Ground Rent reform – what does this mean for you?
The Leasehold Reform (Ground Rent) Act 2022 (the Act) received Royal Assent on the 8 February and will come into force on 30 June 2022.
The exception to this is in relation to some leases of retirement homes where the Act states that in the case of certain types of retirement schemes, provisions cannot be in force earlier than the 1 April 2023.
Once the relevant provisions of the Act are in force, recovery of ground rents in qualifying long residential leases will effectively be abolished and, subject to some limited exceptions, long residential leases should only provide for payment of a peppercorn rent.
To what Leases do the Provisions apply?
Leases subject to the provisions are referred to as 'Regulated Leases'. In simple terms a Regulated Lease is a lease which is granted on or after 30 June (the Act Commencement Date) and which fulfils the following criteria:
- it is a lease of a single-dwelling;
- it is for a term of over 21 years; and
- it is granted for a premium.
Regulated Leases will also include the grant of a lease when, by virtue of variation, there is a deemed surrender and regrant. Therefore, care will be needed where changes are to be made to an existing lease as this could convert its status and no ground rent would be payable from the date of the regrant.
The Act does not apply to leases which are granted before or in pursuance of a contract made before the Act Commencement Date.
Therefore, if a contract is exchanged before the Act Commencement Date, the subsequent lease will not be subject to the restrictions, even if it is completed on or after the Act Commencement Date.
This does provide developers and landlords with a short window of time until the Act is in force to exchange contracts before the Act Commencement Date, retaining their preferred ground rent regime (subject to buyers being happy to do so) even where leases are due to be completed on or after the Act Commencement Date.
Where a lease including ground rent regime of more than a peppercorn is completed after the Act is in force on the basis that the agreement for the lease predates the Act Commencement Date, it would be sensible to record the basis within the lease itself so that it is clear to future buyers that the ground rent position complies with the legislation.
The Act also does not apply to certain 'Excepted Leases' which are:
- Business leases;
- Statutory lease extensions (under the Leasehold Reform Act 1967 or the Leasehold Reform Housing and Urban Development Act 1993);
- Community housing leases;
- Home finance plan leases (which includes 'rent to buy').
Although a shared ownership lease is not listed as an Excepted Lease, the Act has no application in terms of the specified rent payable under a shared ownership lease. However, there is a prohibition on including a ground rent (other than a peppercorn) where this is payable in addition to specified rent.
Voluntary Lease Extensions
Where, on or after the Act Commencement Date, a lease extension is granted on a voluntary basis, although there is a 'new (replacement) lease', a landlord can continue to charge ground rent for the remaining term of the original lease. It is only from the expiry date of that original lease that recovery of ground rent is limited to a peppercorn.
There is one leasehold structure which does not appear to be covered by the Act. In some circumstances a headlease is granted (whether to linked entity or a third party) and the lessee of that headlease then sells the individual flats. It is common for that headlease to make the lessee (of that headlease) liable for ground rent with the intention that the head lessee will collect a commensurate sum from the underlessees of the flat(s) to pass on to the superior landlord.
Developers and investors will need to be careful of the fact that where there is a headlease of more than a single dwelling, it would not qualify as a Regulated Lease under the Act and so a ground rent could be validly demanded under such headleases even when created on or after the Act Commencement Date. If underleases to be granted out of a headlease are not exchanged before the Act Commencement Date, ground rent will not be recoverable from the underlessees by the head lessee leaving the lessee of the headlease liable for ground rent which they will not be able to recover.
As such, to avoid such a shortfall, investors need to consider the position carefully including the triggers for rent in the headlease when they are proposing to enter into this type of arrangement, particularly over the next few months.
Right to buy leases
When these reforms were originally discussed, it was thought that the statutory ground rent allowed for right to buy leases under the Housing Act 1985 (the 1985 Act) would continue. However, the Act amends the 1985 Act so that if the right to buy lease otherwise falls within the definition of a Regulated Lease, a £10 ground rent is no longer permitted, and the ground rent must be a peppercorn.
Penalties and enforcement
If a landlord claims payment of a ground rent in relation to a Regulated Lease (which payment is not subsequently refunded within 28 days), they may be faced with a financial penalty of between £500 and £30,000. Where there are breaches of several Regulated Leases, the amount of the penalty will be calculated per lease and therefore for large schemes or developments, the financial implications could be significant.
In addition to the possible financial penalties, the lessee would be entitled to a full refund, plus interest, which can be applied for directly by the lessee or alternatively could be enforced by the relevant enforcement authority (the local Weights and Measures Authority or a District Council that is not a local Weights and Measures Authority).
A refund can be requested from / enforced against not only the person who is the landlord at the time the payment was made but also:
- The person who is the landlord at the time when the enforcement authority makes the order; or
- The person who is the landlord at the time when the application for a refund by the lessee is made.
Therefore, when an investor is purchasing a portfolio which includes Regulated Leases, it will be important to check that there are no outstanding breaches of the Act for which they may become responsible.
The Act also amends Schedule 11 of the Commonhold and Leasehold Reform Act 2002 and incorporates provision that no administration charge is payable for, in connection with or in respect of, the payment of a peppercorn rent. This section is worded broadly, and it is not currently clear what this may incorporate. However, there has been a large amount of scrutiny by the Government in relation to administration and other charges, and care is needed to ensure that no charges are made which could fall within these provisions.
The Act has now received Royal Assent and the relevant sections will be in force at the end of June.
Until the sections are in force in June, there is nothing in legislation to stop developers from continuing to sell leases with ground rent of more than a peppercorn (no matter whether the completion date will be before or after the Act Commencement Date) provided contracts are exchanged prior to the Act Commencement Date.
Given the publicity surrounding leasehold and in particular the Act, it is possible that lessees, and/or lenders may push back on the inclusion of ground rents for these leases. We have seen over the last few years how lending criteria has a massive impact on what is acceptable to buyers/buyers' conveyancers, whatever the legal position, and ultimately, the market may dictate the effectiveness of policies to include ground rent for as long as possible.
On or after the Act Commencement Date care should be taken to ensure that leases comply with the legislation and the penalties for non-compliance can be significant.
Developers and investors will need to carefully consider the benefit of continuing selling/buying leases with ground rents (which may include an initial cheaper premium) against the impact the ground rent might have on future saleability (including resales).
Developers should also consider the possibility that the Act Commencement Date may fall between the date of reservation and the date of exchange of contracts and whether the agreed terms should include provisos for amended terms (e.g. an increased premium) in such circumstances.