SPECIAL FEATURE: Leaseholders should be aware of new ground rent problems – Cavendish Legal Group

SPECIAL FEATURE: Cavendish Legal Group have written an article that covers the subject of how leaseholders should be aware of new ground rent problems.

The recently-introduced Leasehold Reform (Ground Rent) Act means owners of properties with new leases will not have to contend with the problem of escalating ground rents.

Under this legislation, ground rents in new leases will be token, or ‘peppercorn’, and it will be impossible for freeholders to introduce onerous increases.

Unfortunately, the new law will not bring the same certainty and peace of mind for owners of properties with existing leaseholds.

Indeed, there is a risk that further problems could be created as a result of existing leaseholders becoming confused over how the law applies to their situation.

Having examined the wording of the Leasehold Reform (Ground Rent) Act, I am concerned that property owners who wish to extend existing leases that do not serve their needs could inadvertently end up with new arrangements that do not provide the solution they were seeking.

Under the leasehold reform legislation, all non-statutory lease extensions – in other words lease extensions offered by landlords on an informal basis – will have to be at a peppercorn rent if it amounts to a surrender and re-grant.

However, if a voluntary lease extension by variation (not through the Act itself) is agreed then it is important to note that the existing ground rent provisions applies solely to the existing term of the lease prior to its term being extended.

Therefore, a new lease being extended informally today by deed of variation to another 125 years will still have to pay the contractual ground rent under the existing lease until the new extended term comes into play.

Lease extension

It is vital that leaseholders bear this in mind if they are considering seeking an agreement with their freeholder for a voluntary lease extension instead of going through the formal leasehold enfranchisement process.

My concern is that many existing leaseholders may not realise the limitations of the new legislation to their situation, and could enter into arrangements which do not meet their needs.

I can see this as a potential problem for landlords too, as they may be more unlikely to agree a voluntary arrangement forcing the statutory route to be adopted regardless. The reason being is because some landlords may take the view that there is nothing to be gained now by agreeing terms informally if they may be prevented from retaining that annual income – something not permissible via the statutory lease extension route.

As the law comes into force, we will see whether voluntary lease extension arrangements get affected from both sides of those entering into the same.

At the very least, tenants could still find themselves subject to escalating ground rents – as per their existing lease terms. At worst, the complexities of leases that have been extended in this way could be expensive to resolve and could even jeopardise property sales.

So what approach should be taken by property owners who need to address problems such as rising ground rents, and short leases that need to be extended?

Leasehold enfranchisement

The only current way in which to guarantee a lease extension and a peppercorn rent right now is by seeking a statutory solution though leasehold enfranchisement.

While this is often seen as a more expensive approach than a voluntary lease extension, it offers leaseholders a way in which to take control of their situation without potentially creating new problems. It provides the certainty that any property owner (or potential buyer) is seeking.

Furthermore, the outlay involved in claiming a statutory lease extension should be seen in the wider context of the value that this can add to a property.

In the case of a property that had been unmarketable because of rising ground rent provisions, or a lease with only a short amount of time remaining – or, indeed, both of these issues – then leasehold enfranchisement can make it possible to sell that property and realise its market value.

Indeed, the value of making such a property saleable extends beyond a monetary figure for any property owner who had been in a situation that might have seemed to be insurmountable.

It also adds value to their personal wellbeing, by providing them with a certainty that was previously lacking, and in doing so enabling them to move home if they wish, and to move on with their life.