If you own, are buying or selling a leasehold property then there are some important changes to the law this month which you need to know about. While these changes seem small they could have a big impact going forward Here’s a quick heads-up on the latest changes to leasehold.

What is different about freehold and leasehold property?

As you might know, most property is owned on either a freehold basis or a leasehold basis. While freeholders own their property and the land it stands on outright leaseholders don’t. Instead they have a right to occupy their property on a long lease. Leaseholders pay an annual ground rent to their freeholder or landlord in order to retain their rights under the lease.

Most flats are owned on a leasehold basis. There are also leasehold houses, although houses are generally freehold. (1)

According to the Government, there are around 4.6 million leasehold homes in England alone.

While leasehold is a well-established and safe way to own a property in recent years there have been claims that it isn’t as fair as it could be. This has become more relevant in recent decades due to a practice where some new build developers have sold houses as well as flats with high annual and also escalating ground rent obligations. (Historically ground rent payments were only a small, nominal amount.)

The latest changes to leasehold law

A new law comes into affect this month which makes significant changes to leasehold ownership of houses and flats. The Leasehold Reform (Ground Rent) Act 2022 applies as from 30 June 20222. It has important implications for everyone owning, buying or selling property on a long leasehold basis.

Under the Leasehold Reform (Ground Rent) Act 2022 all new residential leases granted can only require a peppercorn ground rent payment. This applies to both newly built properties sold leasehold AND voluntary renewals of existing leases going forward. A peppercorn ground rent is the value of one peppercorn. While it is something of a dated concept it is essentially an amount which is legally owed but so small as not to be payable.

Under the new law it is illegal for landlords to charge leaseholders more than a peppercorn ground rent on new leases. The law also prevents them from charging an administration or similar fee to replace any ‘lost’ ground rent.

More charges to leasehold are planned

The new law is part of a two-stage reform of the leasehold system. The Government is working on further reforms. These could mean that existing and not just new leaseholders will be able to extend their leases to 990 years at a peppercorn ground rent or buy them more easily. It could also mean the abolition of what is known as marriage value when extending a lease and an official calculator for working out the cost. Marriage value is a payment for extending a lease based on the amount by which a longer lease raises the value of the property. Marriage value can be a considerable amount in some cases.

There could also be measures to encourage the use of commonhold property ownership. Commonhold is a concept where owners of, say, a block of flats can jointly own the freehold of the building rather than being leaseholders as is usually the case now.

It is important to note these changes are not law yet. The Government has said it wants to introduce these reforms by the end of 2024 but there is no timetable for the introduction of another leasehold reform law yet.

So what do owners, buyers and sellers need to know?

If you’re buying or renewing a leasehold on residential property now you need to know that the Leasehold Reform (Ground Rent) Act 2022 applies. Your solicitor or conveyancer should explain this to you and will be able to answer any questions.

Longer term you should consider the implications of further leasehold reform if you own, or are buying, selling or extending the lease on a leasehold property. It could be a lot easier and cheaper to extend or buy out a lease. This could have implications for the saleability and value of leasehold properties where the remaining lease is short. Properties with a lease created post-June 2022 may be more attractive already.

Again, your solicitor or conveyancer is the person to ask for advice and answer any questions on how this might affect you.

(1) Scotland has a different system of property ownership. The new rules don’t apply in Scotland.

(2) The new law does not apply to leasehold retirement properties until April 2023.

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