New Ground Rent laws - possibility they could be extended to all leasehold properties?

gcpbuyer

"In the speech, the government also confirmed measures to end the practice of ground rents for new leasehold properties" - Source
I'm in the process of buying a leasehold property in London with 116 years left on the lease, where ground rent is £300. There's a clause where the ground rent doubles every 25 years. Although I know this is probably OK by most accounts I'm reading online, it's not ideal. 

My questions are:
1) How likely do you think it will be that the new government regulation will be extended to all leasehold properties? 
2) Does extending the leasehold by 99 years automatically reduce your ground rent to a peppercorn amount (if you've been living in the property for two years?)

If the government doesn't extend the new regulation to all leasehold properties, then we'll all be left with a batch of flats where ground rents double at certain dates, and a batch where it's £1 which will skew these flat prices. 

Thanks!

anselld

(1j Extremely unlikely.  The Queens speech stated new leases and it is very difficult to apply retrospectively when contracts are in place.

(2j Yes, but at a cost.

AdrianC

All the QS did was to repeat what they said back in January - that they say they're going to get round to doing something.
https://commonslibrary.parliament.uk/leasehold-reform-in-england-and-wales/

That's a VERY long way from something actually having been announced.

There's no draft legislation yet.
When draft legislation does get published, it has to work its way through both houses, with amendments proposed at all stages.

At any stage, it might peter out.
If the minister responsible - or PM - changes, then the incomer might have different priorities.
The next election is currently scheduled for May 2024. It's not at all certain the legislation will go through completely by then. Perhaps the government party will change then, and they will have different priorities.

firsttimesellerldn

I don’t think there’s any chance that this will apply retrospectively. Freeholders paid for the freeholds on the basis of certain returns so the government can’t just turn around and make their asset worthless - they’d need to be compensated. 

I agree this leaves some leaseholders with expensive ground rents in a frustrating situation. But in terms of resales, we have a property shortage in the uk and many buyers won’t necessarily be picking between properties with ground rent and those without. If someone really likes the property I’m not sure this would put them off. But it perhaps depends on where it is and whether there are lots of newbuilds going up which won’t have ground rent (think this is already a condition for Help to Buy now). 

eddddy

gcpbuyer said:

1) How likely do you think it will be that the new government regulation will be extended to all leasehold properties? 

It depends what you mean by that question. New leasehold legislation would apply to existing leaseholds.

• But that almost certainly won't mean your ground rent gets reduced from £300 pa, or stop it from doubling every 25 years.

• It's also unlikely to mean that the premium for extending your lease is significantly cheaper. But it might mean you have to pay lower legal and valuation fees.

gcpbuyer said:

2) Does extending the leasehold by 99 years automatically reduce your ground rent to a peppercorn amount (if you've been living in the property for two years?)

There's 2 ways of extending a lease - the informal route, and the formal (statutory) route.

Informal Route
If you use the informal route - there are no rules. The freeholder and leaseholder can agree whatever they like:

• The extension could be for 5 years, 50 years, 500 years, 1000 years or any other number of years.
• The new ground rend could be £0, £100, £300, £1000 or any other amount.
• The ground rent could be fixed for the entire lease or escalating/doubling.
• You don't have to have owned the property for 2 years
• The price that both parties agree can be anything - £100, or £100,000 or any other amount

Some leaseholders have reduced the value of their flats, and made their flats unmortgageable for future buyers, by agreeing to bad terms for their lase extensions.  Many other leaseholders have simply ended up with a lease extension that is poor value for money.

So it's best to take professional advice.

Formal or Statutory Route
Briefly...

• The lease will be extended by 90 years
• Ground rent will reduce to £0
• The premium (price) is calculated by a formula - but there are variables in the formula, so expect arguments about the premium
• It might take between 6 months and 18 months
• Expect legal/valuation fees of about £2k to £4k (in addition to the premium)
• You need to own the flat (but not necessarily live in it) for 2 years before you can start it.

The new legislation is expected to make the following changes...

• Instead of extending the lease period by 90 years, extend it to a total of 900 years
• Simplify the premium formula - so there are fewer arguments about it (but it's unlikely that the premiums will work out much cheaper)
• Speed up the process
• Substantially reduce the amount of legal/valuation fees 

user1977

gcpbuyer said:

If the government doesn't extend the new regulation to all leasehold properties, then we'll all be left with a batch of flats where ground rents double at certain dates, and a batch where it's £1 which will skew these flat prices. 

There already are plenty of properties in each of those camps.

eddddy

gcpbuyer said:

If the government doesn't extend the new regulation to all leasehold properties, then we'll all be left with a batch of flats where ground rents double at certain dates, and a batch where it's £1 which will skew these flat prices. 

Just to clarify that point - the legislation is planned to address that point like this:

• New leases will have ground rents of £0
• Owners of existing leases will have the option to pay a lump sum to the freeholder to get their ground rents reduced to £0 

From a leaseholders perspective, conceptually, it would work like this:

• I have promised to pay you £300 per year ground rent for the next hundred years
• But I want to pay you a lump sum today instead of paying £300 per year for 100 years
• So essentially, I am saying that I want to pay 100 years ground rent in advance, but discounted because of inflation etc
• The government's current calculation formula says that works out at about £5000

So in simple terms, I pay my freeholder £5000 today, and in return, my ground rent is reduced to £0

gcpbuyer

Got it! That makes sense @eddddy
Can the freeholder refuse to reduce the ground rent to £0 even if you follow the Formal/Statutory Route after 2 years?

eddddy

gcpbuyer said:

Got it! That makes sense @eddddy
Can the freeholder refuse to reduce the ground rent to £0 even if you follow the Formal/Statutory Route after 2 years?

Under the current legislation, after you've owned the property for 2 years - the freeholder must allow you to extend the lease by 90 years and reduce the ground rent to zero (in return for a payment). The freeholder cannot refuse - if you follow the process correctly.

Under the new legislation, the plan is to let you just reduce the ground rent to zero - and not extend the lease - if you want to (presumably for a slightly lower price). I doubt that the freeholder will be allowed to refuse. I don't know if the 2 year qualification period will remain or not.