Joshua Fraser, Senior Associate
On 8th February 2022 the Leasehold Reform (Ground Rent) Bill 2022 received royal assent.
The impact of this new legislation is that ground rents on new residential leases will be abolished. The legislation will also include other restrictions on landlords in charging for ground rent related matters.
The effective date is still to be announced by Michael Gove, however under current plans it is anticipated that implementation will be no later than August 2022.
The Bill reduces any ground rent chargeable on a lease granted on or after the effective date for a residential property and for a term of more than 21 years to something referred to as a “peppercorn”. In plain English, a peppercorn is effectively nothing – it has no financial value and is a legal term to satisfy one of the requirements to create a contract. No money actually changes hands.
What is the impact on Landlords who breach the law?
- Landlords may receive a fine of between £500 and £30,000
- Landlords will also be prohibited on charging administration fees for dealing with any ground rent-related issues
The introduction of the bill is good news for future purchasers of leasehold properties. It means that they will no longer be subject to escalating ground rent provisions that can, in some circumstances, have a serious impact on the financial value of their properties both in terms of resales and mortgaging.
General limitations of the Bill
The Bill does have some limitations, most notably, that it will not apply retrospectively to current residential leases where an escalating ground rent is already in existence. This has generated criticism amongst some commentators that the Bill threatens to create two tiers of leaseholds, particularly bad news for those located on the same development as one another, where leases with ground rents may become less attractive to investors and lenders over time.
It is also not expected to apply to:
- business leases
- care homes
- lease extensions
- home finance plan leases
What has been the response by developers?
The response has been varied. Whilst some are simply removing the ground rent requirement in existing leases by a deed of variation, even where they are not obliged to do so, others are looking for methods to preserve the ground rent in another form through implementation of various tiered structures before the commencement date.
What should a purchaser do?
Our advice to purchasers is as always to carefully consider ground rent provisions on a leasehold property you may be looking to purchase and be particularly careful where ground rents are onerous, e.g. doubling every 5/10/15 years. We always advise our clients to bear in mind that lender requirements are always subject to change on this issue and their valuations are directly impacted by market conditions as well as market sentiment.
For landlords and sellers our advice is to ensure that you prepare for the changes proactively and in good time so as not to be caught out when the government does finally announce the commencement date.
Please note – this article does not constitute legal advice.