The end of residential ground rents: The first of the UK Government’s planned leasehold reforms gets over the line

The UK Government has announced that the effective ban on ground rents in residential leases introduced by the Leasehold Reform (Ground Rent) Act 2022 (the Act) will come into force on 30 June 2022.

The ban follows negative publicity over the past decade around uncapped ground rents. Historically, ground rents were set at a ‘peppercorn’ or nominal level. However, in recent years a practice had emerged of selling properties on long leases with doubling ground rents, with the result that many long leaseholders faced onerous payments.

The intention behind the Act is to make leasehold ownership fairer and more affordable for leaseholders. The Act will, of course, affect the practice of residential developers significantly as well as the market in ground rents.

Below, in a series of questions and answers, we review some of the detail of the ground rent restrictions and take a brief look at the government’s future plans for legislation in the residential marketplace.

What does the Act require?

The Act requires that if any ground rent is demanded as part of a ‘regulated lease’ in England and Wales, it cannot be for more than one peppercorn per year, effectively zero rent (although special rules apply in the case of shared ownership leases and where a lease replaces a pre-commencement lease).

Which leases does the Act apply to?

The Act applies only to ‘regulated’ leases.  In general, subject to some exceptions (see below), this means leases granted:

1. on or after 30 June 2022 (not pursuant to an existing contract entered into before 30 June 2022);
2. for a term of more than 21 years;
3. in respect of a single dwelling (so, of a flat or a house); and
4. for a premium (so, for monetary consideration other than rent).

So, the new ground rent restrictions catch most new, long residential leases whether of a flat or house.

Are there any exceptions?

Yes. In general, business leases, statutory lease extensions, community housing leases and home finance lease plans are excluded from the provisions of the Act.

Also, the ban on landlords charging ground rent on new residential leases will not apply to retirement homes until 1 April 2023 earliest. This is intended to give the retirement sector, where ground rents are often used to help fund the additional costs of providing communal spaces and facilities, additional time for transition.

Are lease extensions affected?

Yes and no! Statutory lease extensions for flats are already required to be at a peppercorn rent under existing legislation. Although statutory lease extensions for houses may continue to be at an uncapped ground rent, in January 2021, the government announced that it intended to change this so that ground rent on statutory leasehold extensions of houses will be reduced to zero, too.

For existing leaseholders who choose to extend their leases through the non-statutory (‘voluntary’) route, the effect of the Act is that the ground rent will now be restricted to zero on the newly extended term.

Are existing leases affected?

No. The Act applies to new leases in England and Wales. It does not have retrospective effect and does not abolish ground rents payable under existing leases.

However, due to the negative publicity surrounding uncapped ground rents, the number of existing leases containing modern ground rents is already reducing.  Recently the Competition Market Authority secured commitments with major homebuilders to stop doubling ground rents every year. This means that those who own properties with Aviva, Persimmon, Countryside Properties, Taylor Wimpey and others will see their ground rent returned to the rate it was when they first bought their flat or house.

Are leases granted pursuant to a contract entered into before 30 June 2022 affected?

No (subject to limited exceptions). The Act provides that a lease is not a regulated lease if it is granted pursuant to a contract (such as an agreement for lease) that was made before 30 June 2022. This means that for a limited period some new leases may be granted under which an uncapped ground rent can be charged.  However, leases granted pursuant to an option or pre-emption agreement (such as an option to renew in an existing lease) will be caught by the Act.

What about other sums payable as rent (for example, insurance rent and service charge): can these still be demanded?

Yes. A sum expressed to be payable in respect of rates, council tax, services, repairs, maintenance, insurance or other ancillary matters is not rent for the purposes of the Act so these sums may be charged as normal.

Are there any penalties for breach of the Act?

Yes, if a landlord (or someone acting for it) requests payment of a prohibited rent and/or receives a prohibited rent and/or fails to refund it to the tenant within 28 days beginning on the day after receipt breach, it could be fined up to £30,000. There are special rules dealing with multiple breaches.

What future measures does the government propose?

The reform of ground rents is just the first (and arguably the most straightforward) of a package of wide-ranging reforms outlined in several Law Commission reports and government consultations over the last few years, intended to make leasehold ownership fairer. In 2022-2023, we expect to see further progress on the more substantive reforms, including the introduction of draft legislation for changes to the existing law on enfranchisement rights and leasehold extensions.

Residential developers, investors and leaseholders should continue to monitor the progress of these reforms carefully and respond to any further government consultations that are issued.