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There has been lots of discussion over the past few days around Kier Starmer’s TikTok video announcing a cap on ground rent of £250 per annum. But what does this actually mean? This is not clear as of yet, as legislation is yet to be enacted introducing the cap on Ground Rent.
Ground rent is a sum of money which has to be paid by a leaseholder to their landlord each year.
The amount of ground rent will be stated in the lease and issues usually arise when it is subject to change at certain intervals.
The lease for a property will usually set out whether ground rent is payable at a fixed rate for the duration of the lease or whether it is subject to review. Where reviews apply, the lease will specify how often they occur and the mechanism by which any increase is calculated, such as by reference to time periods or index-linked formulas.
On the other hand, following the Leasehold Reform (Ground Rent) Act 2022 modern leases which have been granted since 30th June 2022 are required to have a ground rent of a “peppercorn,” which is a legal term meaning that a nominal or zero monetary value is payable.
While “peppercorn” is essentially a legal term meaning no ground rent is payable, in theory it would mean the leaseholder must pay their landlord one peppercorn a year to own the property.
Sometimes we also find other examples of zero ground rent which are not a peppercorn. For example, we once had a lease where the ground rent was one white rose per year.
Where a property is purchased without mortgage finance, ground rent forms part of the ongoing costs associated with ownership. Where a mortgage is involved, mortgage providers may take the level and structure of ground rent into account as part of their overall assessment.
Certain review mechanisms can result in ground rent changing over the term of the lease, particularly where reviews take place at regular intervals over a long period. Over the length of a typical mortgage term, this can mean that the amount payable may change several times.
Mortgage providers apply their own criteria when assessing leasehold properties, and these criteria can differ between lenders. Similarly, buyers’ circumstances and funding arrangements vary. These factors have contributed to ongoing discussions around ground rent structures and have informed government proposals over recent years aimed at reforming how ground rent is treated in residential leases.
Recent legislation has introduced changes affecting ground rent. The Leasehold Reform (Ground Rent) Act 2022 removed ground rent for new residential leases granted after the Act came into force, meaning new leases and qualifying lease extensions must provide for a peppercorn ground rent.
Separately, more recent legislation addressed concerns where increasing ground rents could result in a lease falling within the scope of the Housing Act 1988. In practice, this issue was often addressed through arrangements such as an indemnity insurance or a lease variation.
It is worth noting that while legislation has changed the treatment of ground rent in new leases, it does not automatically vary the terms of existing leases. Any changes to existing leases still need to be formally executed through a Deed of Variation.
A deed of variation is a legal document used to make changes to an existing lease. The time taken to complete a deed of variation can vary, depending on factors such as the parties involved and the complexity of the changes. Typically, the process involves agreeing the terms, confirming any associated costs, and formally executing the document. Execution is carried out by the relevant parties and, in some cases, may require certain formalities such as signatures by authorised individuals. The timing and steps involved can differ between leases and landlords.
Because of the potential length of time and the costs involved, deeds of variation, while sometimes necessary, can be an additional complication for both sellers and buyers during a property transaction.
The legislation being proposed at the moment is the Commonhold and Leasehold Reform Bill which could bring significant change to how leaseholds are structured.
While the most discussed proposed change is to Ground Rent, another proposed change in the Commonhold and Leasehold Reform Bill is that all new developments cannot be classified as leasehold and would instead need to be Commonhold.
The concept of Commonhold, which was firstly introduced in 2002, remains relatively rare.
A Commonhold property means that a flat is owned outright with no fixed term (similar to freehold ownership) and without any ground rent payable. The building itself is collectively owned by a Commonhold association, in which all unit owners have an interest. This structure is intended to minimise service charges and ensure they are kept at a reasonable level.
If introduced, the Commonhold and Leasehold Reform Bill could represent a significant change for new build developments, as developers and landlords would need to relinquish ownership and control over buildings. Many large landlords may be unwilling to do this, as it would significantly reduce the passive income they receive from owning the land. Reservations also exist over whether mortgage lenders will embrace commonhold and whether Commonhold Associations are best placed to manage complex buildings
At present, the Commonhold and Leasehold Reform Bill remains a proposal. If it is passed, it could bring significant changes for anyone looking to buy or sell leasehold property.
Once passed, there would likely be a transitional period as lender requirements and practical implementation are clarified.
As the Bill is still under discussion, it may take several years before it becomes law, a timeframe that may not align with the plans of many buyers and sellers.
Leasehold regulations continue to evolve and requirements are becoming more complex.
Having an experienced professional to help navigate these changes can make it easier to identify potential issues and manage the process efficiently. Get in touch with us to learn more and speak to an expert.
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