The Freehold and Leasehold Reform Act 2024 gave us plenty to think about. And after a something of a false start, we now know that the government will be abolishing the two year rule to qualify for a lease extension in the early part of 2025. Plenty of further reforms are on the table although there is uncertainty as to when these changes will be brought in.
In amongst the clamour generated by the more headline grabbing removal of marriage value and new 990 year lease extensions, no one seems to be talking up the brand new leasehold right sat buried in the LFRA 2024.
The new right will serve as an alternative to using the s.42 process to remove an onerous ground rent whilst extending the lease.
The right to remove a ground rent
This is as simple as it sounds. There will be a new right, totally separate to the right to extend the lease, and this will allow the leaseholder to remove their ground rent and replace it with a peppercorn. For shared ownership properties, this will apply to the tenants share of property and not the part retained by the landlord.
Who will benefit from the new right?
This is designed to combat those that have found themselves with an onerous ground rent but who don't necessarily need to extend the lease term, for example:
a 999 year lease with a doubling ground rent
a 250 year lease with a ground rent linked to RPI
a 999 year lease with a ground rent that becomes a percentage of property value each time a flat is sold
Who will qualify for the new right to remove the ground rent?
The new right will have a new qualification criteria, separate to the the right to extend the lease. In order to serve a rent variation notice, a leaseholder hold a qualifying lease of a flat or house and:
that lease must have at least 150 years remaining; and
cannot be a community housing lease or home finance plan lease
A qualifying lease of a flat or house means the leaseholder already qualifies under the Leasehold Reform, Housing and Urban Development Act 1993 or the Leasehold Reform Act 1967. Generally speaking this means a residential lease of at least 21 years at the time it commenced and almost all leases meet this requirement.
How will a rent variation notice work?
Firstly, it is important to realise that the freeholder will be entitled to a premium in exchange for swapping the ground rent with a peppercorn rent.
The leaseholder therefore claims their right by serving what will be known as a rent variation notice. The notice must be served on the landlord and any other affected parties, such as an intermediate landlord, and it must state that the tenant wishes to remove the ground rent and propose a premium to be paid.
Importantly, the notice can be assigned with the property, which means that a seller can sell a property whilst the rent variation process is underway.
The freeholder's response to the rent variation notice
The freeholder is required to serve a counter notice, which must accept the claim or refuse it and if so, specify the grounds for objecting to the claim. This notice must be served within the period of time specified by the leaseholder, and that period must be somewhere between two and six months.
If the parties cannot agree on the tenants right to claim a peppercorn rent, the premium to be paid or any variations required to the lease, they can apply to the First-tier Property Tribunal for a determination.
Comment: a new leasehold right with some familiar traits
There are some similarities with the statutory lease extension process, such as the involvement of the Tribunal if there is a disagreement, and this is to be welcomed as the machinery is already in place and experienced leasehold practitioners sit on Tribunal panels.
There are also some new elements that leasehold solicitors will need to get to grips with, such as there being between two and six months for the landlords counter notice (as decided by the tenant), which leaves the door open for potential mistake given that the timeframes are not fixed.
Further legislation is still needed before the right can be exercised
Whilst there is plenty of detail within section 48 of the Leasehold and Freehold Reform Act and Schedule 10 as to how it will work, the new right is not yet law. It cannot be exercised yet, and we will not know when it will commence until Parliament legislates to bring in these existing provisions.
So there we have it, a new benefit for leaseholders is on the way although we will need to wait a while yet before it becomes useful in practice. Our best guess is for further legislation in late 2025 or early 2026, but no one can be certain.
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