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13th July, 2022 by Jonathan Parker
The Leasehold Reform (Ground Rent) Act came into force on 30 June 2022 and broadly speaking prohibits the charging of ‘ground rent’ (except at a peppercorn) on new residential long leases granted on or after that date.
The Act applies to Housing Associations and other providers of social housing (HA’s) and they will have to be aware of the new rules and, in particular, how the rules apply to PRTB/RTA, shared ownership, lease extensions, retirement schemes and community housing. The rules, and the exemptions to the rules, are complex, and if not carefully navigated, could result in significant financial penalties for HAs.
It is worth starting by establishing exactly what ‘ground rent’ is. Although the term features in the name of the Act, at law there is no such thing as ‘ground rent’; it is just an industry term. Instead we should focus on what ‘rent’ is. Section 22 of the Act defines ‘rent’ to include “anything in the nature of rent, whatever it is called”; in other words, if your residential long lease (for a term exceeding 21 years granted at a premium) enables you to collect a weekly/monthly/annual ‘rent’, it is that ‘rent’ that may be caught by the Act and may be prohibited.
For tenants who enjoy either a Preserved Right to Buy (as former secure council tenants) or the Right to Acquire, section 19 of the Act amends the Housing Act 1985 by:
a) Removing the valuation assumption that the RTA/RTB lease will have a £10 per annum ground rent; and
b) Only permitting the landlord to charge a peppercorn rent.
This means that HA’s must ensure all of their precedents are updated to remove the £10 rental figure and ensure accounts teams are aware of the new rules. As you will see further below, charging tenants a prohibited rent can result in significant financial penalties.
Although it is rare (but not unheard of) for an HA to charge a rent on the tenant’s share, HA’s can still breathe a sigh of relief that shared ownership leases are exempt in part from the new rules. On the presumption the shared ownership lease reserves separate rents for the landlord’s and tenant’s respective shares, the landlord will still be entitled to demand rent on their share in new shared ownership leases, but only a peppercorn for the tenant’s share. This means should the tenant achieve final staircasing, the landlord’s share will reduce to zero, and so will its ability to charge rent other than at a peppercorn.
Be aware that if a surrender and re-grant situation arises (some historic shared ownership stock may include such provisions) the ‘new’ lease will be at a peppercorn rent only. To remedy this, HA’s may seek to vary such historic leases with their tenants (whether now or upon sale of the leasehold interest) to remove the surrender and re-grant provisions, but this of course requires cooperation by the tenant and incentives may need to be given to cover legal fees and/or compensation.
Whether or not a lease extension falls within the Act will depend whether it is a ‘statutory’ lease extension (in which case it won’t), or a ‘voluntary’ lease extension (in which case it will).
A voluntary lease extension is most likely to arise in the context of shared ownership. Although shared owners do not have a statutory right to extend their lease, they may approach their HA landlord with a request for a voluntary extension bearing in mind the diminishing mortgageability of shared ownership leases as the term of their lease decreases. If an HA agrees to an extension, they will be able to continue charging the existing rent on the tenant’s share until the end of the original term. After that time however, the rent must reduce to a peppercorn. HA’s will therefore need to implement some form of alert or reminder process to ensure they do not fall foul of the Act.
Some HA’s also have non-shared ownership long-leasehold stock (perhaps flats bought by tenants under the RTA/RTB legislation) and tenants here may have a statutory right to extend. If this is the case, the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 (for flats) or Leasehold Reform Act 1967 (for houses) will continue to apply.
Leases of retirement schemes are not yet bound by the terms of the Act, and the legislation will not come into effect for them until 1st April 2023. To be classed as a retirement scheme, dwellings must be occupied under leases that restrict occupation to those aged 55 or over.
The Act does not apply where the landlord is a community land trust, or the lease is of a dwelling in a building controlled or managed by a co-operative society.
Sections 8-17 of the Act deal with the penalties for non-compliance. In a nut-shell, if a landlord requires a tenant to make a payment of a prohibited rent (whether by simply requesting payment or actually receiving it and failing to refund within 28 days), a financial penalty may be imposed by an enforcing authority. The enforcing authority will either be a local weights and measures authority, or the District Council.
The amount of financial penalty (per breached lease) is:
For large institutional landlords such as HA’s, the cumulative financial penalty for multiple breached leases could be significant. We anticipate tenant organisations to get up to speed very quickly on the new law and educate their members on how and when to raise complaints with enforcement authorities. It is paramount therefore that HA’s ensure systems are updated, precedents are amended, and staff are trained in the new peppercorn rent era.
This is a complex area of law that HA’s must ensure they fully understand and carefully adhere to. If in any doubt it is important to seek legal advice before granting any new long residential lease.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.