30th June 2022
What is the Leasehold Reform (Ground Rent) Act 2022
Overview
The Government wants to tackle unfair practices in the leasehold market and promote transparency and fairness for both leaseholders and landlords.
This Act will mean that if any ground rent is demanded as part of a qualifying new long residential lease, it cannot be for more than one literal peppercorn per year. In effect, qualifying future residential leaseholders will not be faced with financial demands for ground rent.
The Leasehold Reform (Ground Rent) Act 2022 is the first part of the Leasehold Reform announced by the Government in January 2021. The Act puts an end to ground rents for most new long residential leasehold properties in England and Wales and becomes effective on 30th June 2022.
There is a transition period that applies to qualifying leases of retirement homes. The measures will not come into force any earlier than 1 April 2023. A lease of a retirement home is a lease relating to a dwelling that can only be occupied by people aged 55 or over.
What is Ground Rent?
A Ground Rent is a property industry term given to a rent that is usually paid annually by owners of residential long leases (those exceeding 21 years) to their landlord.
Ground rent is a payment specified in a lease that the leaseholder is required to make to the landlord (directly or indirectly through an agent or representative) without obligation on the landlord (or person acting on behalf of the landlord) to provide a specific service in return to the leaseholder.
What is a ‘peppercorn’ Ground Rent?
Historically, a ‘peppercorn’ ground rent often meant a rent that was of nominal or low value.
The Act defines a peppercorn rent for the first time, which is ‘an annual rent of one peppercorn’. The Act restricts ground rents on new leases (unless an excepted or non-regulated lease) to a peppercorn rent, effectively restricting these ground rents to zero financial value. There is no obligation on a landlord to levy a peppercorn rent.
Which leases will the Act apply to?
The new Act will regulate new leases. Generally, a lease will be regulated by the Act where:
- It is granted on or after the 30th June 2022
- It is a long lease (exceeding 21 years) and relates to a single dwelling
- It was granted for a premium (known as a purchase price)
- The lease has been changed or varied by a deemed surrender and regrant and no premium was required
Statutory lease extensions for house and flats under the Leasehold Reform Act 1993 must already be granted at a peppercorn ground rent regardless of this Act.
Does the Act apply to Business Leases?
A landlord may charge ground rent of more than ‘an annual rent of one peppercorn’ if the lease is a business lease.
A business lease is where:
- The lease allows the premises to be used for business purposes (without needing further consent from the landlord for this use)
- The use of the dwelling significantly contributes to this business purpose, for example a residential flat above a commercial shop which is where the shop keeper lives who is also required to open the shop at certain times
- At or before the time the lease is granted the landlord and leaseholder exchange written notices confirming that the use of the premises is for the business purposes specified in the lease.
How does the Act affect a non-statutory (voluntary) lease extension of existing leases that charge ground rent?
Where you negotiate a non-statutory (voluntary) lease extension and the lease is regulated by the Act, the new portion of the lease that extends beyond the date of the original term must only charge a peppercorn ground rent. The ground rent charged on the balance of the term of the original lease must not exceed the original ground rent and the parties may agree to a lower ground rent for the balance of the original term.
For instance, if your existing lease has 80 years remaining, and charged £100 per year in ground rent, then, by agreement between the leaseholder and landlord, the new longer lease may continue charging £100 (or less) per year for those 80 years. The Act does not prevent a landlord and leaseholder negotiating to reduce or extinguish that £100 per year to a peppercorn, in line with the statutory arrangements. For the extended period of the new lease beyond 80 years, ground rent must not be more than a peppercorn.
How will the Act benefit people purchasing a leasehold residential property?
The Act will ensure anyone buying a new leasehold property on or after the 30th June 2022 cannot be charged a ground rent. Historically, ground rents have often caused issues for homeowners of leasehold houses and flats, especially where the ground rent provisions were onerous and included increases disproportionate to the value of the property.
What are the changes on existing leases?
The Act will not apply retrospectively and only applies to new residential long leases on or after the 30th June 2022. As such, existing leases will remain unchanged and any ground rent obligations under the lease terms will remain payable.
What are the penalties of any contravention of the Act?
Where the enforcement authority has sufficient evidence, it may impose a financial penalty on a landlord (not a person acting on their behalf). The amount of the financial penalty that may be issued for a breach of the Act is subject to the discretion of the enforcement authority, within the limits of a minimum of £500 and a maximum of £30,000.
Managing agents must refund ground rent which has been collected in breach of the Act, but they will not be liable for a financial penalty under the provisions of the Act.
Do you need further information?
If you would require further information on the subject, please contact our Leasehold Enfranchisement department on 020 7813 9155 or enquiries@questpc.co.uk who can advise you further.