Just over a year ago, Robert Jenrick, the then Minister of Housing, Communities and Local Government, announced government reforms to "make home ownership fairer and more secure". The first step towards this was announced in the Queen's Speech in May 2021 when it was confirmed that ground rents for almost all new residential leases will be abolished. Tuesday 8 February 2022 saw this become law when the Leasehold Reform (Ground Rent) Act was passed (although regulations will need to be made by the Secretary of State before most of the provisions of the Act come into force).
The new Act, which applies in England and Wales, restricts the payment of ground rents to a peppercorn and bans rent administration charges in most future residential leases with a term longer than 21 years. There are a few exceptions, and business leases, statutory lease extensions of both houses and flats, community housing leases and home finance plan leases will not be affected by the Act. It had initially been expected that retirement housing would be exempt but it is not, although only retirement housing leases granted after 1 April 2023 will be affected.
The Act will not have retrospective effect - if developers have entered into agreements for lease prior to the Act being passed, the new leases will be unaffected and a ground rent may be demanded. However, the government has been clear that the abolition of future ground rents is a starting point – future legislation may address existing leases where leaseholders find themselves trapped by rapidly escalating ground rents. It remains to be seen what effect the abolition of ground rents will have in the future on the marketability and value of existing leases where ground rents are payable.
Leases granted pursuant to options or rights of first refusal which pre-date the Act will not be exempt and landlords will not be able to lawfully reserve a ground rent of more than a peppercorn.
Landlords who demand a ground rent in contravention of the Act face steep fines and leaseholders will be able to apply to the First-Tier Property Chamber for a declaration that a prohibited ground rent is replaced with a peppercorn rent. Enforcement action can be taken against past and current landlords, as well as people acting on their behalf. When acquiring a property subject to long residential leases, buyers will want to enquire about possible past liability.
Landlords will also need to be careful not to inadvertently surrender and re-grant existing leases under which they may collect ground rents - ground rent will not be payable under the re-granted lease once the provisions of the Act are in force and landlords may face action for demanding it.
The government has promised that the banning of new ground rents is the start of much wider residential leasehold reform. It has confirmed that it largely agrees with recommendations made by the Law Commission in July 2020 which are seen as key to making it easier and cheaper for leaseholders to extend their leases, buy their freeholds or exercise the right to manage. Another aspect of the proposed reform is to make commonhold, which has so far failed to become established, more attractive so that eventually it becomes the preferred alternative to leasehold home ownership. To this end a new consultation has been launched by the government on a number of discrete areas of the Law Commission's recommendations. Views are being sought on:
- Increasing the non-residential limit from 25% to 50%, allowing leaseholders in mixed-use buildings with up to 50% non-residential floor space to collectively buy their freehold or claim the right to manage. This would bring many more buildings within the scope of collective enfranchisement and right to manage regimes.
- Allowing leaseholders to require that landlords take mandatory leasebacks of any non-participating units following collective enfranchisement, which would reduce the premium payable by the leaseholders who do participate.
- Introducing a non-residential limit of 50% for individual freehold acquisitions.
- Changing voting rights in right to manage companies to avoid landlords having excessive voting rights.
- The provision of information during the sale of commonhold property.
The consultation closes on 22 February 2022.
It is clear that change, and possibly very significant change, is on the horizon. However, it is still unclear exactly how and when it will happen. The industry broadly welcomes these attempts to stamp out bad practice, but there is some apprehension about the unintended consequences these reforms may have.
If you have any queries on this or any leasehold related issue, contact Rob Bridgman or Ashley Mitchell.