As the Leasehold Reform (Ground Rent) Act 2022 comes into force in a matter of days on 30th June 2022, we look at what implications this may have on the market and what stage the other leasehold reforms are at now.
What is the Leasehold Reform (Ground Rent) Act 2022?
This Act fulfills the commitment to ‘set future ground rents to zero’ which means that all new leasehold agreements commenced from this date can only have a peppercorn (£0) ground rent and will only apply to new lease agreements. New leases of retirement properties will also be affected but the legislation will only come in for these properties after 1st April 2023. Shared ownership leases are also part of this legalisation where the landlord will be able to charge a rent for the proportion they retain, but any rent on the tenant’s share can only be a peppercorn.
The Act will ban freeholders from charging administration fees for collecting a peppercorn rent and the Government are even using fines to enforce this of up £30,000 for freeholders who charge a prohibited ground rent in contravention of the Act.
How will this Act affect the Ground Rent investment market?
Freeholders of any new blocks of flats with leasehold interests granted after 30 June will now have an investment where they will receive no ground rent income so their investment could be seen as less valuable compared to blocks prior to this date where there are higher ground rents and further opportunity to gain more income through lease extensions.
Therefore, these newer blocks suddenly are less attractive to ground rent investors and will have a lower value compared to their older, ground rent yielding counterparts. This can also eventually lead to a two-tiered ground rent investment market consisting of blocks of flats where there is still ground rent payable and blocks of flats where there is a peppercorn ground rent but this may be more in the longer term due to the high number of existing ground rent payable leasehold interests currently still in the market.
How will this Act affect the leasehold flat market?
As this Act only affects new build flats, in the short term, they will only make up a small percentage of the overall flat market, so whilst they will still be a great purchasing incentive for buyers, they will face a lot of competition from existing, ground rent yielding flats. Therefore, whilst the saleability of these new flats will likely increase it is unlikely to significantly affect the value of both the new build flats or older flats in the short term.
However, once more flats are built and the market becomes more dominated by these peppercorn ground rent flats, we may also end up with a two-tiered market for flats which could lead to a widening gap of prices. As competition increases from flats with no ground rent, ground rent payable flats could become less attractive to the market leading to a decrease in demand and their prices fall. However, this could be offset to a degree with the further changes to leasehold reform set to come into force by 2024 which enables leaseholders to either extend their leases and reduce their ground rent to a peppercorn, cheaper than it currently costs and for leaseholders where they already have a long lease, to buy out the ground rent again at a lower price than currently without having to extend the lease term.
This means leaseholders of flats built prior to 30th June 2022 may still have a chance to become more competitive in the future, but it will come at a cost, albeit a lower one than currently. Therefore, the effects on the leasehold flat market in the short and medium term are likely to be small but in the longer term could potentially be more substantial.
What about the other leasehold reforms the Government proposed including the changes to statutory lease extensions?
During the Bill’s committee stage in the House of Lords on 9th June 2021, the aim was to bring forward a Bill on wider leasehold reform in the third session of this Parliament. The third session began on 10 May 2022 but will likely not come into law until the next year or so. It is not expected that there will be any further leasehold reform that will come into force in 2022 but the Government say they are committed to bring it in by 2024.
What will this future legislation be?
It will reform the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold by the abolishment of marriage value and aims to make the cost cheaper for leaseholders to extend. It will also use an online calculator to determine the cost of extending a lease protecting leaseholders from costly and time-consuming negotiations, which would no longer be necessary.
However, at present, there is no formal information about what this calculation might be, and it does not feature in the Leasehold Reform (Ground Rent) Act 2022.
However, we do know it aims to introduce a separate valuation method for low-value properties and will give leaseholders of flats and houses the same right to extend their lease agreements ‘as often as they wish, at zero ground rent, for a term of 990 years’. There will be redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension, “subject to existing safeguards and compensation”.
Finally, it will enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.
Overall, the Ground Rent Act finally coming into force this month will be a step in the right direction for some leaseholders but where this will leave the investment and flat market in the shorter and longer term remains to be seen. With the future reforms, leaseholders and freeholders are still waiting for real answers as to how premiums over lease extensions and enfranchisements will be calculated and when these new reforms will become law to really gain an idea of how these changes will affect them and the overall leasehold market.
For further information or to discuss a house valuation or property requirement, please contact Siân Edwards, Associate Director, on 01727 732 216 or via email to sian.edwards@argroup.co.uk.