New legislation signals the end for ground rent

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Significant new legislation has been passed to effectively end the ability of landlords to charge ground rent on residential leases in England and Wales, with some exceptions.

The Leasehold Reform (Ground Rent) Act 2022 which forms part of plans for wider reform of the residential leasehold market, was passed on 8 February and is expected to come into full effect by August 2022 at the latest.

The Act will apply to regulated ‘long’ leases (covering 21 years or more) granted for a premium and established from the date the legislation comes into force onwards and covers houses, flats and properties leased under shared ownership schemes (excluding the landlord’s share of the rent). Ground rents, other than peppercorn, and any associated administrative charges will be prohibited under the legislation. Rates, council tax, services charges and insurances costs will not be affected.

The leases exempt from the Act are as follows:

  • Community housing leases
  • Home finance plan leases
  • Statutory lease extensions (houses/flats)
  • Business leases (including retirement homes)
  • Leases granted pursuant to a contract entered into before the prohibition comes fully into force.

In terms of the renewal of leases already containing a ground rent element, the question of whether it will continue to be chargeable will depend on the type of renewal involved. As mentioned above, a statutory renewal is exempt from the Act. However, statutory renewals usually result in the ground rent being reduced to a peppercorn. If voluntary, the renewal lease may retain a ground rent for the period up to the point that would have marked the end of the pre-existing lease, but not beyond.

The penalties that will apply to any landlord found to be in breach of the legislation include fines ranging between £500 and £30,000 and the potential requirement to refund tenants who are unlawfully charged ground rent.

For a number of years, the abolition of ground rents in England and Wales has been mooted in order to tackle the issue of some tenants being hit by unaffordable and escalating charges that also create barriers to extending leaseholds or purchasing freeholds. As a result, many landlords have pre-empted the change in the law by introducing zero ground rents voluntarily.

Landlords will be relieved to learn that the legislation does not apply retrospectively, although this will be of little comfort to tenants already feeling the strain of having to pay existing ground rents under a new two-tiered system. However, with wider reform remaining on the agenda, this situation may be subject to change at some future point. Concerns remain that addressing the issue of ground rents may create a new problem if it leads to an increase in house prices to offset the income that ground rents generate for developers.

Those who see the abolition of ground rent as a blunt instrument also point to the possible negative impact that it may cause in regard to the maintenance of leasehold residential properties.

Finally, the Act is likely to have implications for landlords who rely heavily on the collection of ground rents and how they service their costs going forward.