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In December 2017, the Government announced plans to tackle the growing property litigation problem of new build houses being sold as leasehold rather than freehold and to limit the ground rents payable by tenants of leasehold properties. The leasehold reforms aimed to build a freehold or extend a lease “easier, faster, fairer and cheaper”.
The first phase of the leasehold reform was to abolish ground rents for newly built houses, which came into force on 30 June 2022.
Ground rents
The Leasehold Reform (Ground Rent) Act 2022 was enacted on 30 June 2022. This Act abolished ground rents on all new leases in England and Wales, which means that the ground rent on all new leases will now be a ‘peppercorn’ or zero.
Ground rent has also been abolished for lease extensions meaning that if an agreement has been reached with your freeholder to extend the lease, the freeholder cannot increase the ground rent for the remaining lease period. From the date of the new term, the ground rent will be zero.
Any new leases of retirement properties are also within the scope of the Act, but not before 1 April 2023.
Historically, ground rents were always a peppercorn or a nominal rent; however, modern freeholders have set higher ground rents on long leases. Higher ground rent has caused problems for leaseholders being able to sell their property or obtain a mortgage.
Proposals for Reform
In January 2022, the Government opened a consultation and sought views on specific recommendations made by the Law Commission in July 2020 that would broaden access to enfranchisement.
The proposals would increase the residential limit from 25% to 50%, allowing leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or claim a right to manage.
A year on from that consultation, there has been no clear statement from the Government on their timeline for leasehold reform or the Government’s response to the Law Commission’s proposals.
The Government has confirmed that the leasehold reform would be tackled through two pieces of legislation. The first piece of legislation was The Leasehold Reform (Ground Rent) Act 2022, and on 20 February 2023, Michael Grove, Secretary of State, said:
‘We hope, in the forthcoming King’s speech, to introduce legislation to fundamentally reform the system. Leaseholders, not just in this case but in so many other cases, are held for ransom by freeholders. We need to end this feudal form of tenure and ensure individuals have the right to enjoy their own property fully’.
Further legislation
During the next phase of reforms, further legislation will include:
- Giving leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish at zero ground rent, for 990 years”. Currently, leaseholders can extend their lease formally through the statutory process but can only extend their existing term by 90 years.
- Reforming the process of the enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold. Formally outlining the cost of extending a lease will prevent leaseholders from having to negotiate the price with their freeholder.
- Abolish marriage value; this is a major issue for leaseholders if their lease is below 80 years because the cost of extending their lease will become much more expensive due to the marriage value forming part of the calculation.
Timetable for reform
The timetable for the introduction of any new legislation remains to be determined. The King’s speech has been delayed until Autumn 2023, and therefore leaseholders are hopeful that any details of any leasehold reform will be released in the speech.
In the meantime, this presents a challenge to landlords and leaseholders. Landlords need clarification on how to prepare for the reforms and if they can do anything to mitigate against any potential impact on their residential properties. On the other hand, leaseholders have no guarantee of what will be introduced, and those leaseholders who wish to bring an enfranchisement claim are left to decide what to do next.