Are Ground Rents a Thing of The Past?

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The Leasehold Reform (Ground Rent) Act 2022 received Royal Assent on 8 February 2022, effectively outlawing ground rents in residential leases in England and Wales once the legislation comes into force.

The Act will prohibit landlords from charging ground rents under new “regulated” leases (residential leases granted for a term of at least 21 years in return for a premium) granted after the date that the Act comes into force.

Any ground rent which is more than a nominal “peppercorn” will be unlawful, meaning an effective ban on ground rents. The legislation will not have retrospective effect as originally feared.

Are there penalties for breaching the Ground Rent Act?

Breaching the legislation could result in big penalties for landlords found to be unlawfully demanding and receiving ground rents. It will be a civil offence with a penalty of between £500 and £30,000 for repeat offenders. It will also be a requirement for landlords to repay any unlawfully collected ground rents.

Exceptions and transitional provisions

The following exceptions and transitional provisions will apply:

  • Special provision is made for shared ownership leases where landlords will be able to claim rent only for the landlord’s share. Landlords will not be able to charge more than a peppercorn for the tenant’s share of the property, and once the tenant has staircased up to 100% ownership, no rent will be payable.
  • Regulation of ground rents in retirement accommodation will not come into effect earlier than 1 April 2023 to allow for providers to make necessary adjustments to their business model without jeopardising the supply of retirement property required to meet rising demand.
  • Communal housing leases are exempt from the ground rent provision, as are regulated home finance plan leases granted under the Financial Services and Markets Act 2000 (Regulated Activities Order 2001).
  • Leases granted in accordance with an agreement for a lease which was already in place before the legislation comes into force will also be exempt, notwithstanding that lease may start after the Act has come into force.
  • The Act does not apply to business leases (but excludes a home business within the meaning of Part 2 of the Landlord and Tenant Act 1954).

Renewal of Leases

When it comes to renewal of leases under which ground rent was paid, the ability of the landlord to continue to charge any ground rent will depend on the nature of the renewal.

Where the renewal is a statutory renewal of a lease of a house under the Leasehold Reform Act 1967 or a statutory renewal of a lease of a flat under the Leasehold Reform, Housing and Urban Development Act 1993, that renewal lease will be an excepted lease (and it should be noted that statutory lease renewal is typically resulting in ground rent being reduced to a peppercorn in any event).

Where a landlord and tenant enter into a voluntary lease renewal, the landlord will not be permitted to demand a ground rent (other than in respect of any period of overlap between the term of the old lease and the term of the new lease).

When does the Ground Rent Act come into force?

Most of the Act is yet to come into force and future regulation will detail when the legislative provisions commence. The Government has given a commitment that it will be fully commenced within six months of Royal Assent, subject to the exemption in the case of retirement home leases, noted above.

Whilst the Act’s overall purpose is to make residential leasehold ownership more affordable for leaseholders, it will not help existing leaseholders who are struggling with ground rents (except for those granted a replacement lease by way of a voluntary lease extension or a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act 1993) as the legislation only relates to leases granted on or after the relevant statutory provisions come into force.

Landlords whose business models rely on volume collection of ground rents will need to carefully consider how the Act will impact them.

Here to Help

If you need guidance on property dispute issue, please contact Polja Atkins, Associate of CILEX in the Property Litigation team.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.