Ground rent changes: your questions answered

The Department for Levelling Up, Housing & Communities is getting ready to implement its latest reforms to residential ground rent this June. We’ve answered some of the most common questions ahead of the planned changes.

Q. What is ground rent?
A. This is usually an annual sum of money charged by the freeholder (the person who owns the land on which the property is built) to the leaseholder (the person who owns the building but not the land). A typical ground rent fee will be between £100-£250 per year but some freeholders add a clause in the contract that stipulates the ground rent will double every 10 to 20 years.

Q. What properties are subject to ground rent?
A. Usually owners of leasehold flats and apartments are asked to pay ground rent, although it is also common for converted flats in large houses to also receive a ground rent demand. More recently, builders of new houses have been selling the properties on a leasehold basis.

Q. Is the law surrounding ground rent changing?
A. Yes, via The Leasehold Reform (Ground Rent) Act. This new Act takes effect from 30th June 2022. After this date, freeholders will no longer be allowed to charge ground rent to leaseholders who are taking out new long leases. This will represent a financial saving of hundreds of pounds annually for most leaseholders. The ban on ground rent will extend to retirement properties as of 1st April 2023.

Q. What does a ‘peppercorn amount’ mean?
A. If you are signing a new long lease on a leasehold flat or house from 1st July 2022, you may see the wording ‘ground rent set to a peppercorn amount’ used in paperwork. It’s a token way of saying that the ground rent will be zero. Why a peppercorn? The Government has used an item so small and nominal in value that it’s not worth paying, illustrating that there will be no ground rent charges.

Q. I’m an existing leaseholder, what is changing for me?
A. For now, your freeholder will still be able to charge you ground rent but the new Act will change the process of informally extending a lease, allowing existing leaseholders to manage the ground rent they are charged. When a leaseholder informally extends their lease, the freeholder must not increase the ground rent while the remaining term expires. When the new term starts, the ground rent must be reset to zero.

Q. Will ground rent ever be scrapped for existing leaseholders?
A. Of that we are not sure but what we do know is that the Government is consulting on a second Bill that would address many concerns held by existing leaseholders. A major reform will hopefully make it easier and cheaper for leaseholders to buy the freehold of their property, which would remove the necessity to pay ground rent. No date for the Bill moving through Parliament to become an Act was available at the time of writing.

Q. Is there a workaround for existing leaseholders?
A. Leaseholders can formally apply to extend their lease by 990 years at zero ground rent thanks to Government reforms in 2021. While a formal lease extension will effectively see the end to ground rent attached to a property, the cost of extending a lease usually costs thousands of pounds. It is this situation that the Government’s second Bill will hopefully reform in favour of the leaseholder.

Q. What is a Bill and when does it become an Act?
A. An Act of Parliament introduces a new law or changes an existing one. The Act starts off as a Bill (such as the current Renters’ Reform Bill), which sets out the details. The Act has to be approved by the House of Commons and the House of Lords before it is given Royal Assent by the ruling monarch. Only then does the Bill turn into an Act and become law.

If you have any outstanding questions regarding ground rents, leasehold properties and the future changes outlined, please contact the team today.