Ground rents on new leases of houses and flats granted after 30 June 2022 (except pursuant to a contract exchanged before that day) will be at a peppercorn rent, which effectively means landlords cannot charge a ground rent. This article examines the new law.
What leases will the new law apply to?
The Leasehold Reform (Ground Rents) Act 2022 comes into force on 30 June 2022 and will apply to all leases of more than 21 years except for:
- Business leases
- Statutory lease extensions
- Community housing leases
- Home finance plan leases (including rent to buy arrangements).
The Act will not come into force for retirement properties until 2023.
The new law states that the ground rent on a new lease of a house or flat will effectively be zero.
Does the new law apply to lease extensions?
The Act will also apply to voluntary lease extensions, but only to the part of the lease term beyond the term of the original lease.
Leaseholders who formally extend their lease under existing legislation will still get a minimum of 90 years added to the length of their lease and any ground rent reduced to zero, but this is still likely to cost them a significant sum depending on the remaining term of their current lease.
Will the new rules have retrospective effect?
No. The new rules will only apply to leases granted (or contracted for) after 30 June. Ground rents in leases entered into before 30 June continue to be payable.
What happens if landlords charge ground rents on new leases granted after 30 June?
Landlords face fines of between £500 and £30,000 (increasing for regular offenders) and will be required to repay the ground rent with interest.
How does this solve the problems faced by leaseholders with rising ground rents in existing leases?
It doesn’t. Some ground rents in existing leases double every five or 10 years, which can make lenders unwilling to lend on them. In some cases, the properties are unmortgageable or unsellable as a result.
Lenders are concerned that if a lease contains a ground rent that is or is capable of exceeding £1,000 per year in London or £250 per year elsewhere, section 8 of the Housing Act 1988 will apply. This section gives the landlord the right to bring possession proceedings without using the forfeiture process if the leaseholder is in default, which means the lender would not be able to claim relief from forfeiture. This could potentially make their security worthless, which is why they won’t lend on these properties.
Are there plans to resolve this issue?
The government has said it will legislate to lessen the burden of existing ground rents in the current parliament. It proposes to allow leaseholders to extend their existing leases to 990 years at a nil ground rent. An online calculator will be introduced to make it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease. The government plans to abolish prohibitive costs like ‘marriage value’ and set the calculation rates to ensure this is fairer, cheaper and more transparent.
However, a similar amendment that would have seen all ground rents removed was previously defeated in the House of Commons, so this new proposal may face similar objections.
If you have any queries regarding your residential lease or any lease extension issue, please contact Daniel Broughton at [email protected].