Leasehold Reform – What this Means

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August 13, 2022
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Leasehold Reform – What this Means

The Leasehold Reform (Ground Rent) Act 2022 was introduced following pressures on the UK government to end the issue of onerous and escalating ground rent provisions and to initially “set future ground rents to zero.” This consisted of The Law Commission’s (LC) work; an independent body that takes on various roles and offers reform proposals in all legal sectors. Regarding leases, the LC reviewed enfranchisement law and procedure and this entails the purchase of freehold interest or extending lease agreements. Some of the LC’s reform proposals, amongst many others, included; creating ways for leasehold owners to be able to buy their houses freehold and proposed a single leasehold enfranchisement regime for the benefit of leaseholders of houses and flats. This was emphasised by Minister Eddie Hughes 

The New Leasehold Act

The then-secretary of state, Robert Jenrick in early 2021 had stated that reforming leasehold would be addressed by two pieces of legislation. The Leasehold Reform (Ground Rent) Act 2022 and new leases that will be based around retirement properties are aimed for implementation in April of 2023. The Queen’s Speech in 2022 proclaimed that leasehold reform is made on the basis of implementing fairness and fluidity within the leasehold market.  

This new Act means that regarding qualifying new residential leases, landlords cannot demand a financial fee. This, in turn, prevents landlords from charging an administrative fee for collecting ground rent. However, it must be noted that this Act will only be to the benefit of tenants with new residential leases. Existing tenants of leasehold flats, for example, will still be required to pay ground rent as per the conditions of the terms of the lease.

Furthermore, if for any reason a landlord demands ground rent on a new lease after the new Act has come into force, then the landlord will be liable to penalties of up to £30,000. This demonstrates the protective nature of the new Act and gives weight to the Queen Speech’s claim that leasehold reform is underlined with fairness.

Rough edges and implications of the new Act

A technical situation that is likely to arise is where a landlord agrees to an extension of an existing lease and if this will still allow them to reserve a ground rent. This is all dependent on the facts and circumstances of the situation. If a landlord agrees to a statutory renewal under the Leasehold Reform, Housing and Urban Development Act of 1993 (LRHUDA 1993) or Leasehold Reform Act of 1967 (LRA 1967), then the ground rent will be lowered to a ‘peppercorn’. However, in this scenario, the tenant must then pay an additional fee to make up for the ground rent loss incurred by the landlord.

Another circumstance is where the landlord informally agrees to a lease extension and does not follow the statutory procedures as set out in LRHUDA  1993 or LRA 1967. If this is the case after the new Act comes into force, then once the initial period comes to an end, the landlord will no longer be able to request a ground rent.

Another technical situation occurs where there is an existing lease agreement that reserves a higher ground rent made before the new Act comes into force. In this case, there is an exemption for such contracts. Although, the Act’s rules only apply if this is contingent on if there is an option or right of first refusal.

Applicability for the new Act

The provisions of the new Act will only apply to leases that satisfy the following criteria:

  • New leases for a single residence signed on or after the effective date of the Act;
  • Leases of residential properties
  • The lease term is agreed for over 21 years
  • Leases issued for a premium price: On occasion, a long-term residential lease is granted, in which case the renter pays market rent as opposed to a premium. In such situations, The new Act does not apply.

Amongst the recent reforms, future legislation will also:

  • Eradicate marriage value
  • Reform the lease extension or freehold cost calculation process used for enfranchisement valuation.
  • Give leaseholders who already have long leases the option to purchase the ground rent without having to prolong the period of the lease.
  • Maintain current discounts for leaseholder-made upgrades and tenure security.

Government Reform

Further to this, the government have put forward their proposals and have said that they will; make purchasing and selling a leasehold property easier with timeframes for agents and freeholders to reply to leasehold inquiries and maximum fees. This will be done with the introduction of standard, legally required leasehold information forms that are being planned. The government also proposed to create a Redress Reform Working Group involving ombudsmen and redress programmes to assist in advancing the reform agenda, which may include establishing a service for resolving housing concerns and complaints.

Nevertheless, the Act does not apply to leases that were already granted; it only applies to new leases.

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