Ground rents in new residential leases to be outlawed

09/12/2021

The Leasehold Reform (Ground Rent) Bill will end ground rents for new long residential leasehold properties in England and Wales. The Bill is making its way through the House of Commons and is expected to become law in 2022. In this article, we examine the likely provisions of the new law.

Background

Most owner-occupied flats (and some houses) in England are held on long leases. Almost all of these require the leaseholder to pay a ground rent to their landlord.

Historically, these rents were at a ‘peppercorn’ or nominal amount. However, in recent years, new flats have been increasingly sold on the basis of higher ground rents at the start of the lease and shorter ground rent review periods. As a result, long leaseholders can quickly find their grounds rents have become unduly onerous. This has made some flats difficult or even impossible to sell or remortgage.

The Leasehold Reform (Ground Rent) Bill is the first part of the government’s plan to reform the leasehold system in England and Wales.

The Bill 

Once the Bill comes into force as an Act, it will restrict ground rents on newly created long residential leases (with some exceptions) to a token one peppercorn per year. A long lease is one granted for a term of more than 21 years. The legislation will not apply to service charges, insurance or other sums reserved as rent in a lease.

The legislation aims to make leasehold ownership fairer and more affordable for leaseholders. It will effectively mean ground rents have no financial value.

Certain leases will be exempt, including business leases, statutory lease extensions of houses and flats, and community housing leases. The Act will apply to new shared ownership leases where the tenant has not yet bought the full 100% of the property. The landlord can charge rent on their share of the property but only a peppercorn on the tenant’s share.

Due to transitional provisions, the legislation will not apply to leases of retirement properties until at least 1 April 2023.

Specific rules will apply where a developer and leaseholder have entered into an agreement for lease for a flat still being built when the Bill becomes law. In that case, the new law restricting the ground rent to a peppercorn will not apply when the flat is completed and the lease granted.

Enforcement

The Act will be enforced by trading standards authorities in England and Wales. A breach of the ground rent restrictions will be a civil offence carrying a financial penalty of between £500 and £30,000. The money raised by financial penalties can be kept by authorities to fund their enforcement activities. They will also have the power to order repayment of any unlawfully charged ground rent plus interest to the leaseholders.

Issues identified in the House of Lords

During its passage through the House of Lords, several issues were raised about the Act, including:

  1. The new law will only apply to new leases and will not assist leaseholders already faced with high and escalating ground rents.
  2. The House of Lords expressed concern that unscrupulous landlords may pressure leaseholders to agree voluntary lease extensions as a way around the legislation to continue their ground rent arrangements. As it stands, voluntary lease extensions will be caught under the new law, but the restricted ground rent will only apply at the expiry date of the original term.
  3. Concerns that trading standard authorities may not have the budget or capacity to enforce the new legislation.
  4. The fact that ‘ground rent’ is broadly defined in the legislation.
  5. The Act’s commencement date and the transitional period for retirement homes.

When will the new law come into force?

The Bill is expected to be passed in the current session of parliament and become law within six months. Some of the provisions mentioned above may change as it passes through the House of Commons, so the above is by no means definitive. Watch this space for future updates as and when the Act is passed.

If you have any queries about the Leasehold Reform (Ground Rent) Bill, please contact Daniel Broughton at dbr@portner.co.uk.