When buying a property there are two types of tenure, these are Freehold and Leasehold. Freehold is where the owner owns the building and the land on which is sits. Leasehold is essentially, as the name suggests, a lease agreement and the freeholder retain the title to the building and the land and the leaseholder purchases the right to live in the property and use the grounds for an extended period.
One of the disadvantages of a leasehold, which can add hundreds of pounds to a household’s annual bills is ground rent. This is essentially an additional payment on top of the mortgage, which is paid to the landlord (Freeholder) to occupy the land a leasehold property is built on. As with any other type of rent, ground rent can be increased annually which, over time can increase the payments substantially.
New Leasehold Legislation
In January 2021 the Government announced that it was going to reform leasehold tenures significantly to make leasehold ownership fairer and more secure.
So, what are the changes that have been introduced?
There are two main changes to leaseholds which are laid down in the Leasehold Reform (Groundrent) Act 2022 which came into force on the 30th June 2022. This Act stipulates that ground rent for any new leaseholds cannot be more than one peppercorn per year. This peppercorn requirement goes back in history to times when for a contract to be binding there had to be a “consideration” provided by both sides so the rent could not be set at zero legally. Historically peppercorns were a valuable commodity and as such one peppercorn was often used as the “payment” for the low ground rent and this has still remained enshrined in law to this day. In practice, it means that no money can be charged for ground rent. In addition, the Act prohibits administration fees for collecting a peppercorn rent.
The Act also covers voluntary extensions of leases. In these cases, even if ground rent were being charged before the extension, only a peppercorn rent can be charged after the extension. This was already the case with statutory leasehold extensions, where the tenant, if unable to come to an extension agreement with the landlord could use a legal process to force the landlord to extend the lease. This, however, can be an expensive process so going down the voluntary route is always the best option.
Anyone who is looking to extend their lease in the next few months and anyone looking to purchase a leasehold property is advised to check that their lease agreement reflects the new legal requirements which came into force on the 30th of June 2022. In all cases it is prudent to seek appropriate legal advice when purchasing a property.