(Written by Anthony McCafferty, our Conveyancing Solicitor)
The Government is in the process of implementing a two stage reform of the leasehold system in England and Wales. The purpose of the reforms is to make leasehold property fairer and more affordable for homeowners.
The first of the reforms is the new Leasehold Reform (Ground Rents) Act 2022.
The purpose of the Act is to prohibit landlords from charging ground rents for all new leases (referred to as ‘regulated leases’ under the new legislation). There are exceptions to this rule; for example, the rules do not apply to shared ownership leases and business tenancies.
The rules apply only to long leases which are defined in the new legislation as any lease granted for a period of 21 years or more.
Statutory Lease Extensions
The new legislation does not apply to statutory lease extensions to flats under the Leasehold Reform, Housing and Urban Development Act 1993 because the legislation automatically converts rents to a peppercorn (zero) under the current legislation.
Moreover, the new legislation does not affect statutory lease extensions for houses under the Leasehold Reform Act 1967 because the legislation permits leaseholders to extend their leases for 50 years with no premium (without cost) and, although landlords have the ability to charge ground rent under this legislation, the government feels that this is fair for landlords, as tenants do not have to pay a premium for extending their leases.
Voluntary Lease Extensions
New Lease extensions that have been voluntarily agreed between landlords and tenants are able to contain normal rent provisions; however, the rent payable can only apply for as long as the original term would have been in place. The rent must be a peppercorn for the part of the term that has been extended.
Example – Ms A grants to Mr B a lease on the 1st of January 2020 for 125 years with a ground rent of £150 per annum. Under the new legislation, if Mr B wishes to extend his lease, for an additional 100 years, it is possible for Ms A to charge £150 per annum in ground rent until the 1st of January 2145, but the ground rent must be a peppercorn between the 1st of January 2145 and the 1st of January 2245.
The responsibility for enforcement of the new legislation will fall onto the local weights and measures authority or the district council and they have the authority to impose fines of between £500 and £5,000. In addition, the enforcement authorities have the ability to order that the prohibited rent is returned to the tenant.
The main provisions of the new legislation will not come into effect until specified by Regulations made by the Secretary of State. There was some concern raised by Members of Parliament that the new Act would be delayed in its implementation. The government has shown a commitment to bring the legislation into effect within 6 months of the Bill receiving Royal Assent.
A Warning to Tenants
As the Act passed through parliament, there were concerns raised about unscrupulous landlords trying to encourage tenants to extend their leases before the new legislation comes into effect in order to try to get around the new rules.
In order to combat this, there was a proposed amendment to require landlords to inform tenants of the new legislation before proceeding with a lease extension. The suggested amendment would have seen landlords facing the prospect of a £30,000 fine for failing to disclose the new legislation to their tenants. This amendment did not make its way into the final legislation because there were fears that landlords would unwittingly break this rule and, as such, would have to incur a large fine.
There were also concerns raised that landlords could try to recover the loss of rent through other means; such as, charging fees through service charges. In response to this point, the Government said that the definition of rent within the new legislation has been drafted broadly in order to allow the Tribunal to step-in and prevent landlords from attempting to collect any funds from the tenant that could constitute a payment of rent regardless of whether it is masquerading as a service charge.
In the next parliamentary session, the Government is planning to introduce sweeping changes to the process of extending leases and the leaseholders’ right to purchase the freehold of the building (otherwise known as enfranchisement).
Under the proposed reforms, tenants would be able to require lease extensions of 990 years from their landlords at any time.
The Government also plans to scrap the so called ‘marriage value’ which is used to calculate the premium for lease extensions. The ‘marriage value’ is the difference between the value of the leaseholder’s interest before the lease extension compared to its value after the lease extension is granted. Currently, the landlord is entitled to half of the uplift in value of the lease. As it currently stands, for leases with over 80 years left to run, the ‘marriage value’ is zero, but when the lease drops below 80 years, it causes premiums for lease extensions to rise. Under the new proposals, ‘marriage value’ will be scrapped which means that lease extension premiums for leaseholders with under 80 years left to run on their lease will be cheaper.
The Government is also planning to place a cap on ground rent considerations when assessing the premium payable for extending a lease or purchasing the landlord’s freehold interest. Under the current rules, premiums are determined by calculating how much rent the landlord would be missing out on if the lease was to run for the entire original term. The new reforms will cap this rent calculation at 0.1% of the value of the freehold which should result in cheaper premiums for tenants.
Finally, many leases have already been extended for long terms (such as 999 year leases) with high ground rent provisions. The proposals will allow leaseholders to buy-out the ground rent within their leases without the need to extend the term.
At Owen Kenny, we pride ourselves on being able to assist clients with many aspects of leasehold property; including: leasehold purchases, shared ownership leases, voluntary and statutory lease extensions and enfranchisement. If we can be of any assistance, our conveyancing department would be happy to help you with any queries that you may have.
Please contact: Anthony McCafferty on 01243 521726.