground rents experienced by many owners of long leases.
What were the problems with ground rents, and how do the leasehold reforms benefit households?
What is ground rent?
Many homes are owned and occupied under ‘long leases’, rather than the homeowner owning the freehold of the property.
A long lease is classed as a lease that has a term of 21 years or over. Housebuyers pay a premium for the lease (the purchase price of the property), and the lease then requires payment of an annual ‘ground rent’ to the landlord.
Ground rents vary greatly and are often uncapped, ranging from ‘one peppercorn’ to hundreds of pounds a year. In many cases, the landlord may not be required to deliver any services in exchange for the payment of ground rent.
What is ‘peppercorn’ rent?
‘Peppercorn’ ground rents are simply rents of very low or nominal value. Historically, these rents have never been defined in law, but the new Leasehold Reform (Ground Rent) Act 2022 defines a peppercorn ground rent as “an annual rent of one peppercorn”.
What was the problem with ground rent?
Landlords are often permitted under long leases to increase ground rents at regular intervals, resulting in some long leases carrying high uncapped ground rents after values escalated during lease terms.
Owners of long leasehold properties found that they were unable to sell their homes as a result of these high ground rents; homebuyers didn’t want to take on the responsibility or uncertainty of escalating ground rents, and mortgage lenders were reluctant to approve mortgages for purchases of these properties. And, as with any rent, if ground rents are not paid on time, landlords are entitled to sue you for rent arrears and could even – theoretically at least – take possession of the property.
What does the Leasehold Reform (Ground Rent) Act 2022 change?
The 2022 Act restricts most ground rents on new leases to just a peppercorn rent, meaning that the ground rents in effect have no financial value. Further, landlords cannot charge administration costs on a peppercorn rent lease.
The impact of this change means that owners of new long leases should not face the same difficulties of escalating ground rents, giving them greater confidence and clarity when it comes to selling – and buying – a long leasehold property.
Do the changes apply to all long leases?
No. The 2022 Act only applies to long leases granted on or after 30 June 2022, and does not apply retrospectively to older residential leases. If you’re buying a property subject to an older lease, you may find that it is still subject to an escalating ground rent. Your solicitor should advise as to what you may be liable for, both now and in the future.
Further, the Act also does not apply to business leases, and to other more specific leasehold arrangements such as community housing leases.
What does this mean for me?
If you’ve bought a leasehold property on or after 30th June 2022 with a term over 21 years, your long lease should not have a requirement to pay a monetary ground rent. As a result, your lease should be more appealing to homebuyers when you’re looking to sell, as well as their mortgage lenders.
If you own, or are interested in buying, an older lease which is still subject to ground rent, you may wish to explore completing a variation of the lease with your landlord to change the rent to ‘one peppercorn’.
This article has been prepared by Adroit Legal Services and is not intended to constitute legal advice.
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