The Leasehold Reform (Ground Rent) Act 2022 (LRGRA 2022) was granted Royal Assent on 8th February 2022 and became effective on 30th June 2022. According to the Government, it is regarded as one of the most significant changes to property law in a generation and is the first in a series of expected leasehold reforms. The act applies to all newly granted residential long leases and voluntary lease extensions where the current lease is surrendered and reissued.
Granting voluntary lease extensions has been a useful strategy for many freeholders. However, this option’s value has arguably diminished since June 30, 2022. The Leasehold Reform (Ground Rent) Act 2022 (LRGA 2022) has abolished the freeholder’s ability to charge ground rent on the newly extended term of any lease extension if the existing lease is considered surrendered and reissued. Freeholders can no longer grant voluntary lease extensions with increasing ground rents in exchange for a premium. Instead, they can offer newly extended leases with a peppercorn ground rent (i.e., nil ground rent) for a premium. Under the LRGA 2022, ground rent remains payable for the duration of the existing lease term and becomes a peppercorn for the newly extended term.
It is essential to note that leaseholders may not be able to negotiate voluntary lease extensions outside the statutory legislation, including the premium payable to the freeholder, the offered extended term (which may return to the original term), or the legal and valuation fees charged. Unlike under the statutory regime, professional costs are not subject to reasonableness and proportionality. While costs are not fixed under the statutory regime, this may change in the future.
Advantages:
Opting for a voluntary lease extension can expedite the process, but it’s important to note that it may require approval from the lender, which can potentially cause delays. Additionally, registering a lease extension with the Land Registry can currently be a slow and arduous process, regardless of whether it’s agreed upon under the statutory regime or voluntarily.
Deeds of variation
If a freeholder wants to extend a lease without losing their ground rent income, a deed of variation to the existing ground rent in the lease could be a viable solution. With this approach, the existing term of the lease remains unchanged, and the variation is not subject to the provisions of the LRGA 2022. Instead, the adverse ground rent provision in the lease is adjusted to a more acceptable review or fixed rate, in exchange for a premium.
Deeds of variation are often used during the sale of leasehold properties with finance when the lender refuses to lend due to the existing ground rent provisions that breach their lending criteria. In such cases, the buyer may be faced with losing their flat, and the seller may find themselves held to ransom by the freeholder who wants to “cash in” on the situation. It’s possible that this could be an unintended consequence of the LRGA 2022, as it may provide a loophole for freeholders to continue charging ground rent.
The Consequences of LRGA 2022
Despite the LRGA 2022, some freeholders are still opting to extend leases voluntarily, often through deeds of surrenders and regrants, which is a direct violation of the new law. It appears that legal practitioners may not be adequately informing their clients about the changes, and this information is not making its way to leaseholders who need to be aware of the new regulations. Interestingly, some freeholders may find themselves in a situation where newly developed blocks of flats have non-uniform leases, with post-June 2022 leases being devoid of ground rent while pre-June 2022 leases still include it. This disparity could have negative consequences for both parties, depending on their position.
Freeholders and leaseholders are currently uncertain about the future of lease extensions and leasehold enfranchisement in general. Freeholders wonder whether short leasehold reversions, which were once valuable, will hold the same value in the future. On the other hand, leaseholders are grappling with whether to extend their lease now or wait, as they question whether ground rent abolition will apply retroactively to existing leases when future legislation is introduced. Furthermore, there’s uncertainty about whether there will be a comprehensive overhaul of the numerous Acts that govern leasehold enfranchisement. As legal professionals await answers, leaseholders are left to decide whether to exercise their statutory rights or wait for anticipated legislation, which is yet to have a set date.
Disclaimer:
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Connaught Law and authors accept no responsibility for loss that may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Connaught Law. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Connaught Law.
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