GROUND ZERO FOR GROUND RENT: MAJOR LEASEHOLD REFORM ANNOUNCED

On 7 January 2021, the Government published an article setting out, what it described as, the biggest plans for leasehold reform for a number of decades and which follows on from the Law Commission Report on leasehold reforms published last July.

The press release confirmed that:

1. All long leaseholders will be given the right to extend their lease at zero ground rent by a maximum term of 990 years (with the aim to enable homeowners to own their own home without the often unnecessary and unfair expense of ground rent). 
2. The reformed procedure will apply to long-leases (broadly leases of 21 years plus at a low rent) of both flats and houses. 
3. A cap is to be introduced in respect of any ground rent payable when the freehold is acquired.
4. Ground rents will be reduced to zero on all new retirement properties.

These measures will be welcomed by many who have been campaigning for leasehold reform.  However, the announcement was scant on detail. In particular, there was no comment in relation to the calculation of premium payable to the landlord for the permitted extension. Under current rules, the premium is calculated on a formula based partly on the loss of the ground rent to the freeholder for the period of the lease extension;  these could potentially be huge sums where a lease is extended by the maximum of 990 years which raises questions regarding the length of extension which might, in practice, be affordable.

The press release advises that an online calculator will be made available in order to simplify the process for leaseholders to calculate cost of extending their lease.  It also confirms that the complicated marriage value element currently included in the formula for calculating premiums, will be scrapped to be replaced by a fairer, cheaper and more transparent method.  This also leaves a myriad of details yet to be confirmed as to what this will mean in practice.

There is clearly a balance to be struck between making the process cheaper, and fairer for leaseholders and not depriving the freeholder of the true value of the reversion.  Only time and further details will tell how such a balance can be achieved. Fuller details of the reforming legislation due to be debated in Parliament is waited with bated breath.

A full copy of the press release is available on the Government Website, and the Law Commission Reports to which the reforms relate are available on the Law Commission Website.  For further information please contact Anna Phillips or Katie Shire.

With thanks to Megan Sly for her assistance with the article.