Leasehold Reform (Ground Rent) Act 2022

The Leasehold Reform (Ground Rent) Bill 2021-22 sought to restrict ground rents on newly created long leases on houses and flats to a peppercorn amount (a token of no financial value). The Bill received Royal assent on Tuesday 8 February 2022 and is now law.

Why has this Act come about?

In England and Wales, most owner-occupied flats are owned on a long leasehold basis. All shared ownership properties (which are part owned and part rented) are sold on a long lease. Houses can also be owned on a long lease.

Long leases normally require the leaseholder to pay ground rent to their freeholder or landlord. The lease agreement will set out the amount of ground rent payable and the basis for increases over the term of the lease. The landlord is not required to provide a service in return for ground rent.

In some cases, the rights to receive ground rents from leaseholders have been bought and sold in the financial market as a long-term income stream for third party investors.

Historically, ground rents were set at a ‘peppercorn’ or nominal level. However, in recent years a practice has emerged of selling properties on long leases with higher ground rents at the start and shorter ground rent review periods. As a result, long leaseholders can quite quickly face onerous and unsustainable ground rents.

High and escalating ground rents can make it difficult for leaseholders to sell or re-mortgage their property. Onerous ground rent terms can also have an adverse effect on leaseholders’ ability to buy their freehold or to extend their lease. This is because the ground rent charged is a factor in the valuation process.

Who does the Act apply to?

All Landlords granting new residential leases in England and Wales will be bound by the terms of the Act.

What does the Act do?

Its provisions will restrict ground rents on newly created long residential leases (with some exceptions) to a peppercorn (i.e. non-monetary) and rent administration charges are banned in most residential leases with a term longer than 21 years. The intention is to make leasehold ownership fairer and more affordable for leaseholders.

Are there any exceptions?

Business leases, statutory lease extensions of both houses and flats, community housing leases and home finance plan leases will not be affected by the Act.

Can the Act be applied retrospectively?

No – the Act will not apply to current leases and thus there is no benefit to holders of exiting leases with high or more reasonable ground rent obligations. Any agreements for leases entered into prior to the Act being passed will be unaffected and a monetary ground rent may be demanded. However, landlords need to be careful not to inadvertently surrender and re-grant existing leases under which they may collect ground rents. Ground rent will not be payable under the re-granted lease once the provisions of the Act are in force and the penalties outlined below will apply in this situation.

Will there be a penalty for Landlords who demand ground rent?

Yes – Landlords who seek to demand ground rent after the Act has been passed will be liable to fines of between £500 and £30,000. Additionally, such Landlords will be required to repay any unlawfully collected ground rents plus interest. Leaseholders will be able to apply to the First Tier Tribunal in England or the Leasehold Valuation Tribunal in Wales for a declaration that a prohibited ground rent is replaced with a peppercorn rent.

Enforcement action can be taken against past and current Landlords, as well as people acting on their behalf.

Conclusion

The act is good news for those purchasing new property or perhaps agreeing new terms with their current landlord but it will of course have absolutely no impact on anyone with an existing lease with a liability to pay ground rent.