Leasehold reform in the UK: The end of residential ground rents is now imminent

It has been confirmed that the Leasehold Reform (Ground Rent) Act 2022 (the “Act”), which received Royal Assent on 8 February 2022, will come into force on 30 June 2022 abolishing ground rents in ‘regulated’ leases (see below) going forwards.

What does the Act do and why?

From when the Act comes into force on 30 June 2022,  a new ‘regulated lease’ in England and Wales cannot charge a ground rent of more than one peppercorn per year (in other words, zero rent). The Act also prohibits leases from prescribing administration charges for the peppercorn rents. The government has introduced these long awaited measures in order to combat what has been perceived to be the unfairness of onerous ground rent payments for tenants of long leases.

For a further explanation of the operation of the Act, see our previous Engage piece in Related Materials.

What is a “regulated lease” and what are the exceptions?

The Act applies to new  “regulated leases” coming into effect after the Act has come into force on 30 June (a ‘regulated lease’ is essentially a residential lease, granted for a term of at least 21 years in return for a premium (i.e. monetary consideration other than rent)).

The Act will not, as previously feared, have retrospective effect,. This means that ground rents chargeable under existing leases are not affected, and any leases granted after the Act has come into force but pursuant to a contract entered into prior to 30 June 2022 (i.e. an agreement for lease) will also be exempted.  Existing residential leases where there is a deemed surrender and re-grant due to a material variation will be caught by the Act.

Community housing leases are exempt and there are also special provisions made for shared ownership leases, where landlords will not be able to charge more than a peppercorn for the tenant’s share of the property.  Regulation of ground rents in retirement accommodation will not be affected until 2023.

Are lease renewals and extensions affected?

The answer is yes and no.  The effect of the Act will depend on the nature of the renewal. Where the mechanism is a statutory extension (under the Leasehold Reform Act 1967 for houses and Leasehold Reform, Housing and Urban Development Act 1993 for flats) that new extended lease will be an excepted lease and it can continue to prescribe a ground rent. However, statutory lease renewals typically result in the ground rent being reduced to a peppercorn in any event. For existing leaseholders and landlords who choose to extend their lease voluntarily, outside those statutory extension regimes, the Act ensures that the ground rent will now be reduced to zero on the newly extended term.

What are the sanctions for non-compliance?

Any landlord (or their agent) who, in contravention of the Act, requests payment of prohibited rent or receives payment and fails to return it to the tenant within 28 days beginning on the day after receipt could be fined up to £30,000.

Next steps

Many major institutional landlords and developers have already adjusted their business models in anticipation of the new legislation coming into force and have been marketing new developments with zero ground rents for some time. The long term effect of the Act and, in particular, any effect on the value of premiums chargeable in the market for new zero ground rent leases, is not yet known. All landlords of residential long leasehold property should keep the 30 June 2022 in their minds to ensure they do not fall foul of the new prohibition and the risk of very significant financial penalties. 

Authored by Tim Reid and Megan Stewart.