Leasehold Reforms: Ground Rents to be Banned on New Leases
You might’ve heard of ground rent whilst searching for a property to buy in England and Wales. The amount of ground rent payable varies and can either be fixed or drafted to increase over time.
What is ground rent and who pays it?
When buying a leasehold property, the buyer will often have to pay ground rent. Ground rent is the amount leaseholders pay to the freeholder/landlord under the terms of their lease and the amount is usually paid on an annual basis. The amount payable is either fixed where it doesn’t change, or it can be escalating, which will often increase during the course of the lease. The amount of ground rent is disclosed to potential buyers and varies from lease to lease.
Ground rent issues
Paying ground rent in itself isn’t an issue, although the leaseholder doesn’t receive any additional benefits from paying the ground rent. However, ground rent becomes problematic when it’s uncertain how much it will increase by in the future (e.g. increasing in accordance with the retail prices index), or when they double every 10 years or at more frequent intervals, resulting in leaseholder having to pay thousand of pounds per year. A large ground rent may have an impact on the marketability and mortgagability of the lease.
The issue with rising ground rents came to light in recent years as it became apparent that freeholders-often developers or investors- were selling new build houses and flats as leaseholds and taking advantage of doubling clauses in leasehold contracts. These costs impact homeowners where they could get stuck in these contracts for years to come with ground rents spiralling out of control.
Moreover, if the leaseholder defaults on the ground rent, the freeholder can take legal action. Court proceedings and judgments can affect the leaseholder’s credit rating and can result in forfeiture of the lease and repossession of the property.
Ground rent ban
The government has been working for several years to introduce leasehold reforms and abolish ground rents to protect leaseholders from financial burdens caused by escalating ground rent. The Leasehold Reform (Ground Rent) Act 2022 will now come into force on 30 June 2022 and will ban ground rent on long residential leasehold properties in England and Wales.
What does this mean for new buyers looking to buy a leasehold property? They will no longer have to pay ground rent on long leases. Moreover, leaseholders will now be able to extend their leases to a peppercorn lease (990 years) at zero ground rent. These changes will protect leaseholders and make housing more affordable.
The Act only applies to new leases in England and Wales and does not abolish ground rents payable under existing leases. However, existing leaseholders have the option to extend their leases to reduce the ground rent to zero, although this can be costly.
Are you looking to buy a house or flat in Liverpool?
Whether you’re considering buying a leasehold or freehold property in Liverpool, Lavelle Estates are here to help. Lavelle Estates has experienced estate agents in Liverpool who can assist you from beginning to end.
