What does the Leasehold Reform (Ground Rent) Bill mean for property investors?
In recent years, there has been much talk and speculation over leasehold reform in the UK. A ground rent cap in particular has been a significant part of the discussion.
On 12 May 2021, the Leasehold Reform (Ground Rent) Bill was officially introduced to Parliament. If the bill gets approval, it will bring forward significant changes to the leasehold system in England and Wales. And this will have implications for property investors and homebuyers. Here’s a guide to help you understand what this new bill could mean for you.
What are leasehold properties?
For starters, it’s important to understand what leasehold properties are. When looking at a property for sale, find out whether it’s leasehold or freehold as these will have different implications for the property owner.
With leasehold properties, you are buying the property but not the land the property sits on. This means the owner doesn’t own the property outright. Instead, the lease provides the right to occupy the property for a certain period of time. A lease is granted for a fixed set of time. Leases for new-build properties are typically set at 99 or 125 years, but these sometimes go up to 999 years.
The majority of flats and maisonettes are sold as leasehold properties. There are an estimated 4.5 million leasehold properties in England, according to the Ministry for Housing, Communities and Local Government. Of that, 69% are apartments and 31% are houses.
Some new-build houses in recent years had been sold as leasehold. However, those numbers appear to be decreasing. Out of the 216,000 residential property transactions for leasehold properties in 2019, data from Land Registry showed nearly all flats were sold as leasehold, while only 6% of houses were.
What is ground rent and the Ground Rent Scandal?
If you own a leasehold property in England and Wales, you will usually have to pay ground rent. This is a periodic payment payable by leaseholders to freeholders of residential buildings. The lease will typically state how much you have to pay, when it’s due and if it can be increased during the lease term. It’s usually paid on an annual basis.
In recent years, some clauses in leases have meant freeholders could increase ground rents dramatically at regular intervals. Some were doubling every 10 years with leaseholders unaware that these clauses were in their lease. They then struggled to keep up with the rising costs and faced difficulty selling their property. This is a part of what has been called the Ground Rent Scandal.
Some owners of new-build houses have also faced high ground rents. An investigation revealed some buyers were mis-sold or misled on the terms of their lease. In certain cases, buyers weren’t even made aware that the house they were buying was leasehold. Because of these problems, there have been numerous calls for leasehold reform to be brought forward.
What are the proposed changes to ground rent?
Through the Leasehold Reform Bill, ground rent on new leases can only be charged at a peppercorn rate, which is a very low or nominal amount, and can’t be raised above this level. This will help tackle inconsistency and ambiguity of ground rents.
There will be fines of up to £5,000 for freeholders that charge ground rent not in line with the bill. There will be certain exemptions to the ground rent cap, and current leases are not expected to be covered in the bill.
The government has also previously promised to simplify leasehold extensions. For leaseholders who decide to extend the lease on their property for 990 years, the ground rent automatically would reduce to a peppercorn rate. But the leaseholder will have to pay a premium payment to be able to do that.
What is the timeline for the Leasehold Reform Bill?
If the Leasehold Reform Bill receives approval, it will likely take effect at varying times for different lease categories. There are some rumours that the bill would be made retrospective. However, it seems it will only take effect for new leases.
The bill was first introduced to Parliament on 12 May, and the following day the bill was published. The House of Lords debated the Leasehold Reform for a second reading on 24 May, and it’s now at committee stage, which means the bill will be examined line by line. After that, it will need to go to the report stage and a third reading, before going through the House of Commons.
There are no further dates in place to finalise the legislation, making it hard to know when this bill could come into effect. Some are predicting the bill to be passed around May next year if everything goes well.
What does this mean for current and future homeowners and investors?
Some developers have already started adopting peppercorn ground rents for their leasehold properties. However, it’s important to take a close look at all of the clauses in a lease before purchasing a leasehold property and hire an experienced solicitor to help you with this.
If this ground rent cap comes into effect, this could make new-build leasehold properties more attractive to buy and invest in as rising ground rents have been a worry for some. It is expected that new-build properties will be able to have ground rents above the peppercorn rate up to and including the day the new law will come into play, so many property investors will likely keep a close eye on the Leasehold Reform (Ground Rent) Bill making its way through Parliament.
For owners of existing leasehold properties, this bill is not expected to include leases that are already in place. However, if the reform to leasehold extensions is also brought forward, this means these property owners could have their ground rent reduced to a peppercorn rate after paying the premium to extend their lease by 990 years.
These landmark leasehold changes would bring forward important reform, benefiting homebuyers, property investors and the housing market as a whole.
Professional legal and financial advice should be sought when purchasing a leasehold property or extending a lease. Make sure you consult a solicitor about the potential changes and impact on your investment.
