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5 things you need to know about ground rent

about 2 years ago
5 things you need to know about ground rent

While the property industry waits for a date when the Renters’ Reform Bill becomes law, there is an imminent change for all current owners and future buyers of leasehold properties. Here are five important points for anyone involved with a leasehold property.

  1.     A new Act is coming into force from 30th June 2022

The Leasehold Reform (Ground Rent) Act takes effect from 30th June 2022. The Act is in response to growing concern that ground rents – an annual payment paid by the owner of a property to the owner of the land on which it is built – were beginning to financially cripple leaseholders and hinder leasehold property sales. 

Ground rent is usually paid by owners of flats and apartments (especially those that are new build or in a converted block) although ground rent has increasingly been charged to some owners of brand new houses.

While most ground rents stayed at nominally low levels of £100 or £200 every 12 months, some developers and freeholders were setting ground rents that doubled every 10 to 20 years, making the leasehold properties expensive to own and harder to sell in the future.

  1.     Ground rent is to be scrapped for new long leases

The Act details that ground rent will be outlawed after 30th June 2022. As of July, those buying a leasehold property with a new long lease will not have to pay any ground rent. In April 2023, the ban on ground rent will extend to future retirement homes, giving these developers time to adjust their systems.

  1.     New leases will never be more than a ‘peppercorn amount’

You may see the phrase a ‘peppercorn amount’ attached to paperwork concerning new leases. This makes it sound like there will be a ground rent charge for new leases but a ‘peppercorn amount’ actually means zero – no charge at all. 

  1.     The ban only applies to some leases in England & Wales

If you’re the owner of an existing leasehold property, you will still continue to pay ground rent as the Act only covers new long leases. All is not lost, however. A second Bill covering existing leaseholders, formal lease extensions, buying freeholds, commonhold and the Right to Manage is at the consultation stage. It proposes to make it easier and cheaper for existing leaseholders to extend their lease or take full ownership of their property.

  1.     Informal lease extensions are changing

Some of the changes detailed in the Act also apply to leaseholders if they are informally (also known as non-statutory or voluntarily) applying to extend their lease. In this case, the freeholder isn’t allowed to increase the ground rent while the remaining term runs its course. When the lease term expires and a new term starts, the ground will revert to and stay at zero. 

Currently, when a leaseholder formally extends their lease, 990 years are automatically added to the length and the ground rent reduces to zero. The cost of extending the lease does usually run into tens of thousands of pounds. 

If you currently own a leasehold property or are thinking about purchasing a property with a leasehold, please contact us for advice.

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