16 November 2022 by

Could an informal lease extension be better value for money after introduction of the Leasehold Reform (Ground Rent) Act 2022?

Before the Leasehold Reform (Ground Rent) Act 2022 (“the Ground Rent Act”) came into force, we would almost always advise our leaseholder clients to extend their leases under a statutory route. A statutory lease extension allows a leaseholder to reduce the ground rent to a peppercorn (zero) and extend the lease term by an additional 90 years.

After the introduction of the Ground Rent Act, our approach in advising leaseholder clients may be changing in some circumstances, where there is the option of extending the lease under an informal route.

The Ground Rent Act created a new category of “Regulated Leases” which are long residential leaseholds granted on or after 30 June 2022.  It is now a civil offence to grant Regulated Leases which have provision for payment of a ground rent of anything more than a peppercorn.

However, whilst the new legislation prohibits the ground rent being anything other than a peppercorn when granting a new lease, it allows a continuation of the ground rent before the expiry of the existing lease term. Therefore, landlords are permitted to continue charging ground rent that would have been payable under the previous lease, up until the expiry of the original lease term.

For example, if a leaseholder has a lease for 99 years at a ground rent of £200 per annum and the lease is extended by an additional 90 years at a premium, the landlord is allowed under the Ground Rent Act to collect £200 a year until the date on which the original 99 year lease would have expired.  From there on, the continuing ground rent will be a peppercorn for the remainder of 90 years.

The reason why leaseholders may be advised to extend their lease informally rather than under a statute is simple. The premium payable for informal lease extensions is almost always substantially lower than the premium payable under statutory lease extensions. If therefore the existing ground rent is not too onerous (and certainly no more than £250 per year) then it may be more cost effective for a leaseholder to accept an informal lease extension, saving money in paying the higher premium on statutory lease extension as well as on associated costs which are often higher on statutory lease extensions.

Key takeaways:

  • Always instruct a specialist solicitor who can advise whether an informal lease extension may be a better value for money for your particular circumstances
  • The informal lease extension may be a preferred option to those leaseholders who are short of liquid cash to pay for a premium set under a statutory lease extension
  • It may be advantageous to continue paying the annual ground rent set out by an existing lease if it means paying substantially lower premium for a grant of a new lease under an informal route.

If you have any questions about lease extensions, please contact our Lease Extensions and Property Management team.

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