A closer look at the Leasehold Reform (Ground Rent) Bill
The Leasehold Reform (Ground Rent) Bill is currently making its way through Parliament and once it becomes law, it will reduce ground rents in new residential long leases to zero.
What are the main provisions of the Leasehold Reform (Ground Rent) Bill?
The legislation restricts the payment of ground rents in certain future residential long leases of a single house or a flat granted for a premium in England and Wales. A long lease is one granted for a term of more than 21 years.
Certain types of leases are specifically excluded from the legislation. For example, business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases are all exempt.
Once passed, the effect of the Bill will be that it will not be possible to demand ground rent in the majority of new residential leases. The landlord may only demand what is known as an annual “peppercorn rent”. A “peppercorn rent” has no financial value and is effectively zero.
The Bill will apply to new shared ownership leases where a tenant has not yet purchased 100% of the property. A landlord can charge rent on their share of the property but only a peppercorn rent is payable on the tenant’s share of the property.
It will also apply to leases of retirement properties but there will be transitional provisions so that the legislation will not apply those leases until at least 1 April 2023. This means that only new leases of retirement properties granted after 1 April 2023 will be affected.
If a voluntary lease extension is granted outside of the statutory mechanism, a landlord can continue to charge ground rent for the remainder of the term of the original lease prior to its extension, however, only a peppercorn rent is payable for the extension period (i.e from the date of expiry of the term of the original lease). Where a leaseholder seeks a lease extension of a flat or a house under either the Leasehold Reform, Housing and Urban Development Act 1993 or the Leasehold Reform Act 1967, those statutes already provide for a peppercorn ground rent to be payable from the date of completion of the extended lease, and so are excluded from the Bill.
Where a developer enters into an agreement for lease in respect of a flat which is being built before the Bill becomes law, the Bill will not, as currently drafted, apply to the new lease granted when the flat is completed.
Have there been any changes to the Bill since it was originally published?
A new feature of the Bill, added during its passage through Parliament, is a duty on a landlord to inform a tenant, who is seeking to extend its lease or to renegotiate its lease, of the proposed changes within the Bill. This duty will apply once the Act is passed until the provisions of the Bill come into force.
Another development since publication of the Bill is that the definition of rent has been tightened by an amendment so that it excludes service charges, insurance, council tax or other sums reserved as rent in a lease. This alteration was intended to ensure that the Bill only applies to ground rent and not other sums reserved as rent in a lease.
Will the Bill have retrospective effect?
No, the Bill will only apply to new leases which are granted after the legislation comes into force. It will not affect existing leases.
What are the sanctions for non-compliance?
Where ground rent is demanded in respect of a qualifying lease, in contravention of the legislation, a breach will occur if a landlord does not return any payment to a tenant within 28 days of receipt. In addition, a leaseholder has a right to apply to the First-Tier Tribunal (Property Chamber) in England for a declaration that a term in a new lease to which the legislation applies reserving a prohibited ground rent is replaced by a peppercorn rent.
In addition, there are fines for non-compliance of up to £30,000 per qualifying lease (increased from £5,000 by an amendment to the original Bill). Enforcement will be governed by local authorities and trading standards.
Where are we now?
The Bill was published in the House of Lords in May 2021 and has been making its way through Parliament. It has concluded its passage through the House of Lords and has had its first reading in the House of Commons. The first debate in the House of Commons marking the second reading has not yet been scheduled.
In the meantime, the market has been adjusting to the abolition of ground rents in new leases for a number of years since the Government’s first announcement in 2017 and in advance of this Bill being introduced with some landlords having granted new leases at a peppercorn rent. However, there will be other landlords who will need to familiarise themselves with this Bill to ensure compliance for new leases granted after the provisions of the Act come into force.
What will happen next?
The Bill is expected to be passed during the current session of Parliament and a commitment was made during its passage for the provisions of the Bill to come into force within 6 months of the Act becoming law. Further amendments may be made to the Bill before it is passed.
The abolition of ground rent in new leases is part of a package of leasehold reforms which the Government intends to implement including substantial changes to the processes for lease extensions and collective enfranchisement and changes to the calculation of premiums. More detail on these proposals can be found in our insight Leasehold Reform – The devil is in the detail and this is a key area we are tracking on our Essential Residential Hub .