Ground rent legislation receives Royal Assent

Summary

The Leasehold Reform (Ground Rent) Bill received Royal Assent on 8 February 2022. This is a highly significant piece of leasehold reform effectively eliminating ground rents on newly created long leases of houses and flats (with certain exceptions). None of the substantive changes have yet to come into force and further detail of timings will be provided in regulations.

Detail

The property industry is considering the implications of the Leasehold Reform (Ground Rent) Act 2022, which is now law although most of it has still to come into force.

The legislation applies to England and Wales and affects long leases of flats and houses including shared ownership properties (with certain exceptions). The problems that have been caused to tenants under such leases by high, escalating and unaffordable ground rents have been very well-publicised and have caused significant difficulties for many tenants seeking to sell, re-mortgage, buy their freehold or extend their lease, because of the valuation impact of the ground rent. In some cases, the right to receive ground rents from tenants have been sold as a long-term income stream for investors. The legislation is intended to tackle the problems that ground rents have caused residential tenants.

The Act applies to a long lease (i.e. one granted for a term exceeding 21 years) of a flat or a house (known in the Act as a “single dwelling”), granted, for a premium, on or after the day on which the Act comes fully into force in relation to the relevant kind of lease, subject to exceptions some of which are detailed below.

The effect of the legislation is to restrict the ground rent under such a lease (known as a “regulated lease”) to a token one peppercorn per year, effectively restricting the ground rent to zero financial value. The legislation also prohibits the charging of an administration charge in relation to such a peppercorn rent - this is intended to deter landlords from charging what is effectively a ground rent by another name. The Act’s overall purpose is to make residential leasehold ownership more affordable for tenants.

The Act makes it clear that a sum expressed to be payable in respect of rates, council tax, services, repairs, maintenance, insurance or other ancillary matters is not rent for the purposes of the legislation merely because it is reserved as rent in the lease.

Exclusions

The Act does not apply to business leases (but excluding a home business within the meaning of Part 2 of the Landlord and Tenant Act 1954), statutory lease extensions of houses and flats (pursuant to Part 1 of the Leasehold Reform Act 1967 where a proportion of the market rent for the house known as a “modern ground rent” is payable and Chapter 2 of Part 1 of the Leasehold Reform, Housing and Urban Development Act 1993 where a peppercorn is payable), community housing leases and home finance plan leases. Nor will it apply to leases granted pursuant to pre-commencement contracts (unless pursuant to an option or right of first refusal). Particular rules apply to shared ownership leases and leases that replace pre-commencement leases (such as voluntary lease extensions i.e. informal or non-statutory extensions).

Penalties

Penalties for breaching the legislation are potentially severe. It is a civil offence with a penalty of between £500 and £30,000. The local weights and measures authorities (trading standards authorities) will enforce the legislation and the money that they raise through penalties may be kept by them to fund their enforcement activities. Trading standards can also order repayment to tenants of any unlawfully charged ground rent plus interest (the latter being at the rate for the time being specified in section 17 of the Judgments Act 1838, currently 8% a year). Tenants can also bring proceedings to recover unlawfully charged ground rent through the First-tier Tribunal in England or the Leasehold Valuation Tribunal in Wales.

Commencement

As mentioned, most of the Act has yet to come into force and future regulation will detail when the legislative provisions commence. The Government has given a commitment that it will be fully commenced within six months of Royal Assent, subject to an exception in the case of retirement home leases. For such leases, the Act’s provisions must commence no earlier than 1 April 2023, providing the retirement sector with additional time to prepare, since in that sector ground rents are often used to help fund additional costs of providing communal space and facilities.

A concern expressed through the Parliamentary proceedings that remains following Royal Assent is that since the legislation only relates to leases granted on or after the relevant statutory provisions come into force, it will not help existing tenants who are struggling with ground rents (except for those granted a replacement lease by way of a voluntary lease extension, or a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act 1993).

Wider Context

The Act is part of the Government’s wider project for residential leasehold reform. In January 2022, the Department for Levelling Up, Housing and Communities opened a further consultation on aspects of the Law Commission’s proposals to broaden access to enfranchisement, the right to manage and individual freehold acquisitions and on commonhold.

Click here for the Act.