The Leasehold Reform Act: a misdirection of efforts

As the Leasehold Reform Act received royal assent this February, the government proclaimed it had taken a big step in the UK’s levelling-up agenda. Aimed at bringing an official end to spiralling ground rent rates by abolishing ground rents for some residential leaseholds in the UK, the legislation has solid grounding. Yet, it also has one significant and discreet flaw; it will only apply to future leaseholds and will have no real impact on existing leaseholders who are currently facing spiralling ground rents. Indeed, it would seem that the new Act has rather missed the target completely by failing to address the real problem.

Developers have traditionally been able to double down on returns through the practice of selling a house as a leasehold instead of a freehold, and then cashing in on both the sale of the lease and collecting annual ground rents thereafter. By and large, they have been taking two bites of the cherry. However, the new law will restrict ground rents on the majority of future long residential leases in England and Wales to the value of zero.

Unfortunately, whilst a step in the right direction, this new move is unlikely to have any significant impact. The previous practice of doubling/escalating ground rents had already invited unwanted attention to industry bad-practice and following a CMA investigation, many of the large developers have already stopped this practice on their own accord. The government has therefore really only addressed the tip of the iceberg.

This begs the question, why have lawmakers set their sights on future new build properties from developers with the Leasehold Reform Act, and not on the existing leaseholders still struggling with doubling ground rents? The government has so far struggled to justify their motivations and has even taken steps to ignore the issue; when an amendment was tabled to remove ground rents from all existing leasehold properties, it was defeated by 306 votes to 162.

Moreover, the new law may in fact serve as an additional woe to those who are currently paying out of pocket for existing ground rents and are looking to sell their leasehold. Any prospective buyer would be significantly deterred by the idea of paying even a manageable existing ground rent, as this charge has now essentially been deemed illegal.

The new law could also galvanise freeholders into offering informal lease extensions in order to protect their inflated income. Leaseholders are entitled to a statutory lease extension under the Leasehold Reform Housing and Urban Development Act 1993, which ensures that the terms of existing lease can’t be altered when it is extended. Extending a lease through this route would see the ground rent abolished; however, through an informal lease extension, a freeholder can introduce new charges, such as administration charges, which would cover losses once the ground rent on the new lease is removed. An informal extension could, in theory, even see a leaseholder continue to pay ground rent, albeit not in excess of their current ground rent.

Whilst legislators have promised a second bill to address issues with existing ground rents, there is still no indication on timings and at this stage, it hard to see this as any more than an empty promise that pays lip service to aggrieved parties. Leaseholders, who feel largely overlooked by the direction the government has taken, will have to wait with bated breath to find out if they will be offered relief from their ground rents on their existing leases. Furthermore, whilst further reform may be planned, the slow progress of the Leasehold Reform Bill is not encouraging.

Unfortunately, the government’s recent actions will do little to address the ground rents issue, which plagues a significant population of leaseholders in the UK. Nonetheless, the introduction of the new law this coming Summer may prove a glimmer of hope that further reform which will have a meaningful impact by abolishing ground rates on existing leaseholds could be on the horizon. Ultimately, the Leasehold Reform Act appears to have placed a legislative dam in a river that has largely already run dry.

Courtesy of The Law Society Gazzette

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