Owners of leasehold properties should be aware that the UK government recently enacted some important reforms that will affect the future of the housing market for such homes, although the changes are just the beginning and there are more revisions planned.

The reforms are included in legislation known as the Leasehold Reform (Ground Rent) Act 2022, which received Royal Assent — meaning the Queens’ formal approval, the final necessary step to become law — on February 8. The government will now write regulations to implement the reform law, and it plans to have these rules in place by mid-August at the latest.

The primary change included in the law is to place a limit on the ground rent that freehold owners can charge owners of leasehold properties, if the lease is longer than 21 years. But to truly understand the impact of this reform, some background explanation is necessary.

What prompted the change to the leasehold market?

Leasehold properties are different from freehold homes, which the owner possesses the building and the land on which it’s located without any time limit or other restrictions. With a leasehold home, the owner signs a lease agreement with the freeholder that gives them ownership of the house or flat — but not the freehold property — for a set amount of time.

To live in the property, leaseholders usually pay freeholders a ground rent that they pay annually, along with potentially some other fees, for example, to fund the upkeep of the property.

Unfortunately, as the home buying experts LDN Properties have identified, there are some potential problems with the current leasehold market. One recent issue that has led to calls for reform is the fact that some new houses are being sold as leasehold instead of freehold, and that some ground rent charges are too high for new leases.

In December 2017, the government announced that it would try to tackle these problems, enlisting the help of the independent Law Commission to analyse the situation and provide reports with recommendations for changes to how leaseholds are operated.

Responding to those reports, the government then in January 2021 floated a series of leasehold reforms that included the limit on ground rents, among other long-sought changes.

What reforms are happening now?

The Leasehold Reform (Ground Rent) Act 2022 that received Royal Assent last month is a somewhat straightforward piece of legislation in that it focuses on limiting ground rents for long leases — which are leases that last longer than 21 years — to a “peppercorn” each year, with a few exemptions.

A peppercorn charge is a small value that the freeholder will be able to make the leaseholder pay, and this reform should help target property situations with exorbitant ground rents. Freeholders will also be unable to make their leaseholders pay for administrative costs, another important change that should help to address some of the inequity in the leasehold market.

Once the law has been implemented through the rules that the government is currently writing, it will apply to most leasehold residential properties with a number of exceptions.

Owners of leasehold properties will have to look for the government to succeed with its push for further reforms to the market that could provide even more benefits for owners.