Zero Ground Rent Leases in the UK – What do you need to know?

New Legislation: All existing leaseholders will be given the right to extend their lease by a maximum term of 990 years at zero ground rent, Housing Secretary Robert Jenrick announced on 7 January 2021.

The new legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero.

The Benefits: Millions of homeowners and future homeowners will be able to free themselves from expensive ground rents potentially saving thousands of pounds.

What is ground rent? For many new developments, the buyer of the freehold property will enter into a ground lease agreement with the developer. In this agreement, the buyer is the leaseholder and the developer is the freeholder. The ground lease agreement looks like this:

Buyer / Leaseholder: Owns the flat or house itself and agrees to pay the freeholder ground rent for a specified period.

Developer / Freeholder: Owns the land where the flat or house is built on. They set the ground rent price based on what is agreed upon in the ground lease.

Upon expiration of the ground lease, a renewal of the ground lease is usually available at a new ground rent amount.

Why this reform is needed: Freeholders can increase the amount of ground rent without providing any benefit to homeowners. Current law leaves some homeowners feeling like they don’t truly own their home.

Housing Secretary Robert Jenrick said: “Across the country people are struggling to realise the dream of owning their own home but find the reality of being a leaseholder far too bureaucratic, burdensome and expensive.

Professor Nick Hopkins, Commissioner for Property Law at the Law Commission, commented: “We are pleased to see Government taking its first decisive step towards the implementation of the Law Commission’s recommendations to make enfranchisement cheaper and simpler. The creation of the Commonhold Council should help to reinvigorate commonhold, ensuring homeowners will be able to call their homes their own."

The Future: For new multi-residential high rises, commonhold will become the new norm where zero ground rents are paid. Commonhold is the indefinite freehold tenure of the building & land where ownership is shared between the legal owners of the flats. This shared ownership gives the legal owners more flexibility and control with the sales of their flats and management of their building. This system is also widely used globally.

Other rules being introduced: When a ground lease expires, the leaseholder can choose to extend their lease for 990 years at zero ground rent or choose to become a freeholder. To become a freeholder, the leaseholder will have to make a buyout payment, capped at a certain amount. An online calculator will be made available to determine the buyout amount.

What happens if you buy a property today: Some developers may still charge ground rent while other developers, such as Barratt Homes, will be waiving ground rent on their new developments.

Our View: This is reform is fantastic for homeowners as it will save them money and boost returns in their investment properties. To explore your options in the UK real estate market, contact our team today!

Source: Government reforms make it easier and cheaper for leaseholders to buy  their homes  – GOV.UK (www.gov.uk)

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