Ground Rent Reform - Good News for Owners of New Leasehold Properties

In 2017, the government announced measures to root out unfair practices within the residential leasehold system, including limiting the amount of any ground rent paid by the owner of a residential leasehold property to their freeholder / landlord. Following reports from the Law Commission, legislation has now received Royal Assent to introduce some of the leasehold reform measures into practice. Kimberley Fox discusses some of the measures being introduced.

What is Ground Rent and what are the problems?

Ground Rent is an annual charge paid by the owner of a leasehold property to their freeholder/ landlord. Many leases include rent review provisions allowing the freeholder / landlord to increase the rent during the term of the lease.

 A problem arises when the ground rent increases ( and in some cases doubles) which leaves the homeowner in financial difficulty and unable to keep up with the payments. Moreover, where the ground rent increases to a certain level, it can mean that the lease itself can be interpreted as an Assured Shorthold Tenancy. If that happens additional forfeiture rights (i.e to terminate the lease) are then given to the landlord if the ground rent becomes in arrears.

The Leasehold Reform (Ground Rent) Act 2022

The Leasehold Reform (Ground Rent) bill received Royal Assent on 8 February 2022 and several of the provisions within the Act are intended to come into effect on 30th June 2022.

The Act puts an end to ground rent payments on new long residential leases by limiting any ground rent payable to what is called a ‘peppercorn rent’, essentially meaning that no financial value is attributed to the rent. Moreover, the Act also prohibits other charges such as administrative charges being demanded instead of the formal rent. Heavy fines of up to £30,000.00 may be levied where it is found that a ground rent is being charged in contravention of the Act.

Will this apply to all leasehold Properties?

From 30th June 2022, the Act will apply to new, residential long leases (i.e leases that are over 21 years). 

Unfortunately, the Act does not bring into effect the changes retrospectively, so it will not affect leases that are already in existence. However, prior to purchasing a leasehold property, it may be possible to vary the Lease terms bringing the ground rent to nil and or inserting provisions that may prevent the lease being interpreted as an Assured Shorthold Tenancy.  

Concluding remarks

This is a continuing area of reform, and the introduction of the Act illustrates the Government’s move to make owning a leasehold residential property fairer and more affordable.

If you would like to discuss the implications of the Act or any rent review provisions in your Lease please do not hesitate to contact a member of our Property department.