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How the New Law on Ground Rents Affects Landlords?

The Leasehold Reform (Ground Rent) Bill introduces new law on ground rents affects leasehold properties.

The government has effectively abolished ground rents for future long residential leases with its Leasehold Reform (Ground Rent) Bill.

This means that the buyers of residential properties with a long lease – that is a lease of at least 21 years – particularly those on a new development, will no longer face demands for a ground rent.

The Act received Royal Assent on 8 February and will become law within six months. Most property law experts are predicting it will come into force by 8 August 2022.

Mahinan Pathmanathan, of Phew Conveyancing, said: “The new law brings to an end the paying of a ground rent on a qualifying or new leasehold residential property in England and Wales. The government is right when they say this law is one of the biggest changes to property law for a generation.”

The government also says that more residential leasehold reform is being planned.

What will the new act do?

The act will restrict the ground rent to be charged on most new residential long leases of houses and flats – and to the extended term of any lease extension – to a peppercorn amount every year.

Peppercorn refers to an age-old practice used to enter into binding contracts. The party benefiting from the contract provides a token consideration for the contract by giving a peppercorn.

However, a peppercorn rent has no financial value – this means the ground rent will be £0.

The law also prohibits the charging of an administration charge for a peppercorn rent.

The Act will only apply to a regulated lease to cover any leases granted (with some exceptions):

  • For a term of more than 21 years
  • In respect of a single residence
  • For a premium
  • The lease will be effective on or after the relevant commencement date for this type of rental and otherwise than pursuant to a pre-existing agreement.

The right of pre-emption or option agreement does not constitute a contract for the purposes of the Act.

Leases that the law on ground rents does not cover

However, there are some leases that the law on ground rents does not cover:

  • Business leases
  • Statutory lease extensions (but not all)
  • Community housing lease
  • Home finance lease plan – only if meeting excepted lease criteria.

For a new shared ownership lease, section 5 of the new law states that a permitted rent, i.e., a peppercorn rent, covers the tenant’s share – but the landlord’s share in the demised premises is ‘any rent’.

And for leases that do not reserve separate rents for the tenant and landlord’s equity, then the rent will relate only to the landlord’s equity share in the property.

That will cease when a tenant ‘staircases’ their lease to 100% because the landlord will be prohibited from demanding rent of more than one peppercorn.

The new legislation will not cover retirement homes before 1 April 2023 and a retirement home lease is a property that may only be occupied by someone who is at least 55 years old.

Also, the Act makes it clear that money payable for insurance and services can still be requested.


How can a landlord breach the Act?

Should a landlord, which includes someone acting on their behalf, request the payment of a prohibited rent, and if they receive that prohibited rent – and fails to refund it to the tenant within 28 days, they will be in breach of the Act.

It’s worth bearing in mind that under the law, a ‘Landlord’ who demanded a prohibited rent but is no longer the landlord is still liable to comply with the regulations.

There are financial penalties for those failing to comply with the new law should a lease extension or new lease be granted with a rent review provision or escalated ground rent.

That means a potential fine ranging from £500 up to a maximum of £30,000 can be levied.

It’s important to appreciate that the enforcement authority responsible for issuing a financial penalty under the legislation will be a local authority or trading standards.

To take enforcement action, they must be ‘satisfied beyond reasonable doubt’ that the person has breached the act. Failing to comply with the act will be dealt with via the enforcement authority first and then the First Tier Tribunal. Whoever is charged with failing to comply will have the right of reply and the right to appeal.

Paying ground rent under an existing lease

If you are paying ground rent under an existing lease, then the act will not apply.

However, there appears to be a political consensus for a similar Bill to be introduced that will cover existing leases, as well as the rent review and ground rent provisions within those leases.

A landlord will have to be careful to not inadvertently terminate their rental income by agreeing to a lease variation that would constitute a regrant or a deemed surrender.

The landlord will also risk enforcement action should they then look to collect the prohibited ground rent.

The landlord and tenant need to understand that when they want to extend a flat lease voluntarily outside of the procedures laid down by Leasehold Reform Housing and Urban Development Act 1993, they will need to consider the provisions concerning replacement leases.

One unintended consequence for a tenant is when they want to undertake a voluntary lease extension. That’s because there is little incentive for a landlord to grant a voluntary extension because while they may agree to it – the ground rent cannot be higher than the previous lease. Instead, the landlord may require tenants to go through the statutory process which takes longer and is more expensive for tenants.

The government says its new law will prevent landlords from increasing the ground rent or lengthening the period for which it is payable by the tenant in a new extended lease.

This is another disadvantage facing landlords when they grant a voluntary lease extension because they risk losing money should the lease not be completed.

More information about the Leasehold Reform (Ground Rent) Bill

If you would like more information about the Leasehold Reform (Ground Rent) Bill, or to have experts help with your conveyancing matters, then contact the friendly team at Phew Conveyancing on 020 3004 7094.

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