The Leasehold Reform (Ground Rent) Bill becomes law

The Leasehold Reform (Ground Rent) Bill received royal assent on 8 February 2022. It must be noted that its key provisions are not yet in force, although this is expected to occur by early August 2022.

Now known as The Leasehold Reform (Ground Rent) Act, the government describes the Act as “one of the most significant improvements to property law in a generation”. It will abolish ground rents for qualifying residential long leases once the key provisions have been brought into force by the Secretary of State for Levelling Up, Housing and Communities.

The Act is designed to limit ground rent to a peppercorn. A peppercorn rent has no monetary value. The term refers to the custom of providing a peppercorn as a type of token consideration in order to make a legally binding contract.

The aim of limiting obligations to a nominal sum is to keep leaseholders from becoming trapped by rapidly rising ground rents. Expensive ground rents can severely reduce the resale value of a leasehold property. A key objective is to enable fairer and more transparent ownership for leaseholders. As an anti-avoidance measure, the Act also prohibits landlords from demanding administration charges for peppercorn rents.

Which leases are affected?

Once fully in force, the Act will apply to residential long leases (those with terms longer than 21 years) issued for a premium and entered into on or after the Act comes fully into force.

However, where an existing residential long lease is deemed ‘surrendered and regranted’ due to a fundamental variation – such as extending its term or adding additional property to it –  the new lease granted will be subject to the Act. This will be the case regardless of whether it is granted for a premium; the limitations on ground rent will apply.

Some leases are exempt from the Act. Statutory lease extensions for homes and flats, commercial, community housing and home financing plan leases are all examples.

Other categories of leases are subject to different requirements. The rules will not apply to retirement residences until April 1 2023. If a voluntary lease extension is granted, the Act will only take effect when the original term expires. This will be the case even if a presumed surrender and regrant is required, owing to a change in the lease. The Act covers shared ownership leases; however a landlord can still collect ground rent on their portion of the property.

Sanctions for non-compliance

Landlords face a fine ranging from £500 to £30,000 per qualified lease if ground rent is requested in violation of the Act and any payment collected is not returned within 28 days.

Leaseholders may also apply to the First-Tier Tribunal (Property Chamber) in England for a decision as to whether a clause demanding unlawful ground rent should be substituted with peppercorn rent.

Commercial considerations for landlords

• Landlords must be aware of the requirements of the Act to avoid being held liable for non-compliance. Since the Act is not retroactive, leases signed before it comes fully into force can still demand payment for ground rent. However, the Act is only one component of the government’s wider leasehold reform plan, and additional ground rent control provisions may be added to cap ground rent for more types of leases. As the key provisions of the Act are not yet in force, Landlords must monitor when the Secretary of State introduces regulations to do this, along with any further types of rent control that may be introduced on an ongoing basis.
• A lease signed after the Act comes fully into force but based on a pre-existing option or right of first refusal will still be subject to the Act’s provisions. A landlord demanding ground rent under a lease that predates the Act should be careful not to change the lease to the point where it becomes a surrender and regrant. A regrant made after the Act takes effect means that its provisions would still apply – and ground rent would then need to be limited to a peppercorn.
• Landlords could face enforcement action for breaches of the Act. When purchasing land subject to residential long leases, additional due diligence should be undertaken to consider the risk of liability for existing breaches of the Act.