Fairness within Leaseholds – The Leasehold Reform (Ground Rent) Act 2022

It is fair to say that the law concerning leasehold property is complex.  It is the subject of much political and legal debate, both in terms of protecting the tenant and in terms of ensuring that leasehold ownership remains an attractive proposition. At its simplest, a leasehold asset is a ‘diminishing’ asset, which means to say that its duration reduces every day.  Whilst for very long leases, such as 999-year terms (typically for mines and minerals), this is not an issue, for shorter residential lease terms, it is extremely important.

Arguably, the closer to zero that the unexpired lease term has, the less its value will be to the tenant.

For example, mortgage lenders will require a minimum length of term for residential leases for mortgages to be available.  Typically, this is somewhere between 60-65 years.

In instances when residential leases are becoming too short, it is possible for a tenant to request that the lease term is lengthened. This is either by private agreement, or by a statutory process.

In the case of the latter, a section 42 notice is served (of the Leasehold Reform, Housing and Urban Development Act, 1993) requesting a 90-year extension.  The landlord has a two-month period in which to respond. As one would expect, the timing of the service of such a statutory notice is key, bringing with it the consideration of complex matters such as ‘marriage values’ and ‘collective enfranchisement’ which is beyond the scope of this short note.

A recent problem has arisen where landlords of newly built leasehold properties have introduced an escalating ground rent.  Whilst very advantageous to such landlords, who have an ever-increasing revenue, it can be practically fraught with problems for tenants who not only have to pay more rent, but the asset upon which they are paying rent is reducing in value and increasing in age.  It is well within the realms of logic that at its worst, a leasehold property could effectively be worthless but require a high rent to be paid. To combat this issue, a recent piece of legislation was enacted.

It is called the Leasehold Reform (Ground Rent) Act, 2022.  From 30 June 2022, any lease granted after that date cannot contain a ground rent.  If a tenant seeks to extend the lease term, the landlord may grant such an extension (at a price) but may not then ask for a rent as well.  This is very different to the position before the 2022 Act when a landlord could demand a price and an increased rent in exchange for an extended lease term. Failure by the Landlord to comply with the 2022 Act may result in financial penalties, a refund of the ground rent charged, and the lease not being registered at HM Land Registry.

The passing of the Leasehold Reform (Ground Rent) Act 2022 clearly demonstrates a huge desire from the UK Government to ensure fairness within leaseholds. Future legislation is anticipated to create further reforms in other areas of leasehold ownership, such as ‘marriage value’, enfranchisement, and statutory claims.

As the position is, even today, very fluid in terms of where the concept of ‘leasehold ownership’ will end up, we in the UK Real Estate team at Ferbrache & Farrell are now reopening our position on Commonhold ownership. Whilst this has historically been an unpopular form of title, there are moves afoot once more to make it more attractive. This will form the basis of our future comment.

If you need any further information or legal advice, including conveyancing of a property in England, contact our designated UKRE team Anna Douglass, Alastair Hargreaves, Caren Vidamour and Naledi Odiseng who will be delighted to assist.