Lease Extensions and Enfranchisement Claims

A step in the right direction for leaseholders?

The Leasehold Reform (Ground Rent) Act 2022 (“the Act”) is the first stage of the Government’s proposed reforms to rectify what is seen by them as ‘the ground rent scandal’.

18 Feb 2022

Whereby leaseholders are faced with large escalating ground rents leading to a detrimental effect on the market value of their properties.  The Act received Royal Assent on the 8th February 2022 and is expected to come into force in six months’ time, if not before.

Once the Act comes into force, landlords who request a ground rent for certain types of new residential leases could face enforcement action by Trading Standards and receive a fine of anything from £500.00 to £30,000.00 and enforcement action can be taken against former landlords as well as current landlords.

The Act provides that ground rents exceeding the permitted rent (normally a peppercorn) on new leases which are defined as ‘Regulated Leases’ under the Act are prohibited.

This is particularly important for landlords and leaseholders who are looking at informal lease extensions as a deemed surrender and re-grant will amount to a ‘Regulated Lease’ and special conditions will apply to the permissible ground rent.

The Act will not impact on statutory lease extensions which are granted under The Leasehold Reform Housing and Urban Development Act 1993 or The Leasehold Reform Act 1967 as lease extensions under these statutes would result in a peppercorn ground rent in any event.

When the Act comes into force, a Regulated Lease will include a lease granted by virtue of a variation which gives rise to a deemed surrender and re-grant even if no premium is payable.  Any document which affects the term or alters the demise is by operation of law a Deed of Surrender and Re-Grant.  These leases would be caught by the Act and the landlord will no longer be able to charge a ground rent for the extended term. Landlords and leaseholders should be aware however, that the existing ground rent will continue for the remaining term of the original lease, but the extended term will be reduced to one peppercorn per annum (nothing).

M&P Commentary

Shelley Fitzpatrick, Associate Solicitor, said:

“Whilst the reform in this area is a step in the right direction to rectify the issue of escalating and doubling ground rents, under which leaseholders have found themselves trapped with leases they unable to sell or re-mortgage, it will not operate retrospectively.  It is yet to be seen what consequence this will have in relation to informal lease extensions.  It may well be that landlords will seek a higher premium for informal lease extensions and time will tell as to how the market will react.  Similarly, many leaseholders opt for informal lease extensions with reasonable grounds rents, which are widely accepted by lenders to reduce the premium payable and this could raise issues of affordability. Anyone who is partaking in an informal lease extension should, as always, consult with their surveyor.

Further to the above, this is a stark warning to landlords who could face large fines and enforcement action if they try to impose on leaseholders ground rents which go above a peppercorn per annum for the extended term. Given the harsh sanctions to be imposed on landlords, they should proceed with caution as the same could be costly to them.

I am a specialist within the area of leasehold enfranchisement and deal with both informal and statutory lease extensions.  I act for both landlords and leaseholders and have extensive experience.  If you are thinking of extending your lease; please feel free to contact me at Mullis & Peake LLP and I shall be happy to guide you through the process.”

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