No Longer Grounded – Changes in Leasehold Enfranchisement

The Leasehold Reform (Ground Rent) Act 2022 (“LRGRA”), which achieved Royal Assent in February, comes into force on 30 June. Henrietta Hammonds from specialist surveyors, Beckett and Kay shares with us what this means for those with investments in the leasehold sector:

Against the backdrop of the wider leasehold scandal, the LRGRA benefits future leaseholders only – there is no retrospective application. From 30 June, ground rent on the majority of new long leases will be capped at a peppercorn, i.e. zero. (A long lease is one granted for an initial term of more than 21 years). The Act will also apply to retirement properties but will not come into force until 2023.

A landlord who does not comply can be sanctioned with a fine of between £500 and £30,000 per qualifying lease. Leases entered into after 30 June but which come about because of prior agreement or option are still caught by the Act, as are any leases which are regranted due to a variation. Landlords therefore need to be cautious that leases are not inadvertently varied if it could amount to a surrender and regrant.

LRGRA also prohibits ground rent where a lease extension of a flat is granted outside of the existing legislation (Leasehold Reform Housing and Urban Development Act 1993 as amended). Where a non-statutory lease extension has previously been negotiated, landlords and tenants can opt to include a ground rent in the new lease. This generally decreases the premium payable on grant of the lease extension but increases the payments during the course of the new lease. (In a statutory lease extension, the new longer lease has a peppercorn rent).  Although the statutory route is the more common, it does reduce the negotiation options and means that, on lease extension, the landlord must always be compensated for the loss of existing ground rent. This could make it initially more expensive for tenants and certainly reduces the flexibility of non-statutory lease extensions.

LRGRA is only the beginning of the Government’s planned reforms in the leasehold sector. A much more extensive piece of leasehold reform legislation is in the pipeline which aims to reduce the cost of lease extensions, collective enfranchisements, and individual house enfranchisements for all existing leaseholders. The options currently floated include the capping of existing ground rents in the statutory calculations, the abolition of marriage value, an online calculator, and the prescription of some elements of the valuation. There is not yet a timescale for this wider reform and so any leaseholders contemplating a lease extension would be wise to take professional advice to ascertain its possible impact.

With thanks to our contributor Henrietta Hammonds, Beckett and Kay, who co-authored this article alongside the Lewis Silkin team.