The future of voluntary lease extensions following the Leasehold Reform (Ground Rent) Act 2022

Described by the Government as “part of the most significant changes to property law in a generation”, the Leasehold Reform (Ground Rent) Act 2022 (LRGRA 2022) received Royal Assent on 8 February 2022 and came into force on 30 June 2022. The LRGA 2022 marks the first of a series of anticipated leasehold reforms. The Act applies to all new residential long leases being granted, and voluntary lease extensions where the existing lease is surrendered and regranted.

In this article, our leasehold enfranchisement property partner Katie Cohen discusses the process of voluntary lease extensions and their future in the context of the changing leasehold climate.

Voluntary lease extensions

Many freeholders see the benefit in granting voluntary lease extensions to their leaseholders, but this once valuable tool arguably became slightly less valuable as of 30 June 2022. The ability for a freeholder to charge ground rent to their leaseholder on the newly extended term of any lease extension was abolished if the existing lease is deemed to be surrendered and regranted.

Freeholders can no longer grant voluntary lease extensions with increasing ground rents in return for a premium. Instead, they can voluntarily agree to grant newly extended leases in return for a premium with a peppercorn ground rent (i.e. nil ground rent). Given the existence of the LRGA 2022, ground rent in this situation would remain payable as per the existing lease for the duration of the existing lease term and would become a peppercorn for the newly extended term.

It is worth noting that such voluntary lease extensions outside of the statutory legislation may not be negotiable by the leaseholder both in terms of the premium payable by them to the freeholder, the extended term being offered (perhaps back up to the original term, for example) or the legal and valuation fees sought. Such professional costs are not subject to reasonableness and proportionality as they are under the statutory regime – note too, though, that costs are not prescribed or fixed under the statutory regime (this may be changed).

What is the advantage of voluntary lease extensions?

Voluntary lease extensions are often significantly quicker but will be subject to lender’s consent; however, this can sometimes be time-consuming. Registrations are currently subject to excessive delays at the Land Registry irrespective of whether a lease extension is agreed under the statutory regime or voluntarily.

Deeds of variation – an alternative to solve the ground rent issue?

A deed of variation to the existing ground rent in the lease may present a way around extending the lease on a voluntary basis whilst retaining ground rent income streams for freeholders. The existing term is not being extended, the variation of the existing lease is not caught by the provisions of the LRGA 2022 and merely perhaps the adverse ground rent provision in the existing lease is being varied to a more acceptable review or fixed rate in return for a premium.

Deeds of variation are commonly seen during sales of leasehold properties with finance whereupon the lender refuses to lend as the existing ground rent provisions breach the terms of their lending criteria. Often, the buyer will be faced with a predicament of losing their flat and the seller will find themselves being held to ransom by a freeholder wishing to “cash in” on the situation. Is this an unintended consequence of the LRGA 2022, which provides a loophole for freeholders to continue to charge ground rent?

What are the consequences of the LRGRA 2022?

There are still many cases of freeholders seeking to voluntarily extend leases by way of deeds of surrenders and regrants in direct contravention of the provisions of the LRGA 2022. Seemingly, practitioners are either not adequately advising their freeholder clients of the change in law and conversely the advice is not making its way through to leaseholders who should be aware of this crucial change in law. Interestingly, many freeholders could find themselves in a situation whereby newly developed blocks of flats could well have leases which are not uniform. Pre-June 2022 leases can of course still contain ground rent, but post-June 2022 leases will not. This could therefore have an adverse impact on both parties concerned, depending of course which side of the fence you are positioned.

Freeholders and leaseholders are somewhat caught in limbo, currently questioning what the future will hold for lease extensions (as well as the leasehold enfranchisement arena in general). From a freeholder’s point of view, will once valuable short leasehold reversions hold the same value in the future as they do now? Alternatively, should a leaseholder extend their lease now or wait? Will ground rent abolition apply retrospectively to existing leases when the next stage of legislation is eventually introduced? Will there be a complete overhaul of the numerous Acts that govern leasehold enfranchisement?

These are questions facing the legal profession every day. The profession waits with baited breath for answers and the devil is of course very much in the detail. With no set dates for future legislation, leaseholders are very much stuck between a rock and a hard place deciding whether to sit tight and await the anticipated legislation or bite the bullet and exercise their statutory rights.