After years of accusations about freeholders and developers profiteering on the back of ground rent payers the government has effectively abolished the charge, but only for new leases.
The Leasehold Reform (Ground Rent) Act 20221 , which originated in the House of Lords, is intended to restrict ground rents on long leases of houses and flats (with some exceptions) to an annual rent of one peppercorn, which is intended to represent no financial value. It is expected to come into force within six months of February 2022’s Royal Assent.
The new Act only applies leases that are granted for 21 years or more, that are for a single dwelling, tha are paid for (a premium), and that are granted after the relevant commencement date of the new Act. Business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases are excluded, but new shared ownership leases are covered (landlords can charge ground rent on their share of the property but only a peppercorn rent on the tenant’s share of the property). The Act will not apply to retirement properties until 1 April 2023.
It has teeth! Enforcement local authorities and Trading Standards will be able to impose fines ranging from £500 to £30,000 (per qualifying lease) on landlords who own the freeholds and charge the ground rent.
What about existing leaseholders?
An amendment to the Act which would have seen ground rent removed for all existing properties, was defeated by MPs in the House of Commons, so existing leases are not covered by the Act. For those leaseholders, the ground rent terms will have to remain the same until the old lease would have expired, after which it must be a peppercorn (zero).
For some existing leaseholders, where ground rents increase significantly over time under the terms of the lease, this may be untenable and solutions include exercising their right to claim a statutory lease extension, creating a new lease that is covered by the Act.
Residential Management Company directors of blocks that own their own freehold may want to review their policy on ground rent and bring all their leases into alignment.
What next?
The abolition of ground rent for most new leases has been described by the Government as “part of the most significant changes to property law in a generation“2, and further residential leasehold reform2 is likely to follow. Clearly, there is political will behind this move, which can probably be seen as part of an overall plan to pave the way for adoption of commonhold4 in the UK.
FP400-2022
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.