The government has confirmed that the new ground rent ban will come into force on the 30th of June, effectively banning ground rent charges on most new residential leases in England and Wales.
This will be the first of several measures to be introduced since royal assent was given to the Leasehold Reform Bill at the beginning of 2022. It’s designed to be a solid statement from the government that they are actively starting to reform the archaic UK leasehold system.
The ground rent ban will prevent anyone buying a home on a new long-term lease from having to pay an annual ground rent to their freeholder. Once in place leaseholders will also be able to extend their current lease to 990 years at zero ground rent.
And for landlords, breaching the new law will be a civil offence punishable by fines of between £500 and £30,000 for offenders, penalties that local authorities – who will be responsible for enforcing the ban – will be able to keep to fund future enforcement activities.
The existing leasehold system has been widely criticised for many years. Many believe it is open to abuse as freeholders could multiply ground rents and apply substantial renewal charges at their own discretion and without challenge.
This is because most owner-occupied flats and new build houses in England and Wales are owned on a long leasehold basis. As leaseholders do not own the land on which their home is built, they need to pay the freeholder an annual ground rent.
Obviously, the home cannot exist without being able to be on that land. This is what, historically, has given the freeholder the ability to increase ground rents as they saw fit.
The government said many landlords have already reduced ground rent to zero for homebuyers starting a new lease with them in preparation for the new legislation. This announcement comes only months after the Competition and Markets Authority (CMA) persuaded major home builders including Aviva, Persimmon, Countryside Properties, Taylor Wimpey to stop doubling their annual ground rent charges every year for leaseholders.
However, although the ban on ground rent will eventually apply to future retirement homes, this won’t take force until at least April 2023. This is because the owners have claimed it will take longer to adjust their systems.
If you are planning to buy a leasehold property here are the key things you need to know about the new Leasehold Reform (Ground Rent) Act:
1. Ground rent on new leases will be abolished
If you buy a leasehold property with a new lease after the 30th June 2022, there will be no ground rent to pay on it.
2. Ground rent will be abolished on informal lease extensions
If you decide to extend your lease informally, the freeholder who owns your lease will be not able to increase your ground rent for the remainder of your lease term.
Then, from the moment the existing lease term expires and the new term begins, the ground rent will automatically revert to zero.
However, it is important to note that if you are planning to formally extend your lease a minimum of 90 years will automatically be added to the length of your lease while any ground rent is reduced to zero. This could still cost you thousands of pounds depending on the current length of your lease.
In a bid to tackle this the government is proposing a second bill intended to make it easier and cheaper for leaseholders to extend an existing lease. At time of writing this is still in the consultation stage and no date has been set for its introduction.
If this blog has raised any questions and you’d like us to look at a lease for you or you’d like any other help with the purchase or sale of a property, please email me at Jeremy.Tulloch@collinshoy.com or call me on 0208 515 6600.