The much talked about and eagerly anticipated Leasehold Reform (and Ground Rent) Bill is not yet in force but is fast moving through the parliamentary process of becoming legislation.
At the time of writing, it is reasonably anticipated by the specialist team of lease extension solicitors at Holmes & Hills that the Leasehold Reform (and Ground Rent) Bill may become law in 2022. This would be in keeping with the Government’s target timeline for the Bill when it was first announced on 7th January 2021. This timeline set out the Government’s intention to pass this new, first phase of leasehold reform legislation by spring 2022.
As at January 2022 the current drafting of the Bill suggests the following changes will be made to laws relating to leasehold properties.
Ground Rents capped to a ‘peppercorn’ (£nil):
Ground rents on ‘Regulated Leases’ will be capped at a ‘peppercorn’ (£nil). Material fines may be imposed on freeholders attempting to charge leaseholders ground rents in relation to a regulated lease.
2022 leasehold reform will affect ‘Regulated Leases’. These are leases granted after the date the legislation comes into force (commencement date), as well as leases entered into before the commencement date but which are surrendered and re-granted after this date.
Leasehold reform will not apply to ‘Excepted Leases’, these including where:
Shared ownership leases will be impacted by the Leasehold Reform (and Ground Rent) Bill expected to come into force in 2022.
Shared ownership leases will be considered ‘Regulated Leases’. Ground Rent will be capped at a peppercorn (£nil) for shared ownership leases entered into after the commencement date, in respect of the share of the property owned by the leaseholder. Leaseholders are not liable for any Ground Rent that may apply under the lease to that share of the property which they do not own and so, under this proposed legislation, shared ownership leaseholders will have their Ground Rent capped at a peppercorn (£nil).
As mentioned above, leasehold reform coming into force in 2022 will not be retrospective in its effect. Therefore, those who have entered into a shared ownership lease prior to the new legislation coming into force will continue to have to pay a Ground Rent (if their lease requires) following these 2022 changes to leasehold law.
Following the Leasehold Reform (and Ground Rent) Bill becoming law (expected in the first half of 2022), it will still be possible for leaseholders to extend their lease via the non-statutory lease extension process. This process simply involves coming to an agreement with the freeholder, with advice and representation from a lease extension solicitor.
Where a leaseholder pursues a non-statutory lease extension, the freeholder will still be able to charge a ground rent under the new (extended) lease, but there are the following restrictions:
It is not expected that there will be any further leasehold reform that will come into force in 2022. That said, at the point the Leasehold Reform (and Ground Rent) Bill receives Royal Assent and becoming legislation, there will likely be announcements from the Government about further leasehold reform that may become law in future years.
Whilst the abolition of ground rent in new leases is being proposed as part of the current leasehold reforms, it forms part of a package of leasehold reforms which the Government intends to implement including substantial changes to the processes for lease extensions and collective enfranchisement and changes to the calculation of premiums. When announcing the Leasehold Reform (and Ground Rent) Bill back in January 2021, the Government suggested that a second tranche of leasehold reform would follow and that they would aim for this to become law before the next General Election, which is expected in May 2024.
Marriage Value:
Marriage value is a material issue for leaseholders where their lease has a remaining term of less than 80 years or is close to falling below 80 years. This is because once the remaining term of a lease falls below 80 years, the calculation of the amount that must be paid to a freeholder by the leaseholder (the Premium) for a lease extension or to purchase the freehold, will incorporate Marriage Value. Marriage Value does not form part of the calculation where the remaining term of the lease is still 80 years or more.
Marriage Value equates to 50% of the increase in the market value of the property arising from the extension of the lease. Where Marriage Value does apply to the calculation of the Premium, the Premium can be materially higher than it would be were the remaining term of the lease greater than 80 years.
2022 leasehold reform will NOT deal with or remove Marriage Value. The Government has suggested that future leasehold reform will seek to deal with the issue of Marriage Value, potentially reducing the cost of extending a lease or purchasing a freehold. The Government has suggested that it will seek to introduce legislation that deals with the issue and cost of Marriage Value by the time of the next General Election, expected in May 2024.
Leaseholders with a least at or close to having 80 years remaining are recommended to extend their lease before Marriage Value becomes payable, rather than waiting for further leasehold reform law.
Lease extension premium calculations:
The Government has proposed introducing a statutory calculation to determine the value of the premium a leaseholder pays to a freeholder – the cost of extending a lease. The Government’s overarching aim is to reduce the cost of extending a lease for leaseholders but there has been no information provided on what this future calculation may be.
The Leasehold Reform (And ground Rent) Bill does NOT introduce a statutory calculation.
Statutory lease length:
Under existing legislation, where undertaking a statutory lease extension, leaseholders are currently provided a 90 year extension to the existing term of their lease i.e. an additional 90 years on the unexpired term of the current lease. It is currently expected that future leasehold reform may seek to change this so that a statutory lease extension provides an extension that delivers a 990 year remaining term. This however, is NOT a feature of the 2022 leasehold reform being introduced by the Leasehold Reform (and Ground Rent) Bill.
Providing a statutory right to a Deed of Variation in order to deal with onerous (doubling) ground rents:
Many leaseholders find themselves in the position of having a lease with a doubling ground rent. These leases are often considered onerous, leading to material ground rent payments, and/or difficulty in selling or remortgaging the property. In the event a freeholder is not willing to enter into a Deed of Variation to vary the ground rent clauses, the leaseholder has no statutory right to deal with these clauses other than to rely on their statutory right to extend their lease, despite the fact their lease may not require extending.
It has been proposed that future leasehold reform will seek to provide leaseholders the statutory right to agree a Deed of Variation with a freeholder so as to resolve onerous ground rent clauses, without having to extend their lease at the same time.
The Leasehold Reform (And Ground Rent) Bill does NOT provide a statutory right to resolve onerous ground rent clauses.
Expanding the pool of qualifying tenants:
It is suggested that future leasehold legislation will provide for expanding the pool of ‘qualifying tenants’, meaning more leaseholders will have the right to extend their lease. Currently, leaseholders that have owned their property for less than two years and leaseholders who do not own 100% of their property (shared-ownership leaseholders) are not considered ‘qualifying tenants’ and therefore do not have a statutory right to extend their lease.
The Leasehold Reform (And Ground Rent) Bill expected to become law in 2022 does NOT expand the pool of ‘qualifying tenants’.
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