What is the Leasehold Reform (Ground Rent) Act 2022? And what does it mean for freeholders and leaseholders?

The Leasehold Reform (Ground Rent) Act 2022 represents the first stage of the government’s aim to make leasehold property ownership fairer and more affordable, and it will come into force on 30 June 2022*.

But what is the objective of the Act, what does it mean for people looking to buy a leasehold property, and do current freeholders need to do anything to prepare? Let’s take a look.

What is the objective of the Leasehold Reform (Ground Rent) Act?

The Leasehold Reform (Ground Rent) Act will put and end to ground rent payments on new residential long leases for properties in England and Wales. A long lease is one with a term of more than 21 years.

The purpose of the Act is to make owning a leasehold residential property fairer, more transparent and more affordable for the leaseholder and to fulfil the government’s commitment to set future ground rents to zero.

What type of leases will the Act apply to?

It will apply to new, residential long leases that are entered into when the law has come into force on 30 June 2022, and onwards. Long leases are leases which are for a term of more than 21 years, and do not include short-term tenancies.

There are some types of leases that are excluded from the Act, and these include business leases, statutory lease extensions, community housing leases and home finance leases. 

How will this change benefit people purchasing a leasehold residential property?

Put simply, the Act will ensure anyone buying a leasehold property on or after 30 June 2022* cannot be charged ground rent fees. 

Historically, expensive ground rent fees have often caused problems for homeowners of leasehold properties, particularly where the fees have increased exponentially year on year.  

The Leasehold Reform (Ground Rent) Act will put an end to this for people entering into new leases and ensure that they cannot be charged more than a peppercorn rent. It is positive news for homeowners!

Do freeholders of leasehold residential properties need to do anything?

The Act will not apply retrospectively, so it won’t affect leases that are already in existence. 

However, if an existing lease is surrendered and re-granted, it may be caught by the Act - and the new regulations surrounding ground rent will apply. Freeholders need to be careful not to fall foul of the regulations when re-granting or extending the terms of an existing lease. Adding additional land to an existing lease may also cause it to be caught by the terms of the Act.

The new regulations will of course apply if you decide to grant a new lease, and you should review the ground rent clause in your leases before entering into it with a new buyer. It’s important that freeholders are aware of the new legislation so they don’t fall foul of it in respect of new leases.  Heavy fines of up to £30,000 can be imposed on freeholders who breach the new rules and charge ground rent in contravention of the Act.

What do property developers need to be aware of?

If you are developing properties you intend to sell as individual leaseholds, seeking the correct legal advice when creating new residential long leases to ensure they are compliant with the Act is crucial. The expert team at Holden Smith can support with this.

If your new lease demands ground rent, you must ensure it is not for more than one peppercorn per year and that no admin fees are charged for collecting the peppercorn rent.  

Leases entered into prior to the new law coming into force can still provide that ground rent is paid, however, this would likely put buyers off and may encourage them to delay the transaction until the new rules are in force.

Will anything change for people who currently own a leasehold property?

The Act only applies to new residential long leases on or after 30 June 2022*, so will not change the terms of your existing lease.  However, this is a continuing area of reform, and the government is due to address the issue of paying ground rent under existing leases in the future.

* except for retirement properties (where the Act’s provisions will not apply before 1 April 2023).

For more information and support with the topic covered in this blog, please contact us here or email hello@holdensmith.co.uk

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact Holden Smith.