Earlier this summer Parliament introduced new legislation to control ground rents in new long residential leases. However, whilst this offers welcome relief for new leaseholders, it has done nothing for those with leases pre-dating the Act which contain onerous ground rent provisions, and it may even create a two-tier market for the resale of residential leases. In this article, we explore the strengths and limitations of the new Act and consider whether it has brought us any closer to creating a fairer system of leasehold homeownership in England and Wales.
The new Act
The Leasehold Reform (Ground Rent) Act 2022 came into force on 30th June 2022 with the purpose of limiting ground rents in most new residential leases to a peppercorn (effectively nil). The Act is intended to put an end to one of the most troublesome aspects of leasehold ownership which has affected thousands of homeowners in recent years. It represents the first step towards helping leaseholders achieve a fairer deal.
What is leasehold ownership?
Freehold property owners own the land they purchase and the building that sits on it, whereas leaseholders only own a lease, which is an agreement between the freeholder of a property (the “landlord”) and the leaseholder (or “tenant”), giving the tenant ownership of the property for a fixed period of time, on certain conditions.
Most long residential leases require the tenant to pay the landlord an annual “ground rent”, so called because the landlord owns the ground beneath the building which contains the individual leasehold properties. Examples of leasehold properties include flats within a block and, less commonly, houses on modern development estates.
The government criticised the practice of selling house on a leasehold basis back in 2017 - there is rarely any justification for creating a leasehold structure on a housing estate, other than to collect ground rents – and the Competitions and Markets Agency (CMA) has spent the last couple of years cracking down on some of the larger developers who sold such houses and investigating whether any consumer protection laws have been broken.
What are the issues with ground rents?
In addition to paying a substantial premium for the lease, leaseholders usually pay an annual ground rent and service charge. Landlords are not required to provide a service in return for ground rent and whilst service charges enjoy a degree of statutory protection, ground rents have not generally (with one short-lived exception) been subject to any statutory control.
Historically, ground rents were set at a peppercorn or nominal level but in recent years a practice emerged of selling properties with higher ground rents at the start of the lease and shorter rent review periods. Some leases allow the landlord to double the ground rent every ten years during the lease term. Gradually it became apparent that leaseholders had not sat down and done the maths: if they had, the unreasonableness of such provisions would have been obvious. In some cases, doubling ground rents give rise to rents of tens and even hundreds of thousands of pounds per annum, towards the end of the lease term.
Once lenders became aware of the problem, they were reluctant to lend against such properties, making it difficult for leaseholders to sell their leases, and more expensive to extend them. This has created real hardship for leaseholders, not to mention resentment towards developers who created such schemes and sold on the ground rents to third party investors.
Problematic ground rents sit alongside a host of other problems associated with leasehold ownership: decreasing lease terms, high management fees, restrictions on alterations and dangerous cladding, to name a few. The government has committed itself to resolving these problems in the medium term and the abolition of future ground rents is the first reform to reach the statute books.
The new regime
As of 30th June 2022, ground rents in regulated leases are restricted to a peppercorn.
Under the Act, a regulated lease is one which is granted on or after 30 June 2022 and is –
- a lease of a single-dwelling
- for a term of over 21 years, and
- granted for a premium.
The Act will also cover ground rents in retirement home leases (leases relating to a dwelling that can only be occupied by people aged 55 or over) from a date not earlier than 1st April 2023. Currently, ground rents in these types of lease are often much higher than standard leasehold properties, to help fund the additional costs of providing communal spaces and facilities. The retirement sector has therefore been given additional time to transition to the new regime.
However, the new Act does not extend to all leaseholders and the following types of lease are excluded -
- Community housing leases
- Home finance lease plans, and
- Business leases, defined by the Act as leases of commercial premises which include a dwelling, use of which significantly contributes to the business use of the property.
There are special provisions for social housing leases. For information on how the Leasehold Reform (Ground Rent) Act impacts on housing associations, please see our previous article Abolition of Ground Rent – what Housing Associations need to know | Howes Percival
Contravention of the Act attracts fines starting at £500 and rising to £30,000 and enforcement authorities also have the power to order repayment of any unlawfully charged ground rent, plus interest, to leaseholders.
Potential trap for investors
Repayments can be enforced against the person who is the landlord at the time when –
- the payment was made,
- the application for a refund is made, or
- the enforcement authority makes the order.
Therefore, when an investor buys a portfolio which includes regulated leases, it will be important to check that there are no outstanding breaches of the Act for which they may become responsible.
Is the abolition of ground rent the change we have been waiting for?
Overall, the general consensus is that the new Act is a step in the right direction but it has done nothing to help owners of existing leases with high ground rents. If you own one of these leases, or thinking about buying or selling one, then please get in touch with us for advice on how to optimise your position.
Some good news for existing leaseholders
Last week the CMA announced that thousands of leaseholders who have paid a doubled ground rent will receive refunds. In a move that will benefit a further 5,000 households in the UK, the CMA has also secured undertakings from nine companies that bought freeholds from leading housing developers to remove these onerous provisions from their leases, and is working with five other companies to achieve a similar outcome.
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