UK government legislates to make residential ground rents a thing of the past

The Leasehold Reform (Ground Rent) Act 2022 formally entered the statute books on 8 February 2022.   

The Act will prohibit landlords from charging ground rents under new “regulated” leases (residential leases granted for a term of at least 21 years in return for a premium) granted after the date that the Act comes into force.  Any ground rent which is more than a nominal “peppercorn” will be unlawful, meaning an effective ban on ground rent demands. The legislation will not have retrospective effect, as originally feared.  Any breach of the Act can be enforced with financial penalties of up to £30,000 for repeat offenders, as well as a requirement for landlords to repay unlawfully collected ground rents.

In its progress through Parliament, the terms of the draft legislation were tightened up to reduce the risk of unscrupulous landlords exploiting loopholes in the legislation and finding new ways to demand money from their tenants.  Sums genuinely characterised as rates, council tax, service charges and insurance (even if reserved a rent in a lease) will be unaffected by the legislation.

As you would expect, there are some exceptions and some transitional provisions. 

• Special provision is made for shared ownership leases, where landlords will be able to claim rent only for the landlord’s share.  Landlords will not be able to charge more than a peppercorn for the tenant’s share of the property, and once the tenant has staircased up to 100% ownership no rent will be payable.

• Regulation of ground rents in retirement accommodation will not come into effect before 2023, to allow for providers to make necessary adjustments to their business model without jeopardising the supply of retirement property to meet rising demand.

• Community housing leases are exempt from the ground rent prohibition, as are regulated home finance plan leases granted under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

• Leases granted pursuant to an agreement for lease which was already in place before the legislation comes into force will also be exempted, notwithstanding that the lease may start after the new law has come into effect.

When it comes to renewal of leases under which a ground rent was paid, the ability of the landlord to continue charging a ground rent will depend on the nature of the renewal.  Where the renewal is a statutory renewal of a lease of a house under the Leasehold Reform Act 1967 or a statutory renewal of a lease of a flat under the Leasehold Reform, Housing and Urban Development Act 1993, that renewal lease will be an excepted lease (though it should be noted that statutory lease renewals typically result in ground rent being reduced to a peppercorn in any event).  Where a landlord and tenant enter into a voluntary lease renewal, the landlord will not be permitted to demand a ground rent (other than in respect of any period of overlap between the term of the old lease and the term of the new lease). 

Comment

Many major institutional landlords and developers have already adjusted their business models to take account of the ground rent prohibition, which has been on the horizon since around 2016, and are marketing new developments with zero ground rents.  It will be interesting to see what effect the prohibition has on the residential property market in terms of both the amount of supply, and the premiums (if any) payable for zero ground rent leases.  Smaller scale landlords and those whose business model relies upon the volume collection of ground rents will have to take a careful look at how the new legislation will affect them and the costs they have to service.

All landlords should keep an eye out for regulations that will bring the operative provisions of the Act into force, to ensure they do not fall foul of the new prohibition and the risk of very significant financial penalties.

Authored by Tim Reid.