From 30th June 2022, ground rent charges on most new leasehold agreements will be a thing of the past.
The Leasehold Reform (Ground Rent) Act 2022 effectively bans landlords from charging ground rent to future leaseholders. It also gives existing leaseholders the right to reduce ground rent to zero when they extend their leases informally (it’s already part of formal extensions). The change could save homeowners hundreds, if not thousands of pounds a year.
Here, we explain the details of this new legislation to see how it will work and what it will mean for you.
But first, what’s the difference between a freehold and a leasehold?
Freehold and leasehold are the two main property types you can buy in the UK. While both involve owning a home, there are some differences that it’s important to be aware of.
With a freehold property, you’ll own the home and the land it stands on for an unlimited amount of time. On the other hand, with a leasehold, you’ll own the home, but not the land it stands on.
But if you don’t own the land, who does? This is where the landlord, also known as the freeholder, comes in. The landlord owns the freehold to the land the property stands on, and when you buy a leasehold property, you’ll be renting the land from them according to your lease. Usually, your lease will last for years, decades or even centuries. In general, flats and maisonettes tend to be leasehold properties because while you own a property within a building, you don’t own the building itself.
The other main difference between freehold and leasehold properties is who takes responsibility for repairs and maintenance. If you own a freehold property, any maintenance or repair work is your responsibility. However, with a leasehold property, then the responsibility could be yours as the leaseholder, or it could be the landlord’s. Who is responsible for what should be outlined in the terms of your lease so that you know where you stand.
What is ground rent?
Ground rent is the name given to the rent you pay for the land your home is built on. It’s usually an annual fee, but may also be paid every six months, quarterly, or even monthly depending on the terms of your lease. Not all landlords will charge ground rent: it’s their choice whether they do or not. If they do, then this must be detailed in the lease. If it isn’t, then legally, you are under no obligation to pay it, even if your landlord asks for it.
Ground rent is different to service charges, which you may also have to pay if you buy a leasehold property. Typically, service charges cover specific things like building management costs, providing a concierge service, and keeping communal areas like stairwells and corridors clean and well-maintained.
What is the new legislation?
Under the new Leasehold Reform (Ground Rent) Act, ground rent for most new residential leases cannot legally be for anything more than “one peppercorn a year”. This means that no money can be charged or paid as ground rent, and it’s extremely unlikely that a landlord will enforce the collection of their peppercorns!
Additionally, landlords will no longer be able to charge administration fees for the collection of ground rent. Between this and the effective ban on ground rent, future leasehold homeowners could save hundreds, if not thousands of pounds a year.
Paying ground rent not only adds to the ongoing cost of owning a property. It can also make buying and selling leasehold properties more complicated, which means it can take longer to arrange and result in increased legal and conveyancing costs.
When the government announced the Leasehold Reform (Ground Rent) Act, they acknowledged a number of issues caused by ground rent that put people off buying leasehold properties. Leasehold properties are often cheaper than freehold properties at the outset, so it’s hoped that this change in legislation will make them more appealing. In turn, this could make homeownership more affordable and achievable for many people who currently aren’t able to get on or move up the property ladder.
What this means for you
Ground rent and new leasehold agreements
From 30th June 2022, ground rent charges are effectively banned for new leasehold agreements. This means that if you buy a leasehold property, the only ongoing payments you’ll need to make once you’ve moved in will be for your mortgage and for service charges (if these apply). It also means the process of buying a leasehold property should be quicker, less complicated and potentially cheaper from a legal point of view.
Not having to pay ground rent could save you tens of thousands of pounds over the course of your lease.
It’s worth bearing in mind that the new legislation only applies to non-retirement properties for now. But, it will also apply to retirement properties by 1st April 2023.
Ground rent and existing leasehold agreements
If you currently own a leasehold property and your lease includes ground rent, then you will need to keep paying this for the time being.
However, when it’s time to extend your lease, then the Leasehold Reform (Ground Rent) Act has you covered. Existing laws mean that leaseholders who exercise their legal right to extend their lease via the statutory or formal method can already reduce their ground rent charges to a “peppercorn” – or zero. The new legislation extends this right to those who extend their lease informally (outside of the statutory process), too. Despite this, though, there are still a few benefits to following the statutory process that could make it the better option:
- you remove the existing ground rent for the rest of the current term. If you agree an informal lease extension, your landlord may require you to keep paying ground rent, including any scheduled increases, until the current term of your lease is up
- you’re entitled to stay on the same terms of lease. This stops landlords from adding in other charges or terms that benefit them more than you, which they could try to do if you go down the informal route
- you have tribunal support if you need it. If you’re unable to agree a fair price for the extension with your landlord, you can take them to tribunal to settle the matter. You don’t have this option if you extend your lease informally
The new legislation will also give all leaseholders the right to extend their lease to a standard term of 990 years, regardless of the property type. This means that once your lease is extended, you won’t have to worry about it again in your lifetime. This may also make your property easier to sell, as lease renewal will be something generations of future owners won’t need to worry about, either!
Because you can request to extend your lease at any time – not just when it’s up for renewal – you can place the request as soon as the new legislation is in force to benefit from both the elimination of ground rent and the sense of security that comes from having a centuries-long lease.
Can I still buy the freehold to my property under the new legislation?
Yes! The new legislation doesn’t affect your ability to buy the freehold to your property, if that’s something you want to do.
How buying the freehold to your property works depends on what type of property it is.
Flats and maisonettes
If you live in a flat or maisonette, you can buy a share of the freehold, or you can club together with other leaseholders in your building to buy the freehold between you. If you choose the latter option and you’re successful, the building will become what’s known as a commonhold.
In a commonhold, each property owner becomes a “unit owner”, and owns a share of the freehold. You’ll also each take on a portion of the responsibility for maintaining and repairing common areas of the building. These include external walls, the roof, stairs and lifts. The commonhold will appoint a minimum of two directors, who will be voted in by the group. The directors can be people who are part of the commonhold, or they can be external professionals if as a group, you decide that’s the better thing to do. The directors will decide how much money each unit owner will need to contribute to cover maintenance and repair costs. But, every member of the commonhold will have a say on how this money is spent. For example, unit owners will vote on whether repairs or improvements should be made.
If you live in a leasehold house, then you may be able to buy the freehold in its entirety from your landlord. You may even have the legal right to buy the freehold, if you meet certain criteria.
If you choose to exercise your right to buy the freehold, then this is known as the “formal route”. Your landlord must respond to your request, and you must both follow a strict procedure and timescales set out in the law. Taking this route gives you more protection as a leaseholder if you and your landlord can’t agree on a fair price for the freehold. In this situation, you’re able to apply for a tribunal to make a decision.
If you don’t meet the criteria to take the formal route, you can still ask your landlord if they are willing to sell the freehold informally. The landlord has no obligation to agree, or even to respond to your request. The Leasehold Advisory Service recommends that even if you’re able to take the formal route to buy the freehold of your home, you start the process informally to save time and money.
Whatever type of property or own and whichever route you take to buy the freehold of your home, it’s a good idea to get professional help from a solicitor and surveyor to ensure everything is done correctly.
Ready to step onto or up the property ladder? Find out how long could take to buy your next home
Disclaimer: All information and links are correct at the time of publishing.