Ground rents have been a topic of much debate in the property industry for several years with many lenders taking issue with escalating ground rent provisions found in some leases. This has resulted in the Government introducing new legislation in the form of the Leasehold Reform (Ground Rent) Act 2022 (“the Act“). The Act restricts ground rents on new long leases to an annual rent of one peppercorn (which, in practical terms means that no ground rent will be payable). There are certain exclusions to this prohibition and special rules relating to certain types of leases.
The Act received Royal Assent on 8th February 2022. Commencement of the provisions has not yet been announced by the Secretary of State but it is anticipated that the Act will be fully commenced within 6 months.
As regards new residential leases, most of these will now only be permitted to have a ground rent of a peppercorn. Leases which are caught under the Act are those which are:
- Long leases of a single dwelling.
- Granted for a premium.
- Granted on or after commencement of the Act.
- Are not otherwise excepted under the Act.
If a contract has been entered into for the grant of the lease prior to commencement of the relevant provisions of the Act then the lease will be excepted and not subject to the restrictions.
There are various types of leases which are excepted under the Act and therefore not caught by the provisions, as follows:
- Business leases.
- Statutory lease extensions.
- Community housing leases.
- Home finance plan leases.
There are special rules relating to shared ownership leases in that the landlord is permitted to charge any rent in relation to their share in the property. However, in respect of the tenant’s share in the property the landlord can only charge a peppercorn rent.
In respect of voluntary lease extensions, landlords are permitted to charge a ground rent not exceeding the rent which would have been payable under the previous lease up until the expiry of the original term. After expiry of the original term, the ground rent must become a peppercorn for the duration of the term granted by the new lease.
If the provisions of the Act are breached, enforcement action can be taken which could result in fines of up to £30,000. Tenants are permitted under the Act to apply to a tribunal to seek recovery of rent which has been paid in breach of the provisions of the Act. An enforcement authority may also seek to recover prohibited rent from a landlord directly. This includes successors in title who are the landlord at the time enforcement action is taken or any agents who collected rent on behalf of the landlord.
Once the Act comes into force landlords will need to be vigilant in ensuring the rent they are charging is not prohibited under the Act. They will also need to be vigilant when acquiring any new freehold interest subject to existing leases that the leases are not charging prohibited rent as they could be held liable in respect of recovery of any such rent.
- The Act restricts ground rents on new long leases to an annual rent of one peppercorn (subject to certain exceptions).
- If the provisions of the Act are breached:
- There could be enforcement action resulting in fines up to £30,000;
- Tenants may seek recovery of prohibited rent paid;
- Enforcement authorities may seek to recover prohibited rent from a landlord directly.
- These remedies could apply to successor landlords who have inherited their predecessor’s breach.