Move to Prevent Freeholders Charging Ground Rent from Leaseholders

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Move to Prevent Freeholders Charging Ground Rent from Leaseholders

The Leasehold Reform (Ground Rent) Bill will (if it becomes law) ban freeholders charging leaseholders ground rent in new leasehold agreements of newly built residential properties.

This issue first arose in the 2000s when developers started selling homes on a leasehold rather than a freehold basis. Although ground rents were initially lower, more recently developers have set initial ground rents of £250.00/£500.00 p.a. with rent review clauses allowing the rent to be reviewed every 5, 10 or 25 years. More often than not, the ground rent review always provides for an increased ground rent figure on review. Financially, the immediate increase may not be too severe although with many leases being 125 – 150 years (or even 999 years) the escalating costs over the lease term are enormous.

The added problem has been that the majority of mortgage lenders will not lend on such leases, leaving leaseholders faced with huge problems in being able to actually sell their property.

Thankfully, there has been more publicity surrounding these issues, so buyers are aware of them and pressure has been brought upon the Government to address the problem. There will be some exceptions to the new provisions outlined in the Leasehold Reform (Ground Rent) Bill, such as business leases, some community-led housing sector leases and some financial products which depend on leasehold agreements where rent replaces interest-bearing mortgage repayments.

Whilst the expected roll out of the Bill is excellent news for those looking to enter into a new leasehold agreement for a new build property, it will not come to the help of owners with existing leasehold agreements.

However, there is a possibility with the Bill that if an existing lease is varied and becomes a new lease, the ground rent clauses in the previous lease would be un-enforceable.

Laurence Warnell is a partner in our residential property team and also head of our Ascot office. If you have any questions regarding this article, please email Laurence.