The long awaited Leasehold Reform (Ground Rent) Bill was published on 13th May 2021 and follows the Government consultations which started in July 2017. Ground rents have been the subject of much controversy since it was revealed that many leaseholders had signed up to 'onerous' rents with little or no knowledge of the damaging effect on the value of their property.
The Bill seeks to ban ground rent in all new leases of dwellings, from a commencement date that the Secretary of State will decide, other than for leases of retirement homes where the ban cannot come into force before 1 April 2023.
As expected, the Bill simply prohibits any rent that is for more than a peppercorn (nil) in a long lease (over 21 years) of a dwelling. However, there are several points worth noting:
- "Business leases" are to be excepted from the ban. The exception will not apply to businesses that are run from someone's home (e.g. freelancers working from home) but rather where the use of the premises "as a dwelling" has a significant contribution to the purpose of the business. This may cover property rental businesses, including build to rent assets and other forms of institutional investment leases in the residential sector;
- A further exception applies to the surrender and re-grant of existing leases (for example where the boundaries of the premises are enlarged) allowing the same level of ground rent until the expiry of the original term;
- Shared ownership leases are not outright excepted from the ban, but the ban only applies to the tenant's share and the Bill does not seek to regulate the amount of rent that can be charged on the landlord's retained equity;
- In order to prevent landlords from simply relabelling ground rents as service charges in order to circumvent the ban, the definition of "rent" is wide ranging and "includes anything in the nature of rent, whatever it is called". This is a broad definition and could give rise to concerns that genuine service charges that are typically reserved as rent in a lease could be caught by the ban, although we assume this was not the intention;
- The enforcement provisions are significant, with fines payable by offending landlords of up to £5,000, along with the ability for leaseholders to recover any ground rents paid (including from managing agents and any successors in title to the landlord who had erroneously collected the ground rent).
A further Bill (comprising Part 2 of the Government's leasehold reform programme) is expected to address the ban of the grant of leasehold houses and possible further reform to enfranchisement rights allowing leaseholders to call for a 990 year extension to their existing leases whilst reducing their ground rent to nil.
If you would like further information or advice about the reforms, please contact William Bethune or David Zong.
