Ground rent ban on new leases takes effect TODAY – what you need to know

MSE_Kit

Homebuyers who purchase a new leasehold property will no longer have to pay ground rent from today, as long-awaited legislation kicks in. The move could result in savings of £100s a year for homeowners – though new and existing leaseholders still need to beware the dangers of a short lease, as we explain in our news story.

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'Ground rent ban on new leases takes effect TODAY'

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Section62

I know the Government also use the word 'banned' in their press releases, but is it not the case that ground rents for new residential leases are being restricted to no more than one peppercorn per year?

Therefore these ground rents won't be 'banned', they are just limited to a maximum notional value.

The use of the word 'banned' could lead to confusion with people seeing clauses in new leases referring to ground rents of one peppercorn and thinking the lease is 'illegal'.  It would be useful if MSE could explain that a bit better.

For anyone who feels this is nothing but pedantry, it isn't.  The Act defines “peppercorn rent” as "an annual rent of one peppercorn".  There is nothing preventing Parliament redefining “peppercorn rent” for the purposes of the Act as any other sum of money (which could be greater or less than one peppercorn).

Therefore the statement "The new law guarantees that if you buy a leasehold property which has a new lease – ... – you'll never have to pay any ground rent." isn't accurate.

At the discretion of the freeholder the annual ground rent charged could be the value of one peppercorn, and at the discretion of Parliament that amount could increase to anything they wish.  "Never" is a very long time in terms of leaseholds.

user1977

Also, what does "taking effect from today" mean? I'm guessing if you're already in a contract then the agreed terms of a new lease will still apply, even if completion is still to come?

kingstreet

user1977 said:

Also, what does "taking effect from today" mean? I'm guessing if you're already in a contract then the agreed terms of a new lease will still apply, even if completion is still to come?

We have a case, pre-exchange, where the reservation is being amended today to remove the ground rent.

eddddy

It will be interesting to see who ends up owning the freeholds, if they generate no ground rent from the leases.

Up until now, Investment Funds, Pension Funds etc often buy large freeholds, and small investors buy smaller freeholds - to get the ground rent income. It's a very low risk investment for them.

If the freeholds now generate no income, maybe developers will 'give away' the freeholds to the leaseholders - which is perhaps a good thing.

Or maybe they'll be put up for sale for 'peanuts', which might attract the wrong kind of buyer - people who see an opportunity to make a few quid by charging inflated service charges, earning high commission on buildings insurance, etc.

user1977

kingstreet said:

user1977 said:

Also, what does "taking effect from today" mean? I'm guessing if you're already in a contract then the agreed terms of a new lease will still apply, even if completion is still to come?

We have a case, pre-exchange, where the reservation is being amended today to remove the ground rent.

Yes, I wouldn't expect a mere reservation to be fixing anything about the form of deed to be granted.

daveyjp

eddddy said:

It will be interesting to see who ends up owning the freeholds, if they generate no ground rent from the leases.

Up until now, Investment Funds, Pension Funds etc often buy large freeholds, and small investors buy smaller freeholds - to get the ground rent income. It's a very low risk investment for them.

If the freeholds now generate no income, maybe developers will 'give away' the freeholds to the leaseholders - which is perhaps a good thing.

Or maybe they'll be put up for sale for 'peanuts', which might attract the wrong kind of buyer - people who see an opportunity to make a few quid by charging inflated service charges, earning high commission on buildings insurance, etc.

The price of the property will be increased to reflect there is no ongoing and increasing ground rent income and as you note there may be value in the service charge elements of the lease.

mojo293

So to be clear, is this change only applicable to brand new leases being started on new build properties from today?

i.e. I am currently in the process of buying a 6 year old house with an existing leasehold with 147 years remaining and a current GR of £205/pa (reviewed every 15 years to follow RPI, so next review not until 2029). So this change won't really affect me and my purchase?

As it goes, I will be looking to purchase the freehold if I can and it's a reasonable cost (Vendors were quoted circa £2000 when the enquired), mainly to remove the risk of it being sold on to another 3rd party who may decide to change the lease and inflate the ground rent costs.

GDB2222

mojo293 said:

So to be clear, is this change only applicable to brand new leases being started on new build properties from today?

i.e. I am currently in the process of buying a 6 year old house with an existing leasehold with 147 years remaining and a current GR of £205/pa (reviewed every 15 years to follow RPI, so next review not until 2029). So this change won't really affect me and my purchase?

As it goes, I will be looking to purchase the freehold if I can and it's a reasonable cost (Vendors were quoted circa £2000 when the enquired), mainly to remove the risk of it being sold on to another 3rd party who may decide to change the lease and inflate the ground rent costs.

Your ground rent cannot be unilaterally increased, and the new legislation won't change your existing lease.

user1977

mojo293 said:

So to be clear, is this change only applicable to brand new leases being started on new build properties from today?

New leases, yes. Doesn't matter whether it's a newbuild property or not, though obviously the vast majority would be.

Section62

eddddy said:

It will be interesting to see who ends up owning the freeholds, if they generate no ground rent from the leases.

Might be attractive to condiment wholesalers with the number of peppercorns owed to them on a large portfolio.

The one inevitable will be an unintended consequence of some kind....