What does ground rent reform rent mean for leaseholders?
In January 2021, the government announced major reforms to ground rents on leasehold properties, scrapping payments that have added an extra level of bureaucracy to acquiring new properties.
The legislation will allow leaseholders to extend their lease to a maximum term of 990 years, effectively setting their ground rent costs at zero. Housing Minister Robert Jenrick MP declared this a victory for millions of homeowners up and down the UK.
“We want to reinforce the security that home ownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners,” said Jenrick.
“These reforms provide fairness for 4.5 million leaseholders and chart a course to a new system altogether.”
What do these reforms mean in practice for owners of leasehold properties? How much can you expect to save, and what are the steps you need to take to make the most of this opportunity?
Current ground rent legislation
What does ground rent even mean? In the simplest terms, ground rent is a fee that a freeholder charges the owners of a property built on their land.
Essentially the freeholder owns the building (such as a block of flats), while a leaseholder can purchase a lease on the property found within. Typically these agreements can be extended to 99 or 125 years by a new leaseholder.
While leaseholders are permitted to purchase the freehold under the current legislation (The 1993 Urban Development Act), there are a number of caveats that prohibit many leaseholders from taking this step. For example, at least 50% of the leaseholders in a freehold must participate in the enfranchisement claim for it to be successful.
The cost of ground rent varies depending on typical market variables; for example the size of the property or the location. In 2018, the average fee was around £300 per annum, although some leaseholders were paying upwards of £700 a year.
While these fees may not seem prohibitively expensive, they can be off putting for first time buyers. Purchasing a property that requires an extension on a lease can add thousands in professional fees to the process.
It can also make life difficult for the vendor. Letting a lease dwindle down can make a property much harder to sell, as buyers are put off by the impending costs and red tape.
Freeholders can unilaterally increase the amount of ground rent, with little or no benefit to those faced with extra charges, again lengthening the process and increasing the costs of buying or selling property.
What’s changing in the new ground rent legislation?
Leaseholders will be given the right to extend their lease by a maximum term of 990 years, at zero ground rent thanks to this new legislation.
The government is also establishing a commonhold council. Formed by a partnership of leasehold groups, industry and government, it is hoped that the council will prepare homeowners and the market for the take-up of a ‘commonhold model’.
Inspired by other such schemes around the world, commonholds allow homeowners to own their property on a freehold basis, giving them more control of their living expenditure and greater autonomy over their living space.
‘Marriage value’ - a compensatory payment to the freeholder by the leaseholder based on valuation after lease extension on properties with less than 80 years on an agreement - has also been abolished. Ground rents have been restricted to zero on all new builds, restricting uncertain and exploitative practices that have often negatively affected owners of retirement properties.
What does this mean for leaseholders?
What are the immediate steps a leaseholder can take in light of these changes? Check the remaining number of years left on your existing lease, extending before it falls below 80 years. Even with marriage value soon to be abolished, leaseholders should avoid incurring additional costs, as this charge can increase total payments by as much as 20%.
In theory, a dwindling ground rent agreement could incur exponentially increasing costs for a leaseholder. For example, if an agreement fell below ten years, a landlord could effectively demand a premium payable equivalent to a property’s full market value to extend.
Leaseholders should take advantage of this new legislation as soon as possible. Increasing the terms to 990 years will allow the effective abolition of ground rent, reducing risk of being exposed to exorbitant extension costs.
As more and more leaseholders take up this opportunity, ground rent will effectively be consigned to the past, allowing for a much freer market for both vendors and buyers, and giving homeowners more control over their properties.
Speak to Aston James Associates about how we can help you review your current leasehold agreement to make sure you can make the most of this new legislation.
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