The Leasehold Reform (Ground Rent) Bill was announced in the Queen’s Speech last month and will make provision about the rent payable under long leases of homes under what will be known as the Leasehold Reform (Ground Rent) Act 2021.
The Bill will contain provisions that ground rents contained in new long residential leases are restricted to a peppercorn rent (a nominal fee) and will prohibit administration charges from being charged in relation to those peppercorn rents.
To what leases will the Bill apply?
It applies to long leases of dwellings (for example, of houses or flats granted for over 21 years) including those created by a variation of a lease where it is deemed to be a surrender and regrant. However, the Bill will not apply to leases granted after where the parties entered into a legally-binding contract regarding the grant of the lease before commencement (unless it is an option or right of first refusal).
There will be limited exceptions to the ground rent restrictions, such as:
- Business leases (including where the nature of the business is such that use of the premises as a dwelling is required);
- Statutory lease extensions of houses and flats;
- Certain parts of the community-led housing sector;
- Home finance plan leases (for example, an equity release financial product or a rent to buy arrangement).
Special rules will apply to shared ownership leases and certain leases that replace pre-commencement leases. This is on the basis that all shared ownership schemes funded by the Government already cap the amount of rent charged and any annual increases.
How will it be enforced?
A breach of the ground rent restrictions will constitute a civil offence and freeholders will be subject to a fine of £500-£5,000, enforced by local authority trading standards.
The tenant itself may also apply to the First-tier Tribunal for a recovery order, to recover the amount of prohibited rent which has been unlawfully charged.
What about existing leases?
As noted above, statutory lease extensions of houses and flats are excepted. This is because leaseholders whose leases are subject to onerous ground rents are already said to have the option to enter into a deed of variation with the freeholder (subject to the latter’s agreement) or seek a statutory lease extension, reducing the ground rent to a peppercorn.
In recent years, ground rent has received a great deal of criticism, with instances reported that some charges are doubling every 5-10 years, making properties un-mortgageable and thus unsaleable. The restriction to a peppercorn rent will therefore be welcome news to owners of leasehold properties who have considered reform as long overdue.
The significance of the Bill is that it will, in theory, remove the incentive for investors to buy leaseholds simply to benefit from the income of the ground rents, as these will no longer be charged. This should enable buildings to be managed for the benefit of the residents, as opposed to creating an income stream for (often absent) owners who have delegated management responsibilities. Ground rent owners will obviously see it differently, and the Bill is likely to face opposition.
With regards to new leases, the initial position is relatively clear. Instructed solicitors will owe professional duties to their clients to ensure that the terms do not breach the legislation and remove any reference from prohibited ground rents from the leases before they are entered into.
However, problems arise where prohibited grounds rents are being charged, i.e. they have slipped through the net and are contained in a new lease or have been demanded in breach of the legislation.
The concern here is that enforcement by the local authority may not be enough of a deterrent, as some councils (due to lack of funding, for example) may be unable or reluctant to get involved in matters where there is an alternative route of recovery for a tenant. Thus the onus will fall on tenants to assert their rights against landlords breaching the legislation, via the First-tier Tribunal, which can be costly and subject to delay.
Generally, the response to the reform, however, is positive and although there is no current timescale for when the new law will come into effect, change is certainly coming. Therefore extra caution is advised when taking new leases; ensuring ground rent provisions are removed and the lease terms contain no hidden ground rent provisions under another guise.
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