Ground rent ban on new leases takes effect – what you need to know

The banning of ground rent has been made possible by the the Leasehold Reform (Ground Rent) Act, which takes effect today (30 June) and is part of the Government's attempt to level the playing field for leaseholders.

It applies to all new leases, which'll primarily be of benefit to future homebuyers who purchase a brand new leasehold property. The legislation will also, though to a lesser extent, benefit existing leaseholders who opt to carry out an informal lease extension – see below for more on this. 

Across England and Wales, there are estimated to be 4.6 million existing leasehold properties. The banning of ground rent applies in both of these countries, but not in Northern Ireland or Scotland, where different systems are in place. 

Unsure of the difference between a leasehold and freehold property? See our Leasehold versus freehold guide.  

How exactly ground rent rules have changed

• It impacts those who buy a new leasehold property.

The new law guarantees that if you buy a leasehold property which has a new lease – in other words, a brand new leasehold property, or an existing one where a new lease is taking effect – you'll never have to pay any ground rent.

The one (temporary) exception to this is where you're buying a retirement property. Here, the ban on ground rent won't take effect until at least April 2023.

Ground rent is a fixed annual fee that many existing leasehold homeowners have to pay to their property's freeholder, essentially for the use of the land on which the property stands. In recent years, ground rents of £100, £200 and £250 annually (sometimes more) have been common.

• It also impacts existing leasehold homeowners who negotiate an informal lease extension.

The ban on ground rent also impacts informal lease extensions, which'll benefit some existing leasehold homeowners.

Essentially it means that if a leaseholder decides to extend their lease informally (though for most people a formal lease extension – discussed in the section below – is always the advised route), the freeholder who owns the lease will be not able to increase your ground rent for the remaining period of your existing lease term. From the moment your existing lease term expires and the new term takes effect, the ground rent will revert to zero.

Watch out. The dangers of having a short lease STILL apply

Whether you're an existing leaseholder or thinking of purchasing a leasehold property, beware that other issues concerning leasehold properties still apply. The most important of these is related to the length of your lease.

In brief, leases become much more expensive to extend once they are less than 80 years in length. This means it's VITAL not to your lease length drop lower than this – even by one day.

As it stands, a formal lease extension adds a minimum of 90 years to the length of a lease and automatically reduces any ground rent to zero. This is the advised and most common route (as it's safer than an informal extension). In the best case scenario, a formal extension will set you back £1,000s, but where your lease is less than 80 years – or even just nearing 80 years – the cost could easily spiral into the £10,000s. 

An alternative to extending the lease is purchasing your property's freehold. This effectively means you take over responsibility for managing the building. But the cost of purchasing your property's freehold (which is similar to that of extending the lease) also increases as the lease runs out. 

Having a short lease can also make it more difficult to sell or remortgage your property, as lenders often won't approve a mortgage in this scenario.

The Government is currently trying to introduce a second leasehold bill aimed at making the formal lease extension process both easier and cheaper, but there is no indication when this could take effect. It could be years. If you're an existing leaseholder, make sure you are aware how many years are left on your lease – either check your paperwork or speak with your freeholder.

Most leasehold properties in England and Wales are flats. While variations do exist between the rules governing leasehold flats and leasehold houses, there is a lot of crossover and the danger of having a short lease applies to both.

For those who need to extend their lease, step-by-step info – including an indication of costs – can be found in our Should I extend my lease? guide. It also details the pros and cons of buying your property's freehold.

'We're facing a £50,000 bill to stay in our family home'

One family recently got in touch with MoneySavingExpert.com (MSE) to convey the dangers of letting a lease drop too short in length. 

David and Joan Wilkinson, 66 and 63, bought their family home – a leasehold house – in Birmingham in 1978 for £19,000, and have lived there ever since, including being mortgage-free for the past 20 years.

Earlier this year, the couple contacted their freeholder about the possibility of purchasing the freehold (with leasehold houses it's normally more beneficial to purchase the freeholder rather than extend the lease).

Yet as the lease had dropped to just 15 years in length by that time, a professional valuer estimated the cost of buying the freehold at £58,000, a price which was eventually negotiated down to £53,000.

The Wilkinsons told MSE they hadn't been made aware of the issues surrounding short leases by their solicitor when they bought the three-bed semi (the lease at this time was 58 years), and would likely have reconsidered their decision to proceed with the purchase had they been better informed.

The couple are now facing the prospect of delaying their retirement in order to fund the purchase of the freehold, with their children covering some of the the extra cost. If the lease were to eventually expire, the freeholder could technically take steps that might result in the Wilkinsons becoming homeless – despite having paid off their mortgage.