The Leasehold Reform (Ground Rent) Bill received Royal Assent on 8 February 2022. The main elements of it, i.e. the ground rent restrictions themselves, remained to be brought into force by regulations. This has now taken place; The Leasehold Reform (Ground Rent) Act 2022 (The Act) will come into force on 30 June 2022.
The government announcement around this said that this “puts to an end ground rents for new, qualifying long residential leasehold properties in England and Wales. This is part of the most significant changes to property law in a generation.”
The Act will only assist those buying flats after the Act comes into force. For those who already hold a flat under a lease that requires payment of a ground rent their obligation will continue unaffected. So those with ‘onerous’ ground rents still have an issue. That said the wider reforms of the leasehold law currently under consideration may enable those ground rents to be bought out more cheaply in future.
For most leases granted after the Act comes into force the permitted rent will be nil in effect (technically one peppercorn per annum). Different rules apply in respect of shared ownership leases and replacement leases.
Some types of lease aren’t caught by the restrictions however it is very restricted i.e. certain business leases, statutory lease extensions of a house or flat, Community Housing leases and Home finance plan leases.
There are potential traps for unwary landlords; they may be caught out when making changes to existing leases;
- If they agree to make a variation that constitutes a deemed surrender and regrant of the lease, i.e. one that changes the extent of the flat for example, then the lease will be caught by the Act and so the benefit of the existing rent lost unless it falls within the replacement lease exclusion.
- Voluntary/non statutory lease extensions can still reserve a rent but this is heavily prescribed; broadly speaking the existing rent pattern can be retained until the existing lease would have fallen in. it must then fall to a peppercorn.
- Rent instead of premium - it may be possible to agree an enhanced rent in lieu of a premium. That said landlord's may be reluctant to entertain this as the wider enfranchisement reforms include a proposal that ‘onerous’ element of the rent will be ignored when calculating the premium for an extended lease and so the landlord might receive less than anticipated i.e. the current premium foregone.
Landlords will be in breach if they require a tenant to make payment of a prohibited rent (which includes failure to refund it to the tenant within 28 days of receipt). Trading Standards authorities can impose fines of between £500 and £30,000 for breaches.
The Act may have unintended consequences for tenants wishing to obtain voluntary lease extensions. There will be little incentive for a landlord to grant a voluntary extension and so they may more often require tenants to go through the statutory process. This often takes longer and is more expensive for tenants. So this may become more of an issue on resale where often flat owners have been able to negotiate terms for an extension and tie that in with the sale timing.
Tenants who collectively own the freehold to their building still have options available to them to demand a ground rent as usually a premium will not be paid on the grant of a lease extension.
This announcement makes reference to the wider reforms of leasehold law that are under consideration “The move forms the first part of the government’s reform package that will make homeownership cheaper, fairer and more secure. Future measures, announced last year, include a new right for leaseholders to extend their leases to 990 years at zero ground rent and an online calculator to help leaseholders find out how much it would cost to buy their freehold or extend their lease.” These are promised for later in this Parliament.
It remains to be seen which of the Law Commission’s recommendations and valuation options the Government opts to proceed with. For example they may make it much cheaper for flat owners to extend their lease.
Those with leases that have less than 80 years left to run risk being penalised if they wait for the reforms only to find that marriage value is not scrapped or it is made up for in other changes such as the deferment rate.