As part of the Leasehold Reform (Ground Rent) Act 2022, ground rent has been abolished for new leases of flats and houses in England and Wales. However, many of the existing leaseholders who led the campaign for reform won’t actually benefit from the reforms and continue to face potentially ever-increasing bills.
Ground rent had become a big issue in the UK leasehold market after freeholds of blocks of leasehold flats became a more popular low-risk investment. For investors who bought freeholds, the profit they could reap in return for no more than issuing invoices for ground rent were attractive, especially where leases had regular reviews and substantial increases. For example, an initial ground rent of £500 might double every five or ten years under the term of the lease. The threat of flats with five-figure annual ground rents becoming un-mortgageable and unsellable spurred campaigners into action.
Under the new law, the government states that ground rent for new leases is set at a ‘peppercorn rent, effectively restricting these ground rents to zero financial value’. That includes a lease on a brand-new property, a new lease signed when you buy an older flat, or the extension of your existing lease. Retirement homes are due to come under the new scope in April 2023.
If an agreement can’t be reached on ground rent with existing freeholders, they might decide that the alternative is to exercise their statutory rights to buy the freehold, splitting the cost between them. That could be a double-edged sword because, while the government has mentioned ‘supercharging leaseholders’ ability to buy their freeholds’ by making it easier and more affordable, the reforms are not yet timetabled.
Why do we still have ground rent at all?
While we still have leasehold for residential flats, ground rent is a part of the system. Just taking it away could be like pulling a Jenga block out. Keeping it for the system to remain stable but set at a zero cost appears to be the preferred option for now.
Yet we do have an alternative system on the stature books: commonhold. As its name suggests, it puts ownership in the hands of the people who live in the block. There has been little uptake of the system since it was introduced by the 2002 Commonhold and Leasehold Reform Act. Perhaps abolishing ground rent might speed up its introduction, as it removes one of the main income incentives to keep the old freeholder-leaseholder relationship.
The commonhold system allows freehold ownership of individual flats, houses, and non-residential units and isn’t limited by time. The rest of the building or estate which forms the commonhold is collectively owned and managed by the unit-holders through a commonhold association. When someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too.
A detailed legal framework for setting up and running commonhold associations was laid down by Parliament in 2004. So why aren’t all new blocks already being built and sold as commonhold? One argument is that a commonhold flat has a higher initial sale price, because developers cannot also sell the freehold. Nevertheless, eventual change seems inevitable and in May 2021 the government set up a Commonhold Council of experts to help prepare the market for the widespread take-up of commonhold.
More information on leaseholder rights on lease extension, buying freeholds and challenging management charges can be found at LEASE, the government advice service.
