A bill tackling leasehold reform with changes to ground rent for buyers of leasehold properties is making its way through Parliament. When the bill is passed, it will change the future of ground rent for new leasehold buyers. Unfortunately, existing leaseholders prior to the passing of the bill will not be affected by the change.
What is a leasehold?
Firstly, to clarify, there are two types of property; a freehold and a leasehold.
With a freehold property, when you purchase it, you own the building as well as the land it is built on, and are responsible for the upkeep of it all.
A leasehold property, however, such as a block of flats or some recently built houses, would mean that you own the flat or house itself, but not the land that it is built on. The companies who built the blocks of flats are most likely to be the owners (freeholders) of the land. As a result, the people living in a leasehold property have to pay ground rent to the freeholder, essentially renting the land that their property is built on. Leaseholders would also have to seek permission from a freeholder before making changes to the building, such as an extension.
A leasehold term is commonly between 150 and 999 years. Some flat owners may hold shares in the freehold of the overall building, with each having a say in the running of the building, but where a third party is involved, the freehold may be owned by the original developer, an institutional investor, property company or an individual.
Ground rent payments can vary depending on the type of property, who owns the freehold, where the site is, and other contributing factors. These payments would be in addition to any mortgage payments for the property itself, so even a small increase in the cost of this could impact the remaining disposable income that homeowners have.
About the Leasehold Reform (Ground Rent) Bill
In an overhaul of residential property law, the Leasehold Reform (Ground Rent) Bill applies to new, qualifying long residential leases in England and Wales.
This bill is set out to address unfair practices in the leasehold system, which has already seen a ban on leasehold sales for almost all new-build single dwelling houses, a practice that had become prevalent with developers in recent years. Some of those arrangements saw ground rents doubling, with leaseholders facing annual bills for thousands of pounds and their homes rendered effectively unsellable.
The competition watchdog, the Competition and Markets Authority (CMA) enforced action against a handful of housing developers for mis-spelling properties under consumer protection law. The CMA has also investigated a number of investment firms for buying freeholds from the developers and continuing with the same leasehold terms.
Action from the CMA has seen formal commitments from investor Aviva and builder Persimmon, with Aviva committed to removing terms that cause ground rents to double, and Persimmon offering leasehold house owners discounts on buying the freehold.
Zara Banday, Head of Residential Property here at Slater Heelis commented: “It had been hoped that legislation to introduce zero ground rent might be applied retrospectively, which would have been a big boost to those locked into high ground rents.
“Unfortunately, neither the CMA’s action nor the abolition of ground rent on future leases will help those tied into long and expensive leasehold terms, unless their freeholder responds with similar action. While the watchdog has said that legal action will follow if others do not respond, more may need to be done to encourage the developers and investment firms involved to follow the lead of Aviva and Persimmon.”
Current and potential leasehold property owners can find further guidance from the CMA, including how to deal with seemingly unjust fees or charges.
A fairer future
To summarise, this bill exists in order to ensure that homeowners are not sold short with unfair leasehold terms that benefit external, private companies.
The Leasehold Reform (Ground Rent) Bill must still pass through a series of readings in the House of Commons before coming into action with Royal Ascent.
We will be keeping a close eye on the developments of this bill and relay updates as they happen, to keep those interested in purchasing a leasehold property, aware of their rights.