What Will the Impact of Leasehold Reform Be on Investors?
Leasehold reform has brought an archaic law into the 21st century, but what does this mean for the modern investor?
With ground rent being scrapped on new leases in Wales and England from the 30th of June 2022, when the Leasehold Reform (Ground Rent) Act comes into force, this means the ground rent on new leases will never be more than what is called a “peppercorn” amount, meaning the financial value of the ground rent is zero, and landlords are able to apply "administration" charges in relation to the peppercorn rent, with a view to anti-avoidance. With 4.6 million properties in England and Wales, what does this mean for leaseholders, landlords, and investors?
The Key Components of the Act
Ground Rent Being Abolished on New Leases
For any investor that purchases a leasehold property with a new lease, there will be no ground rent to pay on it. This means that future homeowners will save potentially hundreds of pounds a year.
Ground rent is an annual fee that many resold homeowners need to pay to the property freeholder. This used to be a nominal amount, but in the last 20 years, there has been a rise in leasehold properties with ground rents of varying amounts, sometimes exceeding £350 a year.
Ground Rent Being Abolished on Informal Lease Extensions
The freeholder that owns the lease may also choose not to increase the ground rent for the remaining period of the lease term. Leaseholders who need to extend their lease will continue to do so with a minimum of 90 years added to the length of the lease and any ground rent reduced to zero, but this may cost more depending on the length of the lease. However, this is where the second part of the bill aims to make the process easier and cheaper for existing leaseholders to extend a lease.
The second part is eagerly anticipated as it will see the "marriage value" removed, which is the additional value gained when the landlord and leaseholder's separate interests merge into single ownership. But as it stands, there is no information as to when this will come in.
What Does This Mean for People Buying a Leasehold Property?
For anybody in the process of buying a new build, they need to check if the lease is 990 years old based on the new Act and ensure the ground rent is set to zero. Due to it not coming into place and there being a long time between announcement and implementation, there may have been a flurry of deals to sell the ground rents off. If the ground rent is not set to zero, this could put investors in a more prominent position as they could negotiate the price. Many buyers have been put off purchasing leasehold properties, and if the property has a long lease, this could mean investors have the advantage of a cheaper leasehold extension.
Homeowners of newer leasehold properties won't have to pay the freeholder ground rent, but existing leaseholders that choose an informal lease extension will also be protected.
The Impacts on Current Leaseholders
Currently, leaseholders who are looking to extend their lease cannot put a hold on the process, so they have the choice to carry on with extending a leasehold or withdraw from the process entirely. It may be possible to agree on a temporary delay with a freeholder but this is at their discretion. It's important to note that this is where the marriage value could prove to be beneficial because people could argue that the marriage value needs to be taken out of future calculations or wait until the new rules come in.
What Will the Long-Term Impact Be?
Ground rent is a controversial charge and due to its origins in Medieval times, it has been deployed in a way that has left many leaseholders stuck in properties they can't sell. With many leaseholders finding the written leases peppered with "doubling clauses" inserted by developers, making the annual ground rent payment double approximately every decade, it has left many homeowners with unmortgageable properties nobody wanted to purchase.
For commercial landlords the act does not change anything, but landlord investors who have purchased ground rents in the past may want to have a look at their portfolios to see what might be the best course of action. Investors who have property portfolios and associated ground rent are more likely to service mortgages tied to the investments.
The one place where it may have an impact would be the residential property market. While developers have traditionally operated with ground rents that didn't increase over time, it could result in higher prices being paid for ground rent leases, but this remains to be seen. What we can say is that for any investor that has been looking for a profit as a result of ground rent, the time is now up!
