From 30 June 2022, anyone buying a home on a new long lease will now be freed from these annual costs, helping homeowners manage their bills as they face cost of living increases.
Landlords will be banned from charging ground rent to future leaseholders, under a new law that will lead to fairer, more transparent homeownership for thousands of homebuyers, helping to level up opportunities for more people.
Here Partner Thomas Lumsden responds to the news:
Although the new law will ban ground rents on most new residential leases from 30 June 2022, there is unfortunately one potential sting in the tail for some leaseholders, who are thinking of extending their existing lease. As leases get shorter, they become less desirable to buyers and eventually the lease term is so short that lenders will not accept the short lease as security. The flat then becomes unmortgagable and can usually only be sold to cash buyers, who do not need a mortgage, at a substantial discount.
Leaseholders can usually extend their lease by serving notice under the 1993 Act on their landlord. However, many leaseholders prefer to negotiate lease extensions directly, if the landlord agrees, outside of the Act. In fact, this route is often quicker, and the legal and valuation costs tend to be less.
The potential pitfall arises as follows. Before the ground rent ban comes into force, a flat owner can ask his landlord to extend his or her short lease by, for example, an additional 90 years. The landlord might typically agree to do so, on payment of a premium, and on condition that the extended lease reserves a ground rent for those additional 90 years.
Such a ground rent might be say £ 150 per annum, rising in line with Retail Price Index (RPI) every ten years. The actual amount of the premium and the new ground rent is down to negotiation between the flat owner and the landlord in each case. However, once the ground rent ban comes into force, any such ‘voluntary’ lease extension cannot impose any ground rent at all for the extended term.
In the above example, this would mean that during the additional 90 years of the extended lease, the landlord would receive no ground rent at all, rather than the £150 per annum reviewable ground rent which might be payable for a lease extension granted before the ground rent ban.
The loss of this ground rent income over 90 years to a landlord devalues the landlord’s freehold interest. The likely outcome (and I have already seen examples of this in practice recently) is that the premium that a flat owner will be forced to pay on a voluntary extension will increase. This is because the landlord will need to be compensated for the loss of his or her right to receive ground rent. This additional premium could easily be a few thousand pounds in the case of a typical flat.
So, whilst the new legislation is great news for buyers of brand new flats, it will almost certainly make flat ownership more expensive for those who have short leases and need to extend the lease of their flat quickly in order to sell or remortage.
If you would like to discuss topic this further, please do not hesitate to contact Thomas Lumsden on email: tal@cooperburnett.com or tel: 01892 515022.
This blog is not intended as legal advice that can be relied upon and CooperBurnett LLP does not accept any responsibility for the accuracy of its contents.
